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Bank Failures Surpass 50 For The Year

Bad week for bank failures, particularly here in the “Land of Lincoln.” From MarketWatch’s Alistair Barr and John Letzing last night:

Seven banks were closed by regulators on Thursday, including six in Illinois, bringing the total for 2009 to 52 as the U.S. banking system remains under pressure from rising unemployment and record foreclosures.

The John Warner Bank, in Clinton, Ill., was closed by the Illinois Department of Financial and Professional Regulation and the Federal Deposit Insurance Corp. was appointed receiver. The FDIC then sold the bank’s deposits and most of its assets to State Bank of Lincoln, in Lincoln, Ill.

The same Illinois regulator also shut the First State Bank of Winchester, in Winchester, Ill., and appointed the FDIC receiver. The federal agency said it then sold the bank’s deposits and most of its assets to the First National Bank of Beardstown, in Beardstown, Ill.

Rock River Bank, in Oregon, Ill., was also closed and the FDIC appointed receiver. The regulator sold the bank’s deposits and most of its assets to the Harvard State Bank, in Harvard, Ill.

Elizabeth, Ill.-based Elizabeth State Bank was also later closed, with Galena, Ill.-based Galena State Bank and Trust assuming the failed bank’s deposits, the FDIC said. Rounding out the list of Illinois bank failures on Thursday were Danville-based First National Bank, and Worth-based Founders Bank.

The lone bank failure for the day not located in Illinois was Dallas-based Millennium State Bank, the federal regulator said. Irving, Tex.-based State Bank of Texas has agreed to assume the failed bank’s deposits…

On Thursday, the FDIC estimated that the seven bank failures will cost its deposit-insurance fund a total of roughly $314.3 million.

Source:

“Seven banks bring 2009 U.S. failures total to 52”
Alistair Barr, John Letzing
MarketWatch, July 2, 2009

World’s Highest-Paid Investment Adviser Suspects Coming Bank Holiday

Yesterday, MarketWatch’s Peter Brimelow talked about the latest from Harry Schultz, the highest paid investment consultant in the world and publisher of the International Harry Schultz Letter.

What Brimelow wrote was, well, quite disturbing.

From the piece:

In its current issue, HSL reports rumors that “Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that ’something’ is about to happen … within 180 days, but could be 120-150 days.”

Yes, yes, it’s paranoid. But paranoids have enemies — and the Crash of 2008 really did happen.

HSL’s suspicion: “Another FDR-style ‘bank holiday’ of indefinite length, perhaps soon, to let the insiders sort out the bank mess, which (despite their rosy propaganda campaign) is getting more out of their control every day. Insiders want to impose new bank rules. Widespread nationalization could result, already underway. It could also lead to a formal U.S. dollar devaluation, as FDR did by revaluing gold (and then confiscating it).”

Gulp.

Brimelow noted that Schultz’s investment letter was up 81.7% year-to-date through May, compared to 4.1% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.

Source:

“Latest Schultz Shock: a ‘bank holiday’”
Peter Brimelow
MarketWatch, June 24, 2009

Roubini, Shiller, Whitney: No Economic, Housing Recovery Just Yet

Green shoots, or deceptive weeds? From Reuters this morning:

A rebound in key U.S. economic indicators masks an underlying malaise that will likely hamstring growth for many years and keep housing and banks in a rut, several top economists said Monday.

Nouriel Roubini, president of RGE Monitor, said a recovery in risk assets like stocks and emerging markets would not last, since it had been based on unrealistic expectations for a global economic rebound.

“I see subpar, anemic, below-trend growth for the next couple of years,” Roubini said on a panel sponsored by Time Warner.

Housing expert and MIT Professor Robert Shiller was equally pessimistic, saying, with regards to the four-year housing downturn: “This thing is not over yet.”

Banking analyst Meredith Whitney said she was even more bearish than her fellow panelists, saying that better bank earnings would eventually be challenged by the toxic assets on their balance sheets.

