It may be spring in much of the country, but the air in the financial world carries a definite chill reminiscent of the fall of 2008.
So we have to ask again: is the world's banking system strong enough to withstand the forces of a global recession? A number of prominent people - more on them below - are dubious that the banking system is as strong as it should be. They believe that "systemic risk" - defined as the risk that most of the financial system will fail together - is on the upswing again.
If you forgot the term "systemic risk" from your 2009-vintage financial crisis dictionary, it refers to the state of affairs when the financial system as a whole is "undercapitalized" - which means that banks don't have enough money to continue doing business. The whole system becomes at risk - thus, "systemic risk." Systemic risk could be prompted when something -- usually a shock like the fall of Lehman Brothers - causes banks to stop lending to each other and investors like money market funds to pull their money out of the banking system. Right now, Europe's financial crisis is seen as a potential systemic risk that could wound the banking system.
One Nobel Prize winner - economist Robert Engle- has some pretty chilling predictions on just how much money it would take us to bail out a struggling financial system.
So what would American banks need to survive another crisis? Using Engle's calculations, it would take $513.65 billion in fresh capital for the top firms including JP Morgan, Goldman Sachs and Citigroup.
Here's the chilling part: How does that compare to 2008? It's about the same amount. Back then, those top banks would have needed to raise $539.4 billion.
Meaning: we haven't come very far at all, although certain firms have reduced their risk.
But let's explain the numbers. Engle and his colleagues found a way to quantify, in dollar amounts, the otherwise vague threat of "systemic risk."I watched his presentation Thursday at a credit conference sponsored jointly by NYU's Stern School of Business and Moody's.
Engle created a formula that measures what he calls "SRISK": the specific amount of money a bank or financial institution would need to survive a major crisis. (Really wonky types can cut out Easy Street as the middle man and read Engle's work on SRISK here and other work on systemic risk here.)
Think of SRISK as the amount of money that a bank would need to have on hand to keep doing business if there were a major shock to the financial system. Engle created SRISK in part by measuring how much debt a bank has and how much its stock price would fall in a crisis.
Here are Engle's measures of what the top American banks would need, according to his calculations, to get through a crisis. The numbers in parentheses are what they would have needed August 29, 2008, before Lehman Brothers collapsed.
- JP Morgan: $145.1 billion (2008: $110.9 billion)
- Bank of America: $129.2 billion (2008: $97.3 billion)
- Citigroup: $118.95 billion (2008: $136.7 billion)
- Morgan Stanley: $50.6 billion (2008: $70.5 billion)
- Goldman Sachs: $49.9 billion (2008: $57.7 billion)
- AIG: $19.9 billion (2008: $66.3 billion)
That dense little collection of numbers tells us a lot.
First, the numbers are absolutely enormous. That $145 billion for JP Morgan, for instance, becomes a lot less abstract when you consider how complicated it was for JP Morgan to raise just $11.5 billion during the crisis back in 2008. That $11.5 billion deal took hundreds of bankers, investors, and regulators working together to shore up JP Morgan's balance sheet at the request of the government in the days after Lehman failed. To accumulate $145 billion - without selling part of the firm - seems almost beyond reach.
The numbers are also significantly higher in two cases: Citigroup and Morgan Stanley. That means those two firms have accumulated more debt - and have relatively weaker stock - than they did in 2008. That could be troubling, particularly for Morgan Stanley, which is facing a potential downgrade from Moody's and is already having trouble getting enough financing in the market.
What was also startling from Engle's research is that he found that European and Japanese banks present an even bigger systemic risk than U.S. banks. This is, in part, because their stock prices have dropped far more sharply. (Engle uses stock price as one of the factors in measuring SRISK). For instance, here is Engle's list of the systemic risk rankings for the top 10 global banks. (If you may be curious why these numbers are slightly different than the ones above, it's because Engle counts derivatives differently for the global banks according to different regulatory rules).
Here are the top 10 global banks by their systemic risk rankings, according to Engle.
- Mitsubishi UFJ (Japan): $151 billion
- BNP Paribas (France): $134.27 billion
- Credit Agricole (France) : $131.3 billion
- ING Group (Netherlands): $118.7 billion
- Deutsche Bank (Germany): $117.58 billion
- Mizuho Financial (Japan): $117.5 billion
- Bank of America: $112.3 billion
- Barclays PLC (UK): $109.6 billion
- Banco Santander (Spain): $106.4 billion
- JP Morgan Chase (US): $105.4 billion
What that tells us is very sobering. Systemic risk is alive and kicking, and it's been living at not just America's biggest banks, but those of Asia and Europe. You can see that the bank with the highest SRISK in the world - the one that would need the most money to weather a crisis - is Japan's Mitsubishi UFJ, with Japan's Mizuho Financial not far behind. If there's another "Too Big to Fail" book and movie, it won't be about Tim Geithner storming around the Treasury yelling at American subordinates; it will have a distinctly international flavor.
But what does this all really mean? The big picture is sobering.
The Ghost of Big Bailouts Past seems to haunting the banking system, and it's calling up the fellow spirits of the dead - the panic, and bank runs, and lack of confidence that made the end of 2008 such a spooky time. Spain and Greece are dealing with issues - depositors pulling their money out of banks, a chilly bond market - that look like Bear Stearns and Lehman Brothers in their last days, only dressed up for a costume party in the Eurozone.
2008 keeps rattling its chains. This week there emerged details about how Bank of America may have hidden the losses at Merrill Lynch to speed their November 2008 gunshot wedding. The old 2008 Bailout Crew - Tim Geithner, Hank Paulson, Ben Bernanke and Neel Kashkari - brought the old band together again for a reunion tour recently, probably to talk about how the eurocrisis is making everyone remember the bad old days of Too Big to Fail. Meanwhile, the beat of "have we learned nothing?" still goes on at big banks. JP Morgan, one of the most solid banks in the country, is figuring out if it was hiding its own risks to indulge a star trader. Morgan Stanley, the weakest of the big banks that made it through the 2008 crisis, is facing a potentially steep downgrade by Moody's, which has to do with its heavy load of derivatives and a steeply dropping stock price that chief executive James Gorman finds "inexplicable."
So it's no suprise that Sheila Bair, the former chairman of the FDIC, has stepped forward to lead a private group called the Systemic Risk Council, and she's brought the big guns with her: former Federal Reserve chairman Paul Volcker and outspoken former Commodity Futures Trading Commission Brooksley Born, who saw the 2008 financial catastrophe coming. Marketplace host Kai Ryssdal talked to Sheila Bair today about her thoughts, which I'll update here later today.
In the meantime: Baffled bankers, worried regulators, tetchy credit markets, and a largely unwary populace. We had four years to figure it all out, yet here we are again.
SHEILA BAIR: If the risk-taking is such that whenever the losses occur, it's going to hurt innocent bystanders among the general public, and that's when a systemic inaction needs to be taken.