Why banks are easily affected by the markets

Traders work on the floor of the New York Stock Exchange moments after the opening bell in New York City.

Kai Ryssdal: First though, the day on Wall Street. I don't know exactly how it's going to go when we get there, but it's a safe bet that when we do the numbers you're going to hear me say something like, financials led the way down today. And then a grim recitation of individual bank share price drops.

Because it seems like every time the markets get hammered, banks get it worst. We've called our New York bureau chief Heidi Moore to ask: How come? Hey Heidi.

Heidi Moore: Hey Kai.

Ryssdal: So help me out here: Why is it that the banks are among the first to get hit when the markets go bad?

Moore: It's the same reason that banks are the first to get robbed -- because that's where the money is. So basically what we saw after the financial crisis is that we have a tremendous distrust of major institutions: banks; European governance, you're seeing revolutions over half the world. And that's partially because of this huge financial angle. We know now that banks are inextricably linked with our political systems; and our political systems are obviously having a bit of trouble right now, right?

So I talked to Bill Isaac. He's a former chairman of the FDIC, which is the big bank regulator; right now he's at FTI Consulting. And I asked him: Is there any reason that we keep hitting the banks?

Bill Isaac: How can you feel comfortable investing when the government's got $1.5 trillion adding to the debt every year? When state and local governments are in disarray? And Europe's in disarray? How could you feel that we had our troubles behind us? I think we're recognizing that we still have a lot of work to do.

And so that's where we are right now. A lot of the debt in our system -- the things that we're trying to pay off -- is not new debt. It is debt from 2000 to 2007 that is still working its way through our banks, through our homes, through our credit cards. And until we pay that off, we can't start fresh.

Ryssdal: Say that again, this is a very important point: All the toxic assets that we grew so familiar with in 2007 and 2008, they're still out there?

Moore: They are still out there. And in fact, a good number of them are now housed at the Federal Reserve. So you should feel very comfortable about that. The Fed bought a lot of those assets from the banks, but the banks still do have some. Now that said, those aren't killer assets anymore in the way that they used to be. The banks are stronger; they've hoarded more money, which has worked to their benefit. And in fact, the banks are doing better than the economy.

But nonetheless, what we know is that banks depend on funding day-to-day, and that is always what's going to hurt them in a panic. Because in a panic, what happens is the short term worries start to have people pull back credit lines, you know, wonder 'do I have enough money on hand?' And if a bank wants to survive on that short term funding, it's going to suffer, because those credit lines are totally built on psychological confidence. And that's the first thing to go when there's a market tremor.

Ryssdal: Back up for a second here and let's talk about the health of the banks. You and I have said before on this broadcast, people have done stories about how the banks are making so much money. Are we now to understand that they're not healthy enough, given the uncertainty?

Moore: How could they be really, right? To some extent, they are exposed to the economy. And our economy is not doing well. So insofar as you have consumers with problems, you're going to have banks with problems, because that's where consumers get their money. So you have foreclosures -- that's still laying on the banks. We have a huge period of low growth coming. Low interest rates are hurting the banks too, because they can't make money anymore with interest rates that are this low. So if you look at the future, bank earnings aren't going to be so good, and that is also worrying people and may be why the banks get hit when you see something like this.

Ryssdal: Our New York bureau chief Heidi Moore on the banks, the health thereof and how they're connected to what's going on today? Heidi, thanks a lot.

Moore: Thank you Kai.

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"It's the same reason that banks are the first to get robbed -- because that's where the money is." Ummm, no, that's not why financial stocks get hit first in this market; it's because that's where the money isn't. Really, Heidi Moore needs to start using her brain a little more and stop parroting useless aphorisms like this.

I get tired of commentators associating words like "suffer" and "hurt" for bank financial positions, as if banks are people. The real suffering going on there are the employees who get overworked, benefits cut and laid off. Quit anthropomorphizing businesses!

Whenever I hear a story about the housing-bubble debt, I think of the 2006 Lending Tree commercial with "Stanley Johnson" showing off all his toys and a great house, then ending by saying, "How do I do it? I'm in debt up to my eyeballs!" It can be found on youtube in several places.

Heidi's bimbo headed puff piece on the banks was so inaccurate it had me laughing in the car. She says it's good the banks aren't holding as many toxic assets now because the Fed has them! The taxpayers will eat the losses on these assets as the Fed continues to print money and devalue the dollar. Some big banks are insolvent and should be allowed to fail Heidi. If you're going to parrot the main stream media, we don't really need NPR news do we? Heidi thinks the banks are getting paid low interest rates. Really Heidi? The big banks borrow from the Fed at close to 0% -- that's like the government giving a business all its raw material for free -- and then the banks can buy treasuries for a no risk profit of 3-4%. And there are other ways that the Fed is handing money to the banks under the table. Why don't you do some real reporting and talk about the trillions of dollars the Fed has used to support banks, foreign and domestic, according to the recent audit?

Heidi Moore hit the nail on the head with a glancing blow here, when she identified the problem as one of “A lot of the debt in our system . . . that we're trying to pay off . . . debt from 2000 to 2007 that is still working its way through our banks, . . .” However, lumping it all in there with consumer debt, home loans, and I would add, government spending in general is a as toxic a message as the toxic assets floating around out there from the securitization process that has not been separately identified, isolated, and disposed of responsibly. Sooner or later we are going to have to reckon with this astronomical number in the tens of trillions of dollars, stop trying to pay it off and start writing it down. Bright ideas like handing investors a new bubble to inflate, or re-inflate, such as a rental market for foreclosed homes, just shows how far we are from identifying the underlying problem and dealing with it appropriately.

Since high speed trading algorithms account for 2/3 of all market activity, how come nobody blames the algorithms for these big swings in the market? How do we know that a couple of big computer managers didn't just hit the "down" key this morning?

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