Boom2Bust.com

Quote For The Week

Financial analyst Eric King talked about gold and silver on the Financial Sense Newshour this weekend, and warned listeners:

But I want people to listen carefully to what I’m about to say to them. Do not listen to statements made from this government. Ignore them. Ignore statements made by Paulson, who is retiring in November right after the election. They have been consistently wrong in all of their statements. They have lost control of the system, in my opinion, and the system is breaking right now. The United States banking system is insolvent, and they are trying to keep this hidden from people and try to get more suckers to put more money into these banks, but the suckers are not lining up anymore. A big tax bill is going to be laid on the American public, and as Greenspan stated in Belgium, the Federal Reserve, and even the Treasury, stands ready to create money without limit. We are about to go into that phase now where we are going to have very serious money printing, and the Fed knows it, Paulson knows it, the Treasury and Bernanke know it, and because of that they had to crush these metals ahead of that…

Why Do Banks Fail On Fridays?

Back on August 7, the daily web magazine Slate.com attempted to explain this phenomenon. With assistance from David Barr and Robert Schoppe of the Federal Deposit Insurance Corporation, Nina Shen Rastogi wrote:

Last week, First Priority Bank in Bradenton, Fla., became the eighth American bank to fail this year. Every single one of these institutions went under on a Friday. Why do banks always go bust on Fridays?

So the government has a full weekend to reopen them under new management. If the banking business didn’t return to normal at the earliest opportunity, the specter of agitated customers might erode public confidence in the banking system, triggering a wider panic. So regulators close banks at the end of the day on Friday to take advantage of the regularly scheduled days off. In that time, officials from the Federal Deposit Insurance Corp.—the agency in charge of supervising the actual takeover—can settle a failed bank’s accounts and carve out assets to liquidate later, thereby easing the transition to a new owner. And if there is no new owner—i.e., if no healthy bank has stepped up to purchase the failed one—then the FDIC can use the weekend to write checks to customers for the total amount of their insured deposits. (The FDIC can also create a temporary bridge bank, as it did last month with IndyMac, to take over the failed bank’s operations.)

Shena Rastogi detailed what exactly transpires on an “FDIC Friday,” as it’s now known. She wrote:

On the Friday of a typical takeover, the FDIC arrives on-site with a large team to manage the transition. (When a large bank fails, this might include upward of 100 people.) The team has two main priorities. First, it must figure out which customers’ deposits are insured and which are not. This can be a tangle, since customers can sock away money in a variety of accounts to ensure that their deposits fall under FDIC-insured limits. The second priority is getting the bank ready to open under new ownership by Monday. That involves discarding any material with the old bank’s name on it—like posters, cashiers’ checks, and marquee signs—and putting the new bank’s paperwork, advertisements, and employees in place. Specialists from other departments, such as facilities, human resources, IT, public relations, and accounting, round out the FDIC’s team. Officials once even hired a hypnotist to help a bank employee remember a vault code.

The FDIC “Failed Bank List” now includes 8 institutions. Will today be another “FDIC Friday?”

Source:

“Why Do Banks Fail on Fridays?”
Nina Shen Rastogi
Slate.com, August 7, 2008

Credit Crisis Far From Over For Financial Sector

Bank and securities firm write-downs since the beginning of 2007 now total $503 billion. And yet, a number of analysts are saying that the carnage is far from being done. Bloomberg’s Jeff Kearns wrote earlier today:

The credit crisis is “broad, deep, and global” and “far from over” for financial companies even after they reported $500 billion in writedowns and credit losses, Merrill Lynch & Co.’s chief investment strategist said.

“Investors are significantly underestimating both the scope and the extent of the credit bubble and the consequences of its subsequent deflation,” Richard Bernstein wrote in a note to clients. “The problems are not confined to large institutions that are overexposed to U.S. subprime loans.”

The lingering effects of the crisis mean banks and brokerages need “massive” consolidation because of the glut of lending worldwide, Bernstein said.

