If you look at their current earnings and their current losses, their earnings comfortably exceed their losses. This would be to look at them on a cash flow basis, and only recognize losses that *actually occur*, *as* they actually occur.
If, on the other hand, you want to look *ahead* to all the losses they may ever take on anything, then you can get a higher figure for their overall losses. But you'd also have to look ahead to their future earnings that will occur at the same time as those future losses. And will comfortably cover them, in every single future time period, and overall.
The only way you can make them look "insolvent" is to capitalize their losses *now*, and to *not* capitalize their earnings, that they will in fact realize over the same period as those losses.
To see how screwy this is, picture a perfectly sound bank holding a portfolio of loans that incur *zero* credit losses, now or ever. Suppose, in addition, that its funding costs are *half* the rate it earns on its loans, initially - say 4% funding costs and 8% loan returns. Now, instantaneously increase the market rate of return on its loans from 8% to 16%, leaving its funding costs unaffected.
Is the bank insolvent?
In every time period, it will earn 4% of the capital value of the loans made. In every time period, its cash inflows will comfortably exceed its cash outflows. Over time, it will eventually realize $2 for every $1 in assets it began with.
Does the bare fact that in a later time period, it can lend at 4 times its funding costs instead of the 2 times it achieved before, render it insolvent, at the moment that increase in future returns becomes possible?
All the rest is noise. The actual loan losses are exceeded by the net interest earned on the entire book throughout. By a huge margin, incidentally, not a little amount.
It is a ludicrous supposition. Higher rates and wider spreads will render the bank more profitable in the future, not less, if those rates and spreads are actually sustained long term. If, as is more likely, they instead return to their original levels, then a mark to market "capital loss" in one period will be offset by an equal and opposite mark to market "capital gain" in another, and the income relations will remain the same as they were when the loans were originally made. Which, in case everyone forgot, were - the loans bring in twice what it costs to fund them.
They simple aren't insolvent. Insolvent means "unable to pay out cash demands on the institution as they fall due". Citi is cash flow positive to the tune of plus $45 billion *per quarter*, enough to cover its entire stock market capitalization *every month*.
All these companies need to do to meet all of their obligations as they fall due, is sit there and let their loan books run off into cash. They can in the meantime roll their short debts at record low funding rates. They simply are not going to go bankrupt doing this.
The only way they can fail is if the government seizes them at gunpoint.
The only reason their stock prices are so low is (1) irrational people can't add and (2) rational ones are quite reasonably worried that the government, listening to the previous, will recklessly seize them at gunpoint in a blind panic, and therefore leave present owners of the stock without any ownership claim on the future real earnings of the companies.
That is quite completely all. Without the threat of nationalization, these things would be fairly worth roughly 10 times their current prices.
Everyone is meanwhile talking about the prospect of the taxpayer doing well by destroying them, and then wondering why they can't generate any confidence or why the stocks won't go up. Earth to clueless populists - the stocks can't go up if you seize them. They aren't worth jack squat if you put your grubby paws on them. They are worth plenty if you don't.
You *can't steal capital*. The attempt to do so causes it to *evaporate*. This does not mean it isn't there, it means it has *no value* if it can simply be stolen at will.
Can it with the reckless nationalization talk, already.
Good explanation. I’m seeing more and more articles explaining what you just explained - some even recommending buying BAC and C now at their bargain basement prices. They’re basically penny stocks now - how much can you lose?
Why do you think Geithner hasn’t announced a plan yet? Was supposed to today, but that got called off (market didn’t like it much when that happened).
This is the second postponement. He’s looking very indecisive and that’s causing fear and lack of trust.