Thanks To The Fed, The High-Risk, Small-Time Borrower Is Becoming A Thing Of The Past

borrowers

Banks and accounting trickery go together. Last year, as I remember back to my banking days, financial institutions followed the advice once proffered by one of our board members, “If we’re going to the dump, let’s take a full load.” 

When the pandemic struck, banks dumped plenty in their loan-loss provisions, $60 billion, expecting the worst. The cavalry arrived led by Jerome Powell’s Fed liquidity flood, Steven Mnuchin’s Paycheck Protection Program (PPP) loans, Congress’s Coronavirus Aid, Relief, and Economic Security (CARES) Act, and moratoriums on foreclosures and evictions. Instead of an Austrian business cycle cleansing, the cracks were papered over, including bailing out money market funds, allowing us to watch the pandemic comfortably on TV. 

Here we are a year later and banks are rocking their earnings by adding back the money that had been put away for the predicted rainy Covid day. Appearing on Real Vision’s Daily Briefing with Jack Farley, bank analyst extraordinaire and Ludwig von Mises fan Chris Whalen said the future of banks could be dim or worse. Mentioning bank darling JPMorgan, Whalen pointed out, “[Y]ou take the reserve release out, their revenues are down year-over-year. Their earnings would have been down year-over-year, and nobody on Wall Street really gets past the first paragraph in the press release, so they don't bother with this stuff.”

Finding a friendly, promiscuous banker is impossible these days as regulators fight the last war, meaning “banks are continuing to see their assets run off. In other words, they're not originating new loans fast enough to keep up with the loans that are either being redeemed or prepaying early. A lot of early prepayments, especially in business loans, that kills banks,” Whalen said. 

While consumer numbers look good, the lurking problem is commercial real estate. While hiding in plain sight the heavy hand of the government is “letting the banks let these borrowers go [in] the hope that they come back.” Hope is not a good strategy, but “the bank doesn't want the building. The bank doesn't want the shopping mall. They're giving these people time. But I think it's a mistake because especially in big cities, we're going to have to restructure this real estate.”

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