Thumbnail

Sources:

“Bank Debt Risk Rises as Writedowns, Losses Exceed $500 Billion”
Shannon D. Harrington and Abigail Moses
Bloomberg, August 13, 2008

“Credit Crisis Still ‘Far From Over,’ Merrill’s Bernstein Says”
Jeff Kearns
Bloomberg, August 13, 2008

Worrisome News From The Fed

From the Wall Street Journal’s Real Time Economics Blog yesterday:

U.S. banks continued to tighten their standards on loans to households and businesses in the second quarter, said a Federal Reserve study that also shows that many banks think the credit tightening trend could continue into the first half of 2009…

About 60% of the domestic banks surveyed reported having tightened lending standards to large and middle-market businesses. That’s up slightly from what was reported in the last Fed survey conducted in April and released in May. About 65% of the institutions, a percentage that is also up from the previous survey, also said they had tightened their lending standards on so-called commercial and industrial loans, also known as C&I loans, to small firms over the same period…

In addition, a significant portion of the banks surveyed reported having tightened their lending standards on prime, nontraditional and subprime residential mortgages over the previous three months. About 75% of domestic respondents, which is up from 60% in the previous survey released in May, said they had tightened their lending standards on prime mortgages. Also, six out of seven respondents that originated subprime mortgage loans, which is a higher proportion than what was reported in the previous survey, indicated that they had tightened their lending standards on those loans over the past three months.

Turning to the results of the survey’s consumer lending questions, about 65% of domestic banks indicated that they had tightened their lending standards on credit card loans over the past three months, which is up remarkably from the 30% reported in the survey released in May.

From Reuters’s John Parry earlier today:

U.S. economic growth is expected to slow more sharply in the coming months than previously forecast with employers shedding staff into next year, according to a Philadelphia Federal Reserve survey released on Tuesday.

Economists lowered their forecasts for third-quarter gross domestic product growth to a 1.2 percent annual rate from the previous 1.7 percent estimate, according to the bank’s quarterly Survey of Professional Forecasters.

“Growth in U.S. real output over the next few quarters looks slower now than it did just three months ago,” the Philadelphia Fed said on its Web site.

In the fourth quarter, the U.S. GDP growth forecast was slashed to 0.7 percent growth, from the previous 1.8 percent forecast…

The current survey also forecast the U.S. unemployment rate would be 5.7 percent in the third quarter, above its previous 5.4 percent forecast, then rising to 5.8 percent in the fourth quarter.

“A weaker near-term outlook for the labor market accompanies the outlook for slower output growth,” the Philadelphia Fed said.

From MarketWatch’s Rex Nutting today:

The U.S. economy faces a prolonged period of anemic growth, but that’s no reason to get complacent on inflation, said Dallas Fed President Richard Fisher in an interview with the Dallas Morning News published Tuesday. “I expect that in the second half of this year we will broach zero growth,” he said. Fisher, a voting member of the Federal Open Market Committee who’s been on the losing side on the past five votes on interest rates, said the credit crunch is worse than the S&L crisis of the late 1980s.

Sources:

“Fed Study: Banks Tighten Credit on Households, Businesses”
Night Editor
Wall Street Journal (Real Time Economics Blog), August 11, 2008

“UPDATE 1-US economy seen slowing more sharply-Philly Fed”
John Parry
Reuters, August 12, 2008

“Fed’s Fisher expects close to zero growth this year”
Rex Nutting
MarketWatch, August 12, 2008

Write-Downs Approach $500 Billion, With More To Come

According to Bloomberg today, the world’s biggest banks and brokerages have reported $497 billion of write-downs since the start of 2007.

And the end is nowhere in sight, according to CNN Money’s Paul R. La Monica. The editor-at-large wrote this morning:

Make no mistake: The worst probably is not over for financial firms. Not by a long shot.

Many bank stocks have bounced sharply from their panic-induced lows of mid-July on hopes that the bleak second-quarter results represented the bottom.

But the bigger-than-expected losses reported by Freddie Mac and Fannie Mae this week, accompanied by dismal forecasts for the housing market, are strong indicators that there are likely more credit-related woes to come.

“The banks are still at the mercy of writedowns. I don’t think the worst is over for financials yet,” said Liz Ann Sonders, chief investment strategist with Charles Schwab & Co.

