China lending stats update -- The decline continues.

It has been over a year since I last highlighted the slow decline in official lending statistics out of China. Since then not much has happened regarding the direction of Chinese lending growth; a slow decline continues.

I point you to Steve Keen's debtwatch for why the rate of growth in lending is important.

The rate of lending growth peaked in October 2009 and has been declining ever since.  Compare this to the Chinese equity markets and you'll see how Chinese stocks haven't gone anywhere since October '09 either.

Unofficial lending is naturally harder to track but there are anecdotal signs of stress in this sector as well.    http://historysquared.com/ and http://www.alsosprachanalyst.com/ are two good sites to follow the 'underground' lending market.

Goodbye mega huge conglomerate bank

My current mega huge conglomerate bank finally pissed me for the last time. I just got back from setting up my own personal checking account at a local credit union and I am shedding no tears for leaving US Bank.  I will not regale you with my list of annoyances designed to extract the maximum amount of money from my banking 'relationship' with them.

A typical mega huge bank manager? Perhaps.

Lest you think I'm just harping on US Bank for this rant I previously banked at Bank of America until they annoyed me too many times.  Long ago when getting my first home loan Washington Mutual backed out of a locked and approved home loan via a technicality.  I'm not playing favorites in my ever increasing disdain for the mega-huge-conglomerate banks here.

My wife has been a member of a local credit union for several years and after the Bank of America separation I opened our joint account there. What a difference.  The credit union people go out of their way to actually help you solve your problem instead of directing you to the courtesy phone for support somewhere in the world. No activity fees, no minimum balance requirements, no waiting for you to screw up to hit you with a massive fine fee.  I'm not against being charged for items but it appears the current trend in large publicly traded banks is to extract as much as possible from their customers without having them leave in frustration. I'm sure getting the fee/annoyance balance just right occupies the time of several legions of up and coming bank executives.

If your current mega bank pisses you off, take a look at your local credit union. I'm pretty sure the ethos of treating your customers fairly and in a respectful manner is much more common at your local credit union than at the very large banks.

For those of you training for a bank manager position here's the Ferengi rules of acquisition.

Bank lending update

It's been a few months since I last highlighted total bank lending but not much has changed since late October. Just to make sure you don't think I forgot here's an update.

Total bank loans and leases as per the Fed continues its steady decline economic recovery notwithstanding.  As you can see there was a large recent spike but this was due to an accounting change in bank's loans and not a sudden increase in lending.  This lack of new lending may be one reason broad money supply is so sluggish of late.

Like last update the banks are buying US Treasuries instead of lending. If you wondering who is buying those hated T bonds look to your corner mega-huge bank.   Considering their funding costs and capital requirements are pretty much zero you could say banks would rather just play golf and clip Treasury coupons.

Bank lending update

The data initially looks good but a change in accounting rules is the reason and not more lending by the banks.


In Chart #1 you can see the recent large spike in total loans and leases at commercial banks.  New accounting rules forced the banks to place off balance sheet items back on their books.  (I thought the Enron scandal fixed all that? Guess not)


This really throws off the year over year data so don't get excited if you hear bank lending has recently surged.


Just to show you how this decline in lending is unusual Chart #2 shows the series longer term on a year over year change.  As you can see until recently serious declines in lending never happened.


In case you are wondering what the banks are buying instead of lending... they are buying US government securities.

In my opinion this lack of lending by the banks is just one reason the Fed is freaked out and is prepping the markets for QE 2.0.  They are going to flood the market with money to try to get more people to borrow money and buy stuff.  Unfortunately I don't think it will work and I'll be writing about that soon(tm)

Latest Chinese Lending Stats: Ignore these numbers!

An odd way to start a post but as mentioned in my previous entry it is hard to know how much lending is truly going on in China these days.  The official data shows a decline in the rate of growth in lending and the government appears to be reigning in credit growth by raising reserve ratios. 

This does not tell the entire story. There is a boatload of off balance sheet lending but there are no 'official' numbers for that.
The WSJ (Sept 28,2010 ) recently commented:

A report from Standard Chartered economist Stephen Green estimates that by the end of August between 2 trillion yuan and 3 trillion yuan worth of loans (the banks don’t formally disclose the amounts) were moved off balance sheets–and outside the PBOC’s formal loan data–in this way. Over the same period, PBOC data showed the banks lending out 5.6 trillion yuan, suggesting the banking system has already passed the central bank’s 2010 target for new credit creation. It also means that the tightening signaled by the loan quota never happened.

