Re: European bank failures

[John Williams]

On Fri, Nov 21, 2008 at 11:24 AM, Dan M <[EMAIL PROTECTED]> wrote:
> I've waited until I was able to get hard numbers on the ratio between total
> liabilities and deposits.  If we make the assumption (as is true with all
> balance sheets) that total assets = total liabilities  (equity is counted as
> a liability to get this balance...I guess that's why it's called a balance
> sheet), we can use the ratio of deposits to total assets to get the ratio of
> deposits to total assets.

Actually, no. What balances on the balance sheet is assets with "total
liabilities and stockholders' equity". Liabilities do not include
equity, but liabilities and equity are added together on the balance
sheet. As I wrote previously.

> I found this for Chase before and after buying Washington Mutual at:
>
> http://investor.shareholder.com/jpmorganchase/press/releasedetail.cfm?Releas
> eID=337648
>
> Before the purchase, deposits were 41% of total assets, and afterwards, they
> were 44%.

The title of your link is "JPMorgan Chase Acquires the Deposits,
Assets and Certain Liabilities of Washington Mutual's Banking
Operations". It seems WM was not in any danger of not having
sufficient assets to cover deposits, since JPM acquired WM's assets
and deposits, and still was in good shape. The chart in your link puts
WM's assets (presumably already marked down to some extent) at $310B
and deposits at $182B. So WM's assets would need to lose an additional
41.3% to be unable to cover depositors.

> But, at
>
> http://finance.yahoo.com/q/bs?s=jpm&annual
>
> You have stated, from your experience that deposits are a much smaller
> fraction of total liabilities.

Much smaller than what? Please quote me where I made the statement you
are refuting. Also, if you are interested in JPM's balance sheet, why
don't you look at their most recent 10Q filing with the SEC?

http://www.sec.gov/Archives/edgar/data/19617/95012308014621/y72204e10vq.htm#104

Deposits are $970B and total assets are $2251B, so 43% (you said 44%
above, but the dates are slightly different so no problem). In other
words, JPM's assets would need to fall by 57% before they could not
cover deposits. If you are really interested, you could go
line-by-line on the assets to try and see what can easily be converted
to cash and what is likely to take a hit. But my point remains, that
the assets would have to take a huge hit in order to be unable to
cover deposits.

> It is a
> fact that almost half of JP Morgan's assets are now deposits (unless they
> are lying of course).

Heh, very funny. How about we round the other way and say that almost
three-fifths of JPM's asset value would have to disappear before
assets would be unable to cover deposits.

> I've lived through the crash of '86 in Houston, where banks got no more than
> 30 cents on the dollar for many foreclosed properties.

Impressive credentials you have there. Would you mind sharing the
asset mix of those banks you refer to? Specifically, what percentage
of their assets were made up of loans that liquidated for 30 cents on
the dollar. Or, if you prefer, what was the liquidation value of TOTAL
bank assets as a percentage of book value?

> The process took
> years.  In your scenario, you have people with checking accounts patiently
> waiting 2 years before they can write checks again.

The government is certainly wasteful, inept, and slow when it gets
involved in markets.
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RE: European bank failures

[Dan M]

I've waited until I was able to get hard numbers on the ratio between total
liabilities and deposits.  If we make the assumption (as is true with all
balance sheets) that total assets = total liabilities  (equity is counted as
a liability to get this balance...I guess that's why it's called a balance
sheet), we can use the ratio of deposits to total assets to get the ratio of
deposits to total assets.

I found this for Chase before and after buying Washington Mutual at:

http://investor.shareholder.com/jpmorganchase/press/releasedetail.cfm?Releas
eID=337648

Before the purchase, deposits were 41% of total assets, and afterwards, they
were 44%.

But, at 

http://finance.yahoo.com/q/bs?s=jpm&annual

You have stated, from your experience that deposits are a much smaller
fraction of total liabilities.  With all due respect, either JPMorgan is
deliberately falsifying information, or you make invalid assumptions
concerning how one assumes long term debt must be commercial bonds.  It is a
fact that almost half of JP Morgan's assets are now deposits (unless they
are lying of course).


> 
> The balance sheet you referenced has total assets of nearly 2 trillion
> euros, and 422 billion euros of deposits under liabilities. As long as
> the losses on the assets do not exceed about 79% (loss of 1.6
> trillion), then the depositors could get their money back.

In this case, since Deutsche Bank is a mixed house,that could very well be
true.

 
> > You just brushed off the essential problem at the heart of bank runs
> with a
> > "it would just".
> 
> I'm not talking about preventing bank runs. The issue I am addressing
> is whether the depositors would be able to get their money back in
> bankruptcy. If the depositors won't be able to get their money back
> eventually, then that is a more severe crisis than just an insolvent
> bank.

Yes, but if checking accounts are worthless until the sweet bye and bye,
then there is a giant problem.  Further, as I've experienced in cases that
only involve the hundreds of millions and you should know, the attempt to
sell of trillions in assets all at once would decrease the value of the
assets even further.

I've lived through the crash of '86 in Houston, where banks got no more than
30 cents on the dollar for many foreclosed properties.  The process took
years.  In your scenario, you have people with checking accounts patiently
waiting 2 years before they can write checks again.

The results of what would happen are so clear to me, and are born out by
recent data, I'm not clear what statements that meet approval but all but
the small minority of uberlibertian economists that you think are stuff and
nonsense.  Some of these assumptions are:

1) Companies who find that they can't make payroll lay people off.
2) People who's checks are no longer good can't make their mortgage
payments.
3) Failures within the financial system set off a cascade effect.
4) The failure of AIG immediately after the failure of Leeman Brothers
indicates both the interconnectiveness and the inability of private
insurance to handle this type of catastrophic failure of a AAA rated
company.
5) Without some intervention _all_ of the US investment banking houses would
go bankrupt.

6) In such a market, where giant AAA and AA rated companies default en mass,
people are fearful and don't know who's a safe bet for a loan.

7) In such a case, credit starts to freeze.

Let's, though, go back to Deutsche Bank.  They are under water and there is
a run on the bank (with their bad loans and the lower transparency in the EU
than the US they may be hiding the fact that they are presently under water
and hiding it).  As a result, checks written on Deutsche Bank accounts are
not honored.

You ignored this question before, but what do you think would be the action
of the people who can no longer pay their bills?  What happens when major
industries cannot pay their bills?  I'd argue that they'd cut every cost
possible, but still risk going into default.  I'd argue there would be
massive layoffs, and mortgages not met.  I'd argue there would be a positive
feedback loop.

Dan M. 

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