The International Monetary Fund forecasts that global losses tied to the credit crisis will be $945 billion. It’s a widely used number, but Sonders thinks it’s “potentially very conservative.”

So how high could losses go? Sonders points to the $1.6 trillion forecast from hedge fund firm Bridgewater Associates or even the $2 trillion number from Nouriel Roubini, the highly-respected professor of economics at NYU’s Stern School of Business.

And based on the losses already reported, we’re not even halfway through the crisis.

Source:

“$1 trillion in losses? Bank on More”
Paul R. La Monica
CNN Money, August 8, 2008

Next Wave Of Mortgage Defaults Coming

Think the U.S. housing crisis is nearing an end? Think again, says Vikas Bajaj of the Paris-based International Herald Tribune. Bajaj wrote yesterday:

The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is building with alarming speed.

After two years of upward spiraling defaults, the problems with mortgages made to people with weak, or subprime, credit are showing the first, tentative signs of leveling off.

But with the U.S. economy struggling, homeowners with better credit are now falling behind on their payments in growing numbers. The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A, or alt-A, mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

So, when should we expect this new tsunami of mortgage defaults to arrive? Bajaj wrote:

While it is difficult to draw precise parallels among various segments of the mortgage market, the arc of the crisis in subprime loans suggests that the problems in the broader market may not peak for another year or two, analysts said…

Bajaj said that prime and alt-A borrowers typically have a 5 to 7-year grace period before having to start making payments toward their principal. By contrast, subprime loan borrowers had a 2 to 3-year introductory period. David Watts, an analyst with CreditSights, told the Tribune that regarding alt-A mortgages:

More delinquencies look like they are on the horizon because so few of them have reset.

Delinquencies in prime and alt-A loans are worrisome for financial institutions because they have more of these types of loans on their books than they do subprime mortgages. Bajaj noted:

During a conference call with analysts last month, James Dimon, the chairman and chief executive of JPMorgan Chase, said he expected losses on prime loans at his bank to triple and described the outlook for them as “terrible.”

Madness, “One Step Beyond” (1980)
YouTube Video Link

Source:

“A second, far larger wave of U.S. mortgage defaults is building”
Vikas Bajaj
International Herald Tribune (France), August 4, 2008

Move Over Money Honey, It’s The Diva Of Doom

Maria Bartiromo? As my British footballing friends across the pond would say, “Who are yer?” While CNBC’s “Money Honey” was an icon of the nineties stock market boom, Oppenheimer analyst Meredith Whitney, who I refer to as “The Diva of Doom,” is seeing a meteoric rise in popularity as the global economic crisis unfolds. It’s not her looks that are winning over open-minded investors (okay, maybe a wee bit). But her gloomy forecasts, which are turning out to be uncannily correct. CNN Money’s Jon Birger wrote yesterday:

Whitney’s bearishness has deep roots. In fact, she was the first analyst to sound the alarm loudly about subprime mortgages, predicting back in October 2005 that there would be “unprecedented credit losses” for subprime lenders.

Last October, the analyst correctly predicted Citibank would have to cut its dividend.

And now? Well, Whitney is saying U.S. home prices will fall another 33%. From the CNBC website yesterday:

Housing prices will fall more than 30 percent before the market recovers and banks will continue their reluctance to lend until the credit crisis clears up, Oppenheimer analyst Meredith Whitney said on CNBC.

In a wide-ranging interview, Whitney said the housing deterioration will be worse than even the doom-and-gloom predictions that already have circulated regarding the market…

“There’s one obvious area where the bad news isn’t all out yet, and that’s with home prices… Home prices are going to fall much more than people expect,” she said.

“I think it’s going to be well worse than 33 percent, and here’s why: If you look at the futures market, it’s indicating a range right around between 2002-2003 levels, when home ownership rates were actually higher, but fewer people can qualify for a mortgage because you’ve got to put 20 percent down, and that’s a lot of money for people,” she continued. “Furthermore, then you’ve got to find a bank to lend to you, because, Countrywide’s not lending to you.”