Standard Chartered is guessing an additional 50+% of unofficial lending this year. Not a small number.  If the bank regulators crack down on this unofficial lending the rate of true loan growth would fall dramatically.

Foreclosure mess update: Why this is important

Barry Ritholtz clearly explains why this foreclosure mess is so important and how all the cutting of corners by the loan servicing organization has gotten completely out of control.

http://www.ritholtz.com/blog/2010/10/why-foreclosure-fraud-is-so-dangerous-to-property-rights/

I could try to paraphrase it but you really must read it ALL to understand why this scandal is more than just some 'goofed up paperwork'

http://www.marketwatch.com/story/bank-of-america-halts-all-foreclosure-wsj-2010-10-08?siteid=bnbh
Bank of America halts all foreclosures.  This is a few days old but just the latest in a long march of banks who are calling a full halt to foreclosures.

BofA's sterling efficiency is demonstrated by them foreclosing on a house with no mortgage. Whoops!
http://www.businessweek.com/news/2010-10-07/man-who-had-no-mortgage-faced-foreclosure-anyway-ann-woolner.html

This is going to get worse before it gets better . . .

Foreclosure mess roundup

I have not commented on the foreclosure mess but considering how it may impact you, gentle reader, I thought it worthwhile to repeat.

In short, the mortgage processors and servicers did not keep a proper chain of custody and MBS Pool 'C' which believes they own the mortgage does not have the paperwork proving they purchased it from Loan Company 'A' which sold it to 'B', who packaged it up into MBS (Mortgage backed security) 'C', and Bank 'D' now owns said MBS.

Some people along that chain over ownership have been caught forging paperwork.  It's a long and nasty tale that will remain stuck in the courts for a while.

If you know of someone who is going through foreclosure and they want to keep the house this is something to keep in mind. Talk to a lawyer about ensuring the bank has all the proper paperwork.


From the WSJ, October 4

First, the affidavits IndyMac used to file the foreclosure were signed by a so-called robo-signer named Erica A. Johnson-Seck, who routinely signed 6,000 documents a week related to foreclosures and bankruptcy. That volume, the court decided, meant Ms. Johnson-Seck couldn't possibly have thoroughly reviewed the facts of Mr. Machado's case, as required by law.

Secondly, IndyMac (now called OneWest Bank) no longer owned the loan—a group of investors in a securitized trust managed by Deutsche Bank did. Determining that IndyMac didn't really have standing to foreclose, a judge threw out the case and ordered IndyMac to pay Mr. Machado's $30,000 legal bill.

From Bloomberg, October 4

Citigroup Inc. and Ally Financial Inc. units were sued by homeowners in Kentucky for allegedly conspiring with Mortgage Electronic Registration Systems Inc. to falsely foreclose on loans. The homeowners claim the defendants filed or caused to be filed mortgages with forged signatures, filed foreclosure actions months before they acquired any legal interest in the properties and falsely claimed to own notes executed with mortgages.

Video from NBC Nightly News, October 1
http://www.mefeedia.com/video/33073666

Calculatedrisk blog:
http://www.calculatedriskblog.com/2010/10/nightly-mortgage-mess.html


Nakedcapitalism has posted several entries regarding this topic.  Here's just one entry:

Lender Processing Services, a crucial player in the residential mortgage servicing arena, has been hit with two suits seeking national class action status (see here and here for the court filings). If the plaintiffs prevail, the disgorgement of fees by LPS could easily run into the billions of dollars (we have received a more precise estimate from plaintiffs’ counsel). To give a sense of proportion, LPS’s 2009 revenues were $2.4 billion and its net income that year was $276 million.

Here's one MSNBC Video on the mess:


I don't do this nasty tale of cutting corners and deception any justice with this overview. Read all the links above for a fuller story. 

China lending update. Is bank lending speeding up or slowing down?

It has been a while since I have updated you on the bank lending situation in China.   This is not due to me slacking off (I'll admit to a slower pace of posts recently, but I have some good excuses, really)  following this topic.  The data source, People's bank of China, has suddenly been a little more reticent in publishing this data in English and as my Chinese language skills are a bit lacking this data series has languished....

