This is quoted from a private weekly economic report. It's Australian but I think it reflect the American situation/ experience.
My first observation is 'if you can't beat them, join them' (buys shares in banking). My second observation is that we seem to be rushing back to the same economic model, leverage and greed is good.
"This has been a bewildering crisis, not that crises are ever entirely comprehensible. But this one was started by banks over-reaching and getting into trouble, so that the resulting credit squeeze caused a global recession.
But now, just five minutes later it seems, the banks and financial sector are the only parts of the business world that are unambiguously out of trouble. They are rampant once more; it’s as though the crisis never happened. It turns out, in fact, that the banking crisis has been wonderful for banks and investment banks. It is salad days for them, gambolling in the springtime with flowers in their hair.
In the United States investment bank assets increased 4 per cent between April and June: they’re getting free money, they are essentially guaranteed by the state and, so far, no regulation to trouble them apart from weak mutterings about their bonuses, which are about to require wheelbarrows once again..
In Australia the big banks, especially Westpac and CBA, are completely rampant. The big four’s share of new mortgages is virtually 100 per cent, they are operating in the total safety and cheap funding of Government deposit guarantees, and their customers are doing fine.
Those who predicted a hard time for banks, including your humble correspondent, missed two important things: the huge impact of cheap cash and Government guarantees on their funding costs, and the way in which they and their corporate customers have been able to recapitalize with equity.
I thought rising unemployment and corporate collapses would cause a big rise in credit impairments. Neither of these things has happened. Confidence has been preserved by colossal fiscal and monetary stimulus and, more importantly perhaps, companies that would have gone under this year, because of the closure of credit markets after the default of Lehman Brothers last September, have been able to tap equity markets for cash instead.
The capital raisings have been unprecedented. In many cases they happened because banks sent the companies off to their shareholders for money before they would talk to them about refinancing their loans, and the shareholders (institutions) obliged.
That’s because the big funds were getting new stock at a deep discount at the expense of small investors, reinforcing their relative performance and therefore their competitive position against self managed funds.
And who run the biggest fund managers? Er, banks. If one were a conspiracy theorist it wouldn’t be hard to see a giant conspiracy here.
First, banks lend too much and ruin the world economy (although, to be fair, the Australian ones didn't). Then Governments, in a panic, bail them out. They then demand that the corporate borrowers reduce their debts by raising equity capital from their own wealth management arms at huge discounts and dilute those who might have the temerity to manage their own money rather than pay outrageous fund management fees.
And this week, it seems to me, the rest of the market just gave up and went with it. In April, May and June Australian bank stocks performed roughly the same as the rest of the market, perhaps slightly better. But since July 13th they have gone up by a third, versus the all ordinaries’ rise of one quarter. They are putting real distance between themselves and the rest of the market."