Wonder if there’ll be more “money manure” coming from Washington down the road…

Source:

“More Pain Ahead For US Economy: Roubini, Shiller”
Reuters, June 15, 2009

A Plea From Michael Moore

“Save our CEOs”
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Investigation Reveals U.S. Banks Getting Weaker

I give up.

I’ve spent the last 10 minutes on Google looking for a recent headline from any publication pronouncing the U.S. banking system healthy so that I might use it as an intro to this post.

I didn’t find any.

The banking industry, as a whole, was worse off at the end of last quarter than it was three months prior, according to MSNBC investigative reporter Bill Dedman. He wrote on their website Thursday:

Bad loans on real estate continue to push harder on the nation’s banks.

At the end of the first quarter, six out of every 10 banks in the U.S. were less well prepared to withstand their potential loan losses than they had been at the end of 2008, according to a new analysis by msnbc.com and the Investigative Reporting Workshop at American University in Washington. Overall, bad loans rose another 22 percent in the quarter as the recession continued.

Msnbc.com is publishing information on the nation’s 400 largest banks as well as all banks with high ratios of troubled loans to assets. Information on the financial health of more than 8,000 banks nationwide is available at the updated BankTracker site published by the American University group.

The analysis relies on information reported through March 31 to the Federal Deposit Insurance Corp., calculating each bank’s troubled asset ratio, which compares troubled loans against the bank’s capital and loan loss reserves. A similar ratio, known as a Texas Ratio, is commonly used by bank analysts as a snapshot of a bank’s financial health, though it can’t capture all the nuances of a bank’s condition.

Although much attention has been focused on surprising profits at U.S. banks in the first quarter of 2009, under the surface lurks an industry still suffering from the recession. If you set aside the 10 largest banks, the rest of the industry lost money in the quarter, primarily because of very large losses at a few banks.

While the 10 largest banks reported $10.2 billion in earnings for the quarter, the remaining 8,245 banks together lost $2.6 billion, according to the analysis.

One in five banks lost money in the quarter, and several lost big, weighing down the rest.

Four large banks account for more than $5 billion in losses. Huntington National Bank of Columbus, Ohio, lost $2.46 billion. FIA Card Services of Wilmington, Del., lost $1.47 billion. SunTrust Bank of Atlanta lost $783 million. Sovereign Bank of Wyomissing, Pa., lost $764 million.

Source:

“Most banks still weakening, analysis shows”
Bill Dedman
MSNBC, June 11, 2009

Boom2Bust Turns Two Years Old

Memorial Day Weekend 2007. Sure seems like yesterday….

Friday, May 25, 2007.

The Dow Jones Industrial Average closed out the week at 13,507.28. The S&P 500 index finished up at 1,515.73.

The median house price is $222,700, according to the National Association of Realtors.

Family net worth is at an all-time high of $64.36 trillion for the quarter.

The number of unemployed persons is 6.8 million and the unemployment rate is 4.5 percent.

Total public debt outstanding in the United States is $8.8 trillion.

Talk of the “Goldilocks economy” rules the day, and Washington and Wall Street are in “don’t worry, be happy” mode.

Federal Reserve chairman Ben Bernanke doesn’t believe the nation will slip into a recession, and he rejects the notion raised by his predecessor, Alan Greenspan, that the economy’s expansion could be in danger of fizzling out…

The Fed chief testified on Capitol Hill amid growing concerns that problems with risky mortgages and a painful housing slump could send the economy into a tailspin. Greenspan recently said there’s a one-in-three possibility of a recession this year.

But Bernanke — while acknowledging there are risks — told Congress’s Joint Economic Committee that the Fed does not see such negative forces pushing the economy into a recession.

“I would make a point, I think, which is important, which is there seems to be a sense that expansions die of old age, that after they reach a certain point, then they naturally begin to end,” Bernanke said. “I don’t think the evidence really supports that. If we look at history, we see that the periods of expansions have varied considerably. Some have been quite long.”

