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Banks Under Stress But It’s “Night and Day” Compared to 2008: Chris Rupkey

Aaron Task
Editor in Chief
Daily Ticker

As if Friday's desultory jobs data wasn't bad enough, bullish sentient was also being weighed down by another round of bad news about the banks:

  • The Federal Reserve has pushed Bank of America to come up with contingency plans in case economic conditions deteriorate and it needs to raise more capital, The WSJ reports. Bank of America shares have now rescinded about 50% of the gains generated in the wake of Warren Buffett's $5 billion investment and the sale of its stake in China Construction Bank. (See: BANK OF AMERICA: If Things Really Get Bad, We'll Sort Of Spin Off Some Of Merrill Lynch)
  • Citing "a pattern of misconduct and negligence," the Fed issued an enforcement action against Goldman Sachs for alleged abuses by its mortgage-servicing unit.
  • The Federal Housing Finance Agency is preparing to sue several banks on behalf of Fannie Mae and Freddie Mac, The WSJ reports, claiming the banks made false statements in the sale and marketing of mortgage-backed securities.
  • European stocks tumbled and Greek debt yields surged to stratospheric levels amid new snags in the latest bailout package, reviving the specter of big losses for banks exposed to country's sovereign debt.

The latter issue, particularly, has some observers fretting about a 2008-style financial contagion but such fears are "overblown at the moment," according to Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi. "Banks are really much more liquid then they were back in 2008."

While measures of interbank lending such as LIBOR and the TED spread have been creeping higher in recent weeks "it's like night and day" compared to 2008 when those levels skyrocketed, he says. "There's no real funding pressures now."

If bank funding pressures do emerge again, Rupkey has confidence the Fed's lending facilities — put in place in 2008 — will be tapped to avert another crisis. And, as detailed here, he believes the U.S. will avoid a recession, which should ease pressure on Bank of America and other big U.S. banks.

Still, the economist is not totally Pollyanna and admits to keeping a close eye on Italian and Spanish bond yields. They've come down sharply since the ECB announced it would buy their debts last month. But if the Greek bailout comes undone and Spanish and Italian yields surge anew, it really could start to feel like 2008 all over again. (See: 2008 Redo? History Doesn't Repeat, But It Often Rhymes)

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com