Meredith Whitney aka “The Diva of Doom”

In addition to a continuing housing slump, Whitney doesn’t see an end to the credit crunch anytime soon. CNN Money’s Jon Birger wrote yesterday:

The credit crisis is far from over, star analyst Meredith Whitney tells Fortune magazine in its upcoming issue.

Whitney, who audaciously - and correctly - predicted last October that Citigroup would have to cut its dividend, tells the magazine that banks in general today are still facing much bigger credit losses than what they’ve reported so far.

The Oppenheimer & Co. analyst warned last year - and continues to warn today - that the “incestuous” relationship between the banks and the credit-rating agencies during the real estate bubble will have a long-lasting impact on banks’ ability to recover.

How so? The CNN senior writer noted:

For years the ratings agencies, which are paid by the issuers of bonds, gave high marks to securities backed by subprime mortgages. Many of those bonds, of course, turned out to be anything but safe.

With Moody’s and Standard & Poor’s now trying to make up for past wrongs, the pace of downgrades on mortgage securities is quickening.

This is a problem, because every time their portfolios are hit by significant credit downgrades, banks are forced to improve their capital ratios. Often that means issuing reams of new stock, which leads to serious dilution, as shareholders at Citi, Merrill Lynch and Washington Mutual now know.

“You’re going to have this stealth pressure on bank balance sheets until you start to see the ratio of downgrades to upgrades change,” Whitney tells the magazine.

Sources:

“Housing Prices Could Skid Another 33%, Analyst Says”
CNBC, August 4, 2008

“Whitney: Credit crunch far from over”
Jon Birger
CNN Money, August 4, 2008

The Next Great Depression

Taking it down a few notches today, I enjoyed a nice cigar from the Dominican Republic this afternoon out on my balcony here in the Windy City. Kind of bummed out that one of my suppliers raised their prices, though. Too bad. I almost pulled a JFK and ordered a stockpile of cigars last year after Washington Democrats were looking to increase the tax cap from a nickel per cigar to $10 a stick— or 20,413%. Unbelievable. By the way, never heard of the JFK cigar story? Well, if you have time, I highly recommend you watch the following video (a little over 3 minutes long) of Pierre Salinger, JFK’s secretary, telling the story (and other cigar-related ones)…

YouTube Video Link

While puffing away, I got the chance to listen to a portion of last weekend’s “Financial Sense Newshour” broadcast. Jim Puplava and John Loeffler have been talking about a financial crisis window for a while now, which they expect to take place between 2009 and 2012. Puplava and Loeffler had this to say last weekend:

JOHN: So looking forward, say, 12 to 24 months, we would say, given where we’re going, we can probably look towards higher gold and metals prices; there will be another money crisis – another currency crisis – and all it would seem like they’re [Congress] doing right now is staving off the day of reckoning. Let’s face it, we said that 2008, that’s the ramp up to 2009 to 2012 – it’s accelerated a little more than I thought it would be and it’s a little more violent than I thought it would be, but nevertheless we’re still on that; and somewhere in that window, all of this stuff begins to fall apart and you can’t tell what’s going to trigger it, but it will go.

JIM: It’s going to trigger. And I think that the thing that’s scaring the heck out of them [Congress] is all of this is starting to unfold – whether it’s $4 gasoline at the pumps, headline inflation with foods, banks going under, stock market manipulation – all of this – and they’re desperately just trying to buy time to get elected because you’ve got 535 people in Congress who are worried about keeping their jobs. And what I think is going to happen is as this worsens the country is going to lurch very hard to the left in the November election (we’re going to get into this in the next segment) and then as a result of the policies that are going to put us in place, that is going to give us our great depression that I anticipate.

By 2010, the United States is going to be in a major depression.

And then, what is going to happen is we’re going to lurch – almost do a 180 degree turn – and lurch very hard to the right as one disaster after another unfolds upon the country.

Great cigar, not so great forecast…

Source:

Financial Sense Newshour
3rd Hour, Part 2
FinancialSense.com, July 19, 2008

More Bank Failures Ahead?

