In the April issue of Themes on the Global Markets newsletter, Adolfo Laurenti, senior economist at Mesirow Financial, explains why the strength of the recovery hinges on the state of the banking sector, and highlights the strengths and weaknesses of the banking system as it stands today.
Providing examples of the mixed picture of today’s banking sector, he asserts that evidence that bank balance sheets are improving is starting to surface. “On the flip side,” says Laurenti, “several problems persist, with many people still extremely bearish on the banking sector.”
Laurenti also addresses the policy shift from TARP to PPIP (Public-Private Investment Program). “PPIP is a step in the right direction, but it is marred by political risk and a change in accounting rules that may derail its execution and prevent its success,” he cautions.
“Scrutiny by the Administration and Congress has accelerated in recent weeks, reaching a crescendo in the uproar over AIG bonuses, and the long overdue, but heavy-handed action in regard to General Motors and Chrysler. Many investors also fear regulatory changes that will ultimately undermine the value of any asset they may buy.”
“On net, the jury is still out on PPIP, and the sky is not yet clear over the banking sectors. Unfortunately, the recovery cannot wait.”
“In a few months, it is likely that the economy will finally be on the mend, albeit slowly. Preliminary signs of stabilization are already emerging, and sometime during the second half of the year we are likely to see the early stages of a recovery. In order for that recovery to have any momentum, however, our banking system will need to be back on its feet.”
L.D.