Analyst: Banking Industry Not All Doom, Gloom
STEVE INSKEEP, host:
The Obama administration, just like the last one, is committed to a massive bailout of troubled banks. So it's surprising to come across a noted analyst who thinks the banks are not troubled at all. Richard Bove works for Rochdale Research and his analysis is so different from what we've heard for months that it forces you to pause. Bove says the bailout was only needed because of financial panic, not an underlying problem, at least not one that has appeared yet. Now that some time has passed since that initial panic, he says toxic assets have not proven to be that toxic, and banks still have plenty of money coming in.
Mr. RICHARD BOVE (Rochdale Research): You know, you have all of these people like Paul Krugman, Alan Greenspan, senators saying that the banks may need to be nationalized, but they are not looking at the whole picture of the banking industry. In other words, if one took a look at the operating businesses of the banks, they would see that they are relatively strong. For example, in the fourth quarter - we don't have numbers for the first quarter yet obviously - we had more money pour into deposits in the banks than ever before in the history of the industry. It was $100 billion a month. And banks are telling me that in the first quarter that inflow of deposits continued to be quite high.
INSKEEP: What is it, people that don't want to have their money in the stock market anymore, so they're just parking it in savings accounts?
Mr. BOVE: Well, I mean that's certainly part of it, but the fact is that in recessions you generally find that the opportunity to invest money in other areas of the economy, whether it's inventories, receivables, stocks, money market funds, you know, are not that attractive. So money tends to pool in the banking system.
INSKEEP: Do you mean to say that the banks are safe and out of trouble?
Mr. BOVE: Absolutely. I don't think there's any question about that at all. The whole dispute seems to be over capital and some arcane reading of capital, which nobody even cared about a year ago. But a company stays in business because there's more cash coming in than going out.
INSKEEP: Let me just make sure that I understand this, because you're saying the cash flow is pretty good right now. When you talk about capital, though, there are perhaps trillions of dollars in bad loans on the books of various banks and other financial institutions, and the question is whether they have enough capital, enough investment, enough stock, to cover the anticipated losses there. That's the question, right?
Mr. BOVE: Yeah, only it's a really bad question, because the fact of the matter is you used the cliché that everybody's using, which is trillions of dollars in bad loans.
INSKEEP: Help me out.
Mr. BOVE: Well, I think it's a hallucinogenic dream for people to say trillions of dollars in bad loans. There's only $8 trillion in loans in the banking system. And when you hear people come along and say there's a couple of trillion dollars in bad loans that have to be written off, you're saying that one out of every four dollars in loans in the banking system has to be written off.
INSKEEP: Well, aren't we talking also about mortgage-backed securities and other things that were invented and built on top of those trillions of dollars in loans?
Mr. BOVE: There's not much more than a couple of trillion of dollars of that either. The fact of the matter is that 98 percent of the loans in the American banking system are paying interest. And 97 percent of the loans are current in all interest and principal payments. So you see, there's a huge gap between all of this fluff which is being mentioned about the banking industry and the reality.
INSKEEP: You are pointing out a basic reality of America, which is that people pay the mortgage if they can pay anything at all, or they pay off the home equity loan. They don't want to lose the house even if it's a difficult situation. You're arguing that that's the reality. But I thought the problem was that the financial industry had drifted away from reality into this fantasy-land of mortgage-backed securities and increasingly exotic securities that no one could properly value and consequently there is a real problem from this fantasy financial transaction. Isn't that true?
Mr. BOVE: Well, let's think about that. If you've got a mortgage-backed security…
Mr. BOVE: …and it's paying interest on a timely basis and it's paying principal when it should, what do you think it's worth? Why the whole system has got to be driven by the loss reported on a small number of loans is beyond my comprehension.
INSKEEP: Well, Richard Bove of Rockdale Research, thanks very much.
Mr. BOVE: Thank you.
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