Data released recently shows a continuing trend of official slowing in the rate of loan growth.  I put official in italics because there appears to be some off balance tomfoolery going on. . .

From Caixin Online:

Despite regulatory directives aimed at preventing banks from removing loans off their balance sheets to dodge credit restrictions, China's banks did not slow down their pace in packaging loans as wealth management products.

Banks and trusts cooperated on wealth management products, effectively allowing them to shirk their responsibilities toward credit limits imposed nationwide under the central government's macroeconomic controls.
In the first half 2010, according to trust company reports, the value of wealth management products cooperatively offered by banks and trusts rose to 2.6 trillion yuan, topping the previous year's 1.77 trillion yuan.

This amount combined with the 4.58 trillion yuan in on-the-books, new credit issued by banks in the first half brought total lending in China through June 30 to near the 7.5 trillion yuan limit set by the government for all 2010.

[The 4.58 trillion yuan number matches my data.  Look at the 'wealth management products' value of 2.6 trillion.  Greater than 50%  of the 'on the books official' value of 4.58 trillion.  Continuing . . ]

By charging fees as well as commissions of up to 2 percent, banks earn more than trusts when they jointly market bank-trust products. Moreover, by cooperating with trusts, banks keep customers otherwise unavailable due to credit controls, since off-book business doesn't require bank capital and thus avoids CBRC capital constraints.

When companies start hiding assets off balance sheet it rarely ends well.

If you are wondering where all that money is going, this blog entry by staff at the World bank is stunning. Not only for the information presented but the absolute lack of surprise. (ht Mish)

In Chenggong, there are more than a hundred-thousand new apartments with no occupants, lush tree-lined streets with no cars, enormous office buildings with no workers, and billboards advertising cold medicine and real estate services – with no one to see them.

I went to China in 2003 and I can assure you I NEVER saw a single piece of urban pavement that was not completely full of cars, trucks, bikes, scooters, etc at all times.   I have mentioned empty Chinese cities before such as Ordos. How many more empty cities in China are there? Andy Xie has wrote about this before. Here is his latest article regarding the excess housing stock in China:

What distinguishes China’s property bubble from others is its unprecedented quantity dimension. China just doesn’t have any constraint limiting supply. The current debate about the quantity of empty flats is about the extent of quantity excess. The stock of empty flats measures the size of the quantity bubble. Taiwan experienced a price-cum-quantity bubble in late 1980s. At the time the market quantified the number of empty flats by obtaining data from the electricity supplier on flats without usage of electricity. The stock of empty flats measured this way was about 15% of the total households. Some analysts are trying the same tactic to quantify the volume of empty flats in China. The problem with this methodology is the complexity of China’s housing conditions.  . . . While the data are not accurate, we can confidently conclude that China doesn’t have absolute housing shortage and the per capita space is above Europe and Japan’s level. Indeed, if we adopt Japan’s standard, China already has sufficient urban housing space for everyone in the country, i.e., there is housing for every person in the countryside to move into city. . .  Four unique factors may explain China’s unique phenomenon.

1) Sustained negative real interest rate has led to declining demand for money and rising appetite for speculation. Greed and fear of inflation are working together to form unprecedented speculative demand for property.
2) The massive amount of gray income looks for a ‘safe’ haven. China’s gray income of various sorts could be around 10% of GDP. In an environment of rising inflation and depreciating dollar-the traditional safe haven, China’s rising property market is becoming the preferred place for this money.
3) China’s masses have no experience with property bubble. The property crash in the 1990s touched a small segment of the society. Foreigners and state-owned enterprises were involved. Geographically, it was restricted to Southern freewheeling zones like Hainan and Guangdong and Shanghai. Most people in China don’t know that the country had a property crash. Lack of fear is turbo-charging the greed.
4) Speculators believe that the government won’t let property price fall. They correctly surmise that local governments all depend on property for money and will try every effort to prop up its price. But, their faith in the government omnipotence is misplaced. In the end, market is bigger than government. Government behavior can delay, not abolish market force. Nevertheless, this faith in government is removing the fear over the downside. Hence, the speculative demand just grows with credit availability unchecked.

When this bubble goes pop you better have some popcorn and a good seat because the explosion will best any action film explosion sequence.