-Associated Press, March 29, 2007

…a new SUV in every McMansion’s garage

Fast forward to today…

The Dow Jones Industrial Average closed at 8,473.49. The S&P 500 index finished up at 910.33.

The median house price in the first quarter of 2009 is now $169,000, according to the National Association of Realtors.

Banks and businesses worldwide have lost $1.47 trillion in write-downs and credit losses in the past 22 months stemming from the collapse of the subprime-mortgage market.

Household net worth dropped a record 9 percent in the fourth quarter of 2008, pushing total net worth down to $51.48 trillion. It was the sixth straight quarterly decline from the peak of $64.4 trillion in the second quarter of 2007. Also, the drop in net worth in the fourth quarter of 2008 was the largest drop in dollar terms on record, going back to 1951, when the U.S. government began keeping quarterly records. The 9 percent drop was also the largest drop as a percentage change on record.

In April (the last month data is available for), the number of unemployed Americans reached 13.7 million persons and the unemployment rate was 8.9 percent. According to the Bureau of Labor Statistics, 5.7 million jobs have been lost since the recession began in December 2007.

The total public debt outstanding in the United States is now $11.3 trillion. Furthermore, as Bloomberg’s Mark Pittman and Bob Ivry pointed out on March 31:

The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

Goldilocks made a fine meal for the bears.

But I’m convinced our fuzzy friends still want more.

Thank you all for reading and contributing comments to Boom2Bust.com, and for inspiring me to post about some of the financial research I come across on a daily basis.

Personally, I think that while we may get out of this recession soon enough, I fear all the additional obligations accrued since 2007 will only have made the house of cards that is the U.S. financial system weaker, thereby setting ourselves up for more pain when the eventual crash comes.

You can only kick the can down the road for so long before you have to call it a day.

Year three, here we come!

Christopher E. Hill
Editor

BankUnited FSB Is Largest Bank Failure This Year

Another bank bites the dust. And a big one at that. The Associated Press’ Marcy Gordon wrote this morning:

The federal seizure of struggling Florida thrift BankUnited FSB is expected to cost the Federal Deposit Insurance Corp. $4.9 billion, representing the second-largest hit to the FDIC’s insurance fund since the financial crisis began felling banks last year.

The costliest was last year’s seizure of California lender IndyMac Bank, on which the bank insurance fund is estimated to have lost $10.7 billion.

The Office of Thrift Supervision, a Treasury Department agency, said Thursday that BankUnited FSB reported $1.2 billion in losses last year as defaults on loans piled up. The thrift “was critically undercapitalized and in an unsafe condition to conduct business,” the agency said in a statement.

Coral Gables, Fla.-based BankUnited FSB is the 34th federally insured institution to be closed this year, and the biggest.

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Gordon discussed the problem of rising bank failures in more detail. She wrote:

The 34 bank failures this year in the U.S. compare with 25 in 2008 and just three in 2007. As the economy nationwide has soured, amid rising unemployment, tumbling home prices and soaring loan defaults, bank failures have cascaded and sapped billions out of the deposit insurance fund. According to the most recent data available, the fund now stands at its lowest level in nearly a quarter-century — $18.9 billion as of Dec. 31, compared with $52.4 billion at the end of 2007.

The FDIC expects that bank failures will cost the insurance fund around $65 billion through 2013.

The FDIC has planned to impose a new emergency fee on U.S. banks to replenish the fund. Legislation passed by Congress this week boosts the FDIC’s authority to borrow from the Treasury Department if needed from $30 billion to $100 billion, allowing the agency to reduce the amount of the insurance fees.

Source:

“Florida’s BankUnited fails, will cost FDIC $4.9B”
Marcy Gordon
Associated Press, May 22, 2009

Small And Midsize Banks Threatened By Bad Commercial Real Estate Loans

Sounds like there’s the potential for more rough sailing ahead for the U.S. banking industry. Especially when it comes to the smaller players. From the
Wall Street Journal’s David Enrich and Maurice Tamman yesterday:

Commercial real-estate loans could generate losses of $100 billion by the end of next year at more than 900 small and midsize U.S. banks if the economy’s woes deepen, according to an analysis by The Wall Street Journal.