According to the Paris-based publication International Herald Tribune, a number of analysts are predicting more U.S. bank failures in the aftermath of the IndyMac tragedy. IHT’s Louise Story wrote Monday:

As home prices continue to decline and loan defaults mount, U.S. regulators are bracing for dozens of American banks to fail over the next year…

The nation’s banks are in far less danger than they were in the late 1980s and early 1990s, when more than 1,000 federally insured institutions went under during the savings-and-loan crisis. The debacle, the greatest collapse of American financial institutions since the Depression, prompted a government bailout that cost taxpayers about $125 billion.

But the troubles are growing so rapidly at some small and midsize banks that as many as 150 out of the 7,500 banks nationwide could fail over the next 12 to 18 months, analysts say. Other lenders are likely to shut branches or seek mergers.

William Isaac, chairman of finance consulting firm Secura Group and a former chair of the FDIC in the early eighties, told the IHT:

Failed banks are a lagging indicator, not a leading indicator. So you will see more troubled, more failed banks this year.

Story noted that troubled small and midsize banks all share something in common:

They vary in size and location, but their common woe is the collapsed real estate market and souring mortgage loans.

According to the IHT piece, the Federal Deposit Insurance Corporation, or FDIC, has $53 billion set aside to reimburse consumers for deposits lost at failed banks. However, the IndyMac situation will subtract $4 to $8 billion from that fund, the agency estimates, “and that could force it to raise more money from the banks that it insures,” Story said.

Source:

“Analysts say more U.S. banks will fail”
Louise Story
International Herald Tribune (France), July 14, 2008

Wall Street Journal’s Smack Down Of Senator Schumer

If U.S. Senator Charles Schumer (D-NY) is a subscriber to the Wall Street Journal, I’m pretty sure he’s in the process of cancelling it as we speak. Even if it was a complimentary subscription. Last night, I happened to come across an op-ed on the Journal website that makes it pretty clear how they feel about “Bank Run Charlie” in the wake of the IndyMac failure. From the Review & Outlook piece entitled “$4 Billion Senator” of July 15:

The federal takeover of IndyMac Bank over the weekend could cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion. But Senator Chuck Schumer, who helped to precipitate the collapse by publicizing a letter to the bank’s regulator last month, has no remorse.

He was, he says, just doing his job in telling regulators that the bank “could face a collapse,” a prophecy that quickly proved to be self-fulfilling. “It’s what legislators are supposed to do,” the New York Democrat told the Journal. Depositors who spent Monday trying to recover some of their money might beg to differ.

The Office of Thrift Supervision (OTS), whose job it actually was to regulate IndyMac, took a different view. “The immediate cause of the closing,” the OTS wrote in a press release, “was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York.” The OTS added: “In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.”

As the op-ed piece noted, nobody is pretending that IndyMac wasn’t in bad shape before Senator Schumer wrote his letter. But the Journal argued:

Mr. Schumer was not content merely to share his profound concern with regulators. He also leaked the June 26 letter to the press – which is more like shouting “fire” in a crowded bank than dialing 911.

Yet, “Bank Run Charlie” continues to dodge any blame, as most successful politicians routinely do. According to the WSJ:

Mr. Schumer now argues that OTS was asleep at the switch, and that blaming him is like blaming “the fire on the guy who called 911.” In fact, it’s blaming the guy who poured on the gasoline. Very few banks, if any, would remain standing for long in the current tense financial environment after a Senator, in effect, told its depositors to run for the exits. In the 1930s, such tipsters were derided as rumormongers and often faced indictment for encouraging depositors to stampede banks.

Only last week, the Securities and Exchange Commission announced an investigation into the role of rumor-peddlers in the run on Bear Stearns. We somehow doubt that Mr. Schumer will receive similar SEC scrutiny for his very similar role in bringing about a liquidity crisis at IndyMac. But he may be more deserving.

Source:

“The $4 Billion Senator”
Review & Outlook
Wall Street Journal, July 15, 2008

Furious IndyMac Customers Caught On Video

Los Angeles television station KTLA Channel 5 was broadcasting from an Encino IndyMac branch this morning as customers lined up to try and withdraw money from the failed bank. When word got out that some customers wouldn’t be allowed in, tempers flared. Is this a sign of things to come for the U.S. banking system? As one patron who was waiting in line said:

Two or three more bank runs, I don’t think anyone’s going to have very much confidence.