Bank lending update

It has been a while since I last discussed the decline in bank lending.  Total loans and leases continues to decline while bank's holdings of US Treasury securities continues to climb (Source: Federal Reserve, 2010-05-24)

You may notice the spike in loans and leases but don't get excited, this is due to FASB 166 & 167 requiring banks to bring off balance sheet items back into the sunlight.  This will screw up the year over year data for a while but even after this 'increase', lending is down year over year.  Annaly's blog has the details

A contrary opinion on HELOC's and banks

I recently posted an article about the concern HELOC's may have on bank capital positions. Here's a contrary opinion from another blog I follow, Calculatedrisk

The following report is from housing economist Tom Lawler:
In a House Financial Services Committee meeting today on “Second Liens and Other Barriers to Principal Reduction as an Effective Foreclosure Mitigation Program, spokespersons from BoA, Citi, JPMorgan Chase, and Wells Fargo explained the potential dangers of broad principal reductions, as well as tried to dismiss the silly claim that many second mortgages have “virtually no value” because so many borrowers with seconds have total mortgage balances at or exceeding the value of the home collateralizing those mortgages. Below are some observations on BoA’s and Chase’s testimony.

I'd read the whole article as it provides some counter points to my previous post. 

Chinese lending update --- Is the peak in?

It's been a while since I last updated you on Chinese loan growth.  Some of that was due to the problems of getting the data out of China. I was finally able to extract the data and it appears the peak in lending is finally in.  March data comes out soon but considering the difficulties of updating this data I thought I'd get you up to date now.

Even with the 'record' lending in the first two months of 2010 both the trailing twelve month total of lending and year over year percent change of total loans outstanding have peaked.

As with every massive increase in lending it ends up on all sorts of places and turns out to be much more prevalent than commonly thought.  Elite Chinese Politics blog (Mr. Victor Shih) has some serious allegations of hidden debt in the local government investment entities that are the analog of the Special Investment Vehicles (SIV's) of our banking bust.  Here's some more reading on the matter at businessinder.com and here.  Of course this is difficult to 'prove' as the Chinese accounting books are not the most transparent but Mr. Shih's work should not be discounted out of hand.  I suggest you go to his blog and read the comments and rebuttals.  It's good stuff. . .

Will HELOC's toast the banks?

Ouch... I read this several days ago and after turning it over in my head it jived with my previous tinfoil allegation the banks are managing their losses over time  . . .

From Creditwritedowns:

About a month ago I wrote a post called “The coming wave of second mortgage writedowns” the gist of which was that the big four banks (Citi, JP, BofA, and Wells) had a shed load of exposure to now worthless second mortgages. With many first mortgages now hopelessly underwater, it stands to reason that second mortgages on those same properties have zero value. . . .

So the original loss from second-liens, as reported by the stress tests, was $68.4 billion for the four largest banks. If you look at those numbers again, and assume a loss of 40% to 60%, numbers that are not absurd by any means, you suddenly are talking a loss of between $190 billion and $285 billion. Which means if the stress tests were done with terrible 2nd lien performance in mind, there would have been an extra $150 billion dollar hole in the balance sheet of the four largest banks. Major action would have been taken against the four largest banks if this was the case.

Please go over and read the whole thing. I stopped following the bank several quarters ago. Any additional facts on this possibility would be appreciated.

This would explain the banks' dragging their feet foreclosing properties.  Not only would they have to mark down their first mortgage but the 2nd lein would be marked to zero instead of the 15-20% loss as described in the 'Stress Tests' of early last year.

Living Rent Free

Trader Mark from fundmymutualfund.com had a great post about the apparent disconnect between income and spending -- it's not adding up.  I had my own suspicions about this but TraderMark does a much better job skewering several sacred cows so I'll defer to his rapier and wit:

I was looking through the avalanche of economic data today, and it struck me how once again Americans are spending well over their income growth.  

I've written about this in the past in conceptual terms but never put it into an analysis. The true stealth stimulus plan in America is letting so many of its people live "rent free" as they sit in defaulted homes not making a mortgage payment. This "cost savings" allows them to shop and spend, and otherwise support the American consumption society.

From anecdotal stories (many of them) it is now taking at minimum 9-12 months to get evicted, and that's in states without super high foreclosure rates. I read the other day some Florida locations are 2+ years now. So 9, 12, 15, 18 months of not having to make a $1200, $1500, $1800 payment. And it can go longer now if you enroll in the trial modifications offered by government, then redefault. If you are really good at playing the system you might be able to go through two whole default cycles with the trial modification in the middle. 3 years of rent free living? Nirvana.