Such loans, which fund the construction of shopping malls, office buildings, apartment complexes and hotels, could account for nearly half the losses at the banks analyzed by the Journal, consuming capital that is an essential cushion against bad loans.

Total losses at those banks could surpass $200 billion over that period, according to the Journal’s analysis, which utilized the same worst-case scenario the federal government used in its recent stress tests of 19 large banks. Under that scenario, more than 600 small and midsize banks could see their capital shrink to levels that usually are considered worrisome by federal regulators. The potential losses could exceed revenue over that period at nearly all the banks analyzed by the Journal.

The potential losses on commercial real estate are by far the largest problem facing the midsize and small banks, easily exceeding losses on home loans, which could total about $49 billion, according to the Journal’s analysis. Nearly one-third of the banks could see their capital slip to risky levels because of commercial real-estate losses, the Journal found.

The Journal, using data contained in banks’ filings with the Federal Reserve, examined the financial health of 940 small and midsize banks. It applied the loan-loss criteria that the Fed used in its stress tests of the largest banks.

The findings are a stark reminder that the U.S. banking industry’s problems stretch far beyond the 19 giants scrutinized in the government stress tests. Regulators and investors have focused on too-big-to-fail banks such as Bank of America Corp. and Citigroup Inc. But more than 8,000 other lenders throughout the country are being squeezed by the recession and real-estate crash.

19 institutions does not a banking system make…

Source:

“Local Banks Face Big Losses”
David Enrich, Maurice Tamman
Wall Street Journal, May 19, 2009

‘Fear Gauge’ Returns To Pre-Banking Crisis Levels

The VIX, a measure of market volatility that some associate with investor confidence, has returned to levels not seen since before the collapse of Lehman Brothers last fall. From MarketWatch’s Nick Godt this afternoon:

The Chicago Board Options Exchange’s volatility index, otherwise known as the market’s fear gauge, has slumped to levels unseen since before the collapse of Lehman Brothers…

On Tuesday, the VIX (VIX 28.61, -1.63, -5.39%) slumped 3% to 29.33, a level last seen in early September 2008, just days before Lehman Brothers shut down. The announcement had sent the VIX sharply higher, a move up that continued through December…

According to FactSet Research, the VIX spiked to record highs of between 81 and 96 in late October, as panic gripped markets worldwide. From 2003 to July 2007, readings below 20 were the norm.

Steven Sears wrote on Barron’s website today that a related volatility index had also pulled back. Sears pointed out:

VIX’s big brother — Realized Volatility — who almost no one but the options insiders mention because he complicates the investor-sentiment conversation — has been edging lower and lower. Implied volatility — essentially a view of the future — is influenced by what happens in the past, which is realized volatility. Like VIX, realized volatility has steadily declined since October, making it possible for implied volatility to decline, too.

So, will we soon be seeing big money returning to Wall Street? Maybe not. Sears added:

Volatility analysis is very complicated. The genius of VIX is that it expresses something very complicated into a simple number that anyone can understand.

But investors need to fight the urge to view VIX as the ultimate red or green light in the investment world…

One of the least understood parts of VIX is that it only offers a 30-day snapshot of expected volatility, which is a lot different than a flashing neon sign of oversimplified investor sentiment.

Sources:

“Is lack of fear such a good thing for stocks?”
Nick Godt
MarketWatch, May 19, 2009

“Don’t Get Euphoric About a Falling VIX”
Steven M. Sears
Barrons.com, May 19, 2009

Nobel Prize-Winning Economists Warn Of U.S. ‘Lost Decade’

A couple of Nobel Prize-winning economists have weighed-in on where they think the U.S economy is heading. Back on April 17, I talked about 2001 prize winner Joseph Stiglitz. Bloomberg had interviewed him the previous day and wrote:

Stiglitz said the Fed, while it’s done almost all it can to bring the country back from the worst recession since 1982, can’t revive the economy on its own.