While I was able to access the video from my computer earlier in the day, the KTLA website is now saying its server is currently experiencing technical difficulties.

You can access (I hope) the 5 minute 58 second video here.

Hat tip WhatReallyHappened.com.

Source:

“Customers Grow Furious Outside Encino IndyMac Branch”
Eric Spillman
KTLA Channel 5, July 15, 2008

Quote For The Week

The administration is doing what they always do, blaming the fire on the person who called 911.

-New York Senator Charles Schumer, deflecting blame that he was partially responsible for the IndyMac bank run and failure last week.

When a senior senator who is in a number of influential posts regarding oversight of bank regulators directly attacks the confidence of a depository institution, it matters. Not surprisingly, the director of the Office of Thrift Supervision concluded that the collapse of the bank immediately following the Senator’s comments was not a coincidence. Director Reich concluded that Senator Schumer had ‘given the bank a heart attack’.

Why? Why would a federal official with enormous power, destroy an institution on which tens of thousands of depositors (not all of whom are insured) and employees depend? Why would a New York Senator attack a Pasadena bank, acting as some sort of amateur, self-appointed, long-distance bank examiner?

-Jerry Bowyer, CNBC “Kudlow & Co.” Contributor

FDIC Failed Bank List

For all of you readers “keeping score” of bank failures in the United States, I happened to come across a very interesting resource this morning. If you go to the Federal Deposit Insurance Corporation (FDIC) website, at the bottom right-hand corner of the home page under “Top Search Results” you’ll find a link for Failed Bank List. The FDIC explains the purpose of the list:

The FDIC is often appointed as receiver for failed banks. This page contains useful information for the customers and vendors of these banks. This includes information on the acquiring bank (if applicable), how your accounts and loans are affected, and how vendors can file claims against the receivership.

This list includes banks which have failed since October 1, 2000.

So far in 2008, there have been 5 casualties (the most in one year since the list’s inception):

• January 25- Douglass National Bank, Kansas City, MO
• March 7, 2008- Hume Bank, Hume, MO
• May 9, 2008- ANB Financial, NA, Bentonville, AR
• May 30, 2008- First Integrity Bank, NA, Staples, MN

and last (only for now, it appears) but not least…

• July 11, 2008- IndyMac Bank, Pasadena, CA

May they rest in peace.

Source:

Federal Deposit Insurance Corporation (FDIC) website

IndyMac Collapse Second Largest Bank Failure In U.S. History

Well, it wasn’t long before all those recalled FDIC employees were put to good use. From MarketWatch tonight:

IndyMac Bancorp Inc. became the biggest casualty of the subprime mortgage crisis on Friday, as federal regulators shut down the troubled Pasadena, Calif.-based savings bank in one of the largest U.S. bank failures ever.

The Federal Deposit Insurance Corp. said in a statement it will take over operations of IndyMac, which will open for business on Monday as IndyMac Federal Bank. The thrift had total assets of $32.01 billion as of March 31.

IndyMac Bancorp Inc. now has the distinction of being the second-largest financial institution to fail in U.S. history, according to the Office of Thrift Supervision, which had regulated IndyMac.

MarketWatch reporters Jonathan Burton and John Letzing noted:

Regulators said the “immediate cause” of IndyMac’s failure was a deposit run in recent days that began after a June 26 letter to the OTS and the FDIC from New York Senator Charles Schumer was made public. The letter voiced concerns about IndyMac’s soundness.

By July 10, depositors had pulled more than $1.3 billion from their accounts, the OTS said in a statement.

“The institution failed today due to a liquidity crisis,” said OTS Director John Reich. “Although this institution was already in distress, I am troubled by any interference in the regulatory process.”

Schumer couldn’t immediately be reached for comment late Friday.

It must be pretty lonely up there on that pedestal right now…

Bank Slayer?

Source:

“Latest victim of mortgage crisis, IndyMac taken over”
Jonathan Burton, John Letzing
MarketWatch, July 11, 2008