Further, with the new accounting rules that were the nexus of the market rally in March 2009, the banks no longer had to mark value of assets on their balance sheet to market... so they can now mark to what they see fit. Hence this system works for them too. All these foreclosures they should be closing on are things they are in no hurry to do... because doing so would mean they need to stop pretending about the true valuation of these defaulting mortgages and start admitting reality. Don't you love what 1 change in accounting rules can do for a country? ;)

My suspicion is the banks decide how much of a loss they want to take on home loans each quarter and then foreclose enough homes to make that quarter.  (The easiest number for a bank to hit for the next several years!)  The Feds are turning a blind eye as they are terrified of another drop in home prices and want to keep the banks 'solvent'  All the mortgage modification programs give cover to the banks to delay foreclosures and regulate the supply of homes hitting the market. 

How does that saying go??? Owe the bank $10,000 and they own you, owe the bank $50 million and you own the bank.  In America we can do it better:  Own a trillion in mortgages and you own the US Government.

Bank lending continues falling -- Are buying US Treasuries instead

Bank lending continues to fall on a year over year basis.  Compared to the previous two recessions in which bank lending stabilized and then renewed growing this time overall bank lending is down and is continuing to decline.

As you can see from the first graph they are instead following the pattern from the last two recessions and are increasing the US Government securities portfolios while cutting lending to the private sector.   Unlike private bank loans Treasuries are very liquid and can be sold immediately if cash is needed.   Capital requirements for Treasuries are also much lower compared to a private bank loan.  Considering the capital positions of most banks in America (I'll have a post on this soon)  are tenuous they need the liquidity and 'safety' of Treasuries.

The year over year change in bank's holdings of US Government securities does not show the full extent of the bank Treasury purchases. As you can see from the second graph the banks continue to load up and the slope is definately upwards.

Bank lending continues cliff diving

Here's the update on total bank lending and it is not good.  Total loans and leases at US banks continue to drop and is picking up speed.

I went back and looked throughout the entire data set available (back to 1973) for bank loans and loan growth has never been this negative, ever.  

If you notice on the graph, bank lending levelled off and slowly resumed growing after each of the two previous recession.    So far bank lending continues to fall and shows no sign of even levelling off. 

The year over year deceleration in US government securities owned by banks is curious considering loans dropped as well.  Are banks deleveraging their balance sheets or is it just seasonal noise?

Until bank lending stabilizes and starts growing again we will not have any meaninful recovery.

Who is buying all the Treasury debt? a.k.a how bankers are bad traders

Like a worldwide version of Where's Waldo,  a lot of people want to know who is buying all the US Treasury debt being produced by a yawning budget deficit and when they will conversly dump them on the open market.  The Chinese and the Federal Reserve are the first people on everyone's list, but here's another. 

Presented is US Government Securities at all commerical banks.  The first graph shows the absolute change year over years, in billions of dollars.  As you can see US banks have added nearly 240 billion dollars to their portfolios in the last 12 months.   Unfortunately this has not absorbed the entire supply of new issuance in the last 12 months, but it takes a serious chunk of the notes out of circulation.  As this data series is released weekly, I'll be watching it closely to see if the bankers are buying more US debt in the near future. 

Here is the data in a slightly different format so recent events do not dominate the picture, it shows government debt holdings on a year over year percentage basis.  What struck me about this graph is how the banks seem to be adept at raising their treasury holdings as the recessions appear to be ending as shown by the gray vertical shaded areas. 

The bankers appear to consistently purchase US debt just as the recession is finally ending (remember the recession 'end' is backwards looking and it can take several months before a recession is declared as over) and from a trading perspective at exactly the antipodal time to reduce credit risk. 

Also, a bank loading up on US debt is less likely to be making conventional loans to consumers and corporations.  They only have so much room on their balance sheet to hold securities and with all things being equal (yes, I know they aren't)  US Government debt purchases crowd out the possibility of making conventional loans.

Hey, look at that.... Inverse correlation between (US debt) and (loans and leases) on banks books!  It appears the bankers are still running scared and loading up on US treasuries.  Also, look at how loans are declining on a year over year basis, something that has not happened over the entire time period in this graph.  Corporations can access credit via other means (commercial paper, debt markets, etc) but the decline in bank lending  is troublesome.