Relying on low interest rates to help put a floor under housing prices is a variation on the policies that created the housing bubble in the first place, Stiglitz said.

“This is a strategy trying to recreate that bubble,” he said. “That’s not likely to provide a long run solution. It’s a solution that says let’s kick the can down the road a little bit.”

While the strategy might put a floor under housing prices, it won’t do anything to speed the recovery, he said. “It’s a recipe for Japanese-style malaise.”

Paul Krugman, the 2008 Nobel Prize winner, is also warning of the same outcome for the U.S. economy. Earlier this week, Reuters wrote the following about the New York Times columnist:

The United States risks a Japan-style lost decade of growth if it does not take aggressive action to stimulate its economy and clean up its banking system, Nobel Prize-winning economist Paul Krugman said on Monday.

“We’re doing half-measures that help the economy limp along without fully recovering, and we’re having measures that help the banks survive without really thriving,” Krugman said.

“We’re doing what the Japanese did in the nineties,” he told a small group of reporters during a visit to Beijing…

Krugman said he expected little or no employment growth this year or next in the United States, where the jobless rate in April hit a 25-year high of 8.9 percent.

“A second stimulus is becoming clearly urgent. They need a very, very strong stimulus,” said Krugman, a Princeton University professor and a New York Times columnist.

Source:

“U.S. risks ‘lost-decade’ due to half-steps: Krugman”
Reuters, May 11, 2009

Robert Prechter Sees Stock Plunge, Deflationary Depression

If Marc Faber’s prediction that the U.S. government will go bust didn’t start your weekend off on a positive note, how about Robert Prechter’s forecast that U.S. stocks will plummet in advance of a deflationary depression? From Reuters (UK) yesterday:

Longtime technical analyst Robert Prechter, who forecast the 1987 stock market crash, predicted this week that U.S. equities may plunge to half their lows hit in March as a deflationary depression bites.

Oil and U.S. Treasury bonds are also locked in long term bear markets, while corporate bond prices will plunge precipitously by next year as broad economy, banking system and company earnings sustain more damage from a financial crisis that’s akin to the Great Depression, he said.

The U.S. S&P 500 stock index’s rebound by nearly 40 percent since it sagged to a 12-year closing low of 676 points on March 9 is not sustainable, Prechter said in an interview with Reuters.

“It’s not the start of a new bull market,” said Prechter, chief executive at research company Elliott Wave International in Gainesville, Georgia. “Our models are (showing) right now that it is a much bigger bear market than most people realize, something along the lines of 1929-1932,” he told Reuters in a wide ranging interview. “It’s a very rare event,” he added.

“I think the next leg down will be at least as severe if not more severe than what we just experienced. So you want to stay on the side of safety,” he said.

As in his 2002 book “Conquer the Crash,” which warned of the dangers of a U.S. debt bubble and deflationary depression, Prechter continues to advocate safer cash proxies such as Treasury bills…

“Deflation is coming, it’s going to lead to a depression. We’re not at the bottom yet,” Prechter said. “I think we are going to have bouts of deflation separated by recoveries.”

Source:

“Stocks still face deflationary collapse: Prechter”
Haitham Haddadin, Ellis Mnyandu, and John Parry
Reuters (UK), May 14, 2009

Wall Street Pay To Be Dictated By Washington?

The Wall Street Journal reported today that the Obama administration is seriously contemplating changing compensation practices on Wall Street and throughout the financial services sector. The Journal’s Damian Paletta and Deborah Solomon wrote:

The Obama administration has begun serious talks about how it can change compensation practices across the financial-services industry, including at companies that did not receive federal bailout money, according to people familiar with the matter.

The initiative, which is in its early stages, is part of an ambitious and likely controversial effort to broadly address the way financial companies pay employees and executives, including an attempt to more closely align pay with long-term performance.

