What Treasury Secretary Geithner Isn’t Telling Us about the Banks

Yesterday on my radio show, Defending Your Money, I analyzed the testimony of our Treasury Secretary, Timothy Geithner. Speaking before a Congressional oversight committee, Geithner told everyone our nation’s banks have enough capital.

He told us that in the event certain banks fail the stress test, the results of which are due out May 4, they have options. They can either take more taxpayer money, raise private capital, or convert the preferred shares the government owns into common shares.

But once again Geithner is not telling the whole story. He stopped well short of addressing the problems our banking system will encounter after the stress testing is complete—problems that won’t go away soon. He’s keeping that part secret.

Geithner Secret #1: Many banks will fail the stress test. Many will pass, but for those that do not, the stress test results will cast a pall over investor psychology. Even for those that pass, they still have to deal with these Geithner secrets…

Geithner Secret #2: Commercial Mortgage Backed Securities Collapse. These commercial mortgage pools will likely be a major contributing factor to Part II of the economic meltdown that began in 2007. CMBS’ are a type of mortgage security that is backed by commercial mortgages rather than residential mortgages. Geithner’s stress testing will largely measure damage to banks from Part I of the economic meltdown… it won’t measure what is yet to come from the commercial side.

Geithner Secret #3: Credit Default Swaps Rising. Even while Geithner testified Tuesday, credit default swaps – the cost of protecting against defaults -- used to insure on banks whose earnings are up this year were rising. According to the Wall Street Journal, the cost of protecting against a Wells Fargo credit default in the swaps market has risen 109% since early February, and rose 11% Tuesday even as the bank’s stock soared. Bank Credit Default Swaps have been rising even though the banks have reported positive earnings this year. That’s because the government has forced them into temporary profitability by its quantitative easing monetary policy. But the market knows better, and is not buying into the scenario that the worst is behind us.

Geithner Secret #4: We’re only in the 2nd or 3rd of the banking recession. This economic contraction is far from over. Banks have barely begun to feel the losses typically dealt to them by a normal recession, let alone this one. Losses from credit card defaults, home equity lines, commercial mortgages, real estate developers, and the like have yet to show their stuff.

Geithner Secret #5. REITs coming due. This will likely prove to be the source of great losses in the banking industry later in 2009 and during 2010. According to real-estate research company Foresight Analytics LLC, this year alone, an estimated $248 billion of commercial mortgages will come due, up from $230 billion in 2008. Financing has been very difficult on the commercial side, as Mall owner General Growth Properties learned this month when it had to seek bankruptcy protection in one of the largest real-estate failures in U.S. history. Owners and developers that piled on mounds of debt during the real-estate boom now face mountains of problems when that debt comes due.

The process of working through our nation’s economic problems is a multi-year affair. To be sure, our nation’s banking industry will have a few months after the May 4 stress test reporting date to deal with issues of undercapitalization. It will take until 2010 to wash out the Commercial Mortgage Backed Securities problems. And, some argue that the effects of government stimulus will help the banking system absorbed some of the commercial mortgage shock to come.

The bottom line: When you hear the results of the stress tests released on May 4, keep in mind that we’re only looking at the effects of the past two years on the banking system. The next two years will be equally difficult.

The stock market just gave investors a 20%+ rebound rally, which is a gift that allows a calm, systematic rebalancing of portfolios to adjust for today’s difficult economic climate. We advise taking advantage of this opportunity by filling out our portfolio review request form. We would be glad to provide our expertise and assistance.

For more on the subject of this article, listen Dan’s radio show on www.ascaniwm.com.

About Defending Your Money

For more information and archived issues, visit http://www.ascaniwm.com

Defending Your Money is published free of charge, ©2009 by Ascani Wealth Management, LLC, North Palm Beach, Florida. Defending Your Money does not recommend individual securities. Rather, it seeks to educate the reader. Nothing contained herein should be considered a recommendation to buy or sell individual securities or commodities. The comments, graphs, forecasts, and indices published in Defending Your Money are based upon data whose accuracy is deemed reliable but not guaranteed.

Past performance is not necessarily indicative of future results.

Permissions Defending Your Money issues are complimentary and can be forwarded to other recipients. Republished issues MUST include attribution of the author(s) and the following short paragraph:

This investment news is brought to you by Ascani Wealth Management, LLC. Defending Your Money is a free investment newsletter from Dan Ascani and his research team at Ascani Wealth Management. Dan Ascani has been a licensed professional for over 25 years, and has been publishing market research and financial advisory services for over 20 years. Dan manages millions of dollars in individually managed accounts as a Registered Investment Advisor Representative. Contact information: http://www.ascaniwm.com.

From time to time, Defending Your Money may contain information from select third-party advertisers. We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Defending Your Money or its editors, or of Ascani Wealth Management, LLC.

If you would like to unsubscribe from this publication and are having issues with the unsubscribe link, please email us at webmaster@ascaniwm.com.

To make sure you don’t miss our urgent updates, add www.ascaniwm.com to your address book.

Dan Ascani is registered with, supervised by, and securities offered through Kovack Securities, Inc., Member FINRA/SIPC . Telephone 954-782-4771 . Located at 6451 North Federal Highway, Suite 1201, Ft. Lauderdale, FL 33308.  Dan is also a Registered Investment Advisor Representative of Kovack Advisors, Inc., and Managing Director of Gemini Futures, LLC, a CFTC-registered futures Introducing Broker, Commodity Trading Advisor, and Commodity Pool Operator.  There is no relationship between Gemini Futures LLC and Kovack Securities, Inc.,or Kovack Advisors, Inc, which are independent companies.

©2009 Ascani Wealth Management, LLC. All Rights Reserved.