Administration and regulatory officials are looking at various options, including using the Federal Reserve’s supervisory powers, the power of the Securities and Exchange Commission and moral suasion. Officials are also looking at what could be done legislatively.

Among ideas being discussed are Fed rules that would curb banks’ ability to pay employees in a way that would threaten the “safety and soundness” of the bank — such as paying loan officers for the volume of business they do, not the quality. The administration is also discussing issuing “best practices” to guide firms in structuring pay.

At the same time, House Financial Services Committee Chairman Barney Frank (D., Mass.) is working on legislation that could strengthen the government’s ability both to monitor compensation and to curb incentives that threaten a company’s viability or pose a systemic risk to the economy.

Just more posturing, or another nail in the coffin for Wall Street as we know it?

Some, like legendary investor Jim Rogers, would say it really doesn’t matter, as they argue a new financial center is being established in Asia. They might have a point, considering that’s where the money is flowing to these days.

As usual, time will tell.

Source:

“U.S. Eyes Bank Pay Overhaul”
Damian Paletta, Deborah Solomon
Wall Street Journal, May 13, 2009

Commercial Real Estate Poses Danger For Regional Banks

Anyone know who Tom Barrack, Jr., is? Besides being one of the legendary investors followed on Boom2Bust.com’s sister blog, Investorazzi.com, back on October 31, 2005, he made the cover of Fortune as “The World’s Greatest Real Estate Investor.” Donald Trump once said, “Tom has an amazing vision of the future, an ability to see what’s going to happen that no one else can match.”

And these days, Barrack sees danger ahead for regional banks from commercial real estate assets.

From Henry Sender of the Financial Times (UK) last Friday:

The Federal Reserve’s stress-test estimate that 19 leading US banks could face losses of $53bn on commercial real estate assets is raising fears that many smaller banks could be facing big losses on their loans to the sector.

Experts anticipate that commercial real estate prices will drop another 20 per cent – on top of the 30 per cent drop so far. “There are two revaluations going on,” said Michael Pralle, a veteran real estate investor. “The risk premium is going up, the cost of debt is going up and the amount of leverage available is coming down.”

The Fed predicts that under a “more adverse scenario” for the US economy, the 19 banks that it subjected to stress tests could lose a combined $53bn, or 8.5 per cent, of the $600bn or so of commercial real estate assets on their books…

However, some investors and analysts said they suspect the problems for regional banks could be severe. They note that losses on commercial real estate loans can be difficult to track because different banks include different kinds of loans in the category.

Regulators “are underestimating the weight of what will happen”, says Tom Barrack, head of real estate private equity firm Colony Capital, expressing particular concerns about lower-quality shopping mall developments. “The regional banks are where the TNT is buried.”

Source:

“Commercial real estate fears for regionals”
Henry Sender
Financial Times (UK), May 8, 2009

Stress Test Results: Big Banks Could Lose Up To $599 Billion

“A billion here, a billion there, pretty soon it adds up to real money.”

-Everett Dirksen (U.S. Senator from Illinois. 1896-1969)

From the Wall Street Journal today:

The federal government projected that 19 of the nation’s biggest banks could suffer losses of up to $599 billion through the end of next year if the economy performs worse than expected and ordered 10 of them to raise a combined $74.6 billion in capital to cushion themselves.

The much-anticipated stress-test results unleashed a scramble by the weakest banks to find money and a push by the strongest ones to escape the government shadow of taxpayer-funded rescues.

The Federal Reserve’s worst-case estimates of banks’ total losses and capital shortfalls were smaller than some had feared. Optimists interpreted the Fed’s findings as evidence that the worst is over for the industry. But questions remain about the stress tests’ rigor, in part since the Fed scaled back some projected losses in the face of pressure from banks.

You don’t say?

Source:

“Fed Sees Up to $599 Billion in Bank Losses”
David Enrich, Robin Sidel, and Deborah Solomon
Wall Street Journal, May 8, 2009