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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

U.S. Housing Price Forecast: Double-Digit Percentage Decline Still Ahead

“Housing rebound still fragile; St. Louis sales down 16% from May ‘08”

-St. Louis Post-Dispatch, June 23, 2009

“Option ARMs reset threatens housing rebound”

-Seattle Times, June 27, 2009

“Housing rebound continues, barely”

CNN Money.com, July 1, 2009

From headlines like these, I apparently slept through the U.S. housing bottom. Then again, maybe not. From Reuters today:

U.S. housing prices will fall by a double-digit percentage from already beaten-down levels, resulting in an overall 40 percent plunge by the time foreclosures peak in the second half of 2010, Barclays Capital economist Michelle Meyer said.

Meyer issued her forecast two days after the Standard & Poor’s/Case-Shiller Home Price Indexes showed for April an 18.1 percent year-to-year decline, compared with 18.7 percent in March, in the rate of home price declines in 20 major U.S. metropolitan areas.

The indexes have tracked the prices of U.S. single-family homes since 1987.

“While the early signs of improvement are in place for housing, the market will likely remain out of balance for some time, given the flood of foreclosures,” Meyer wrote.

“Home prices are likely to continue to fall, albeit at a slowing pace, even after the economy technically emerges from the recession.” Home prices have fallen 32.6 percent from their peak three years ago, S&P/Case-Shiller said.

On that basis, they would need to fall another 11 percent for an overall 40 percent peak-to-trough decline. Further declines could imperil metropolitan areas that have yet to experience the worst of the nation’s housing slump.

According to S&P/Case-Shiller, New York was the only major market to have above-average, month-over-month housing price declines in both March and April and also have a below-average decline for the year ended in April.

Home prices in that market fell 12.5 percent from a year earlier. The Denver area had the smallest drop, 4.9 percent.

Bloomberg’s Oshrat Carmiel talked more about the Manhattan residential real estate market today. Carmiel wrote:

Manhattan apartment prices dropped for the first time since 2002 in the second quarter as the collapse of Lehman Brothers Holdings Inc. and Bear Stearns Cos. caught up to property owners in the nation’s most expensive urban market.

The median price fell 18.5 percent from a year earlier to $835,700, New York appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said today. The number of sales plunged by half, the most since Miller Samuel began keeping data in 1989.

“The standstill that existed after Lehman Brothers has been broken, and it was the sellers that cried uncle,” Pamela Liebman, chief executive officer of New York-based property broker the Corcoran Group, said in an interview.

Values are falling broadly in Manhattan for the first time in the almost four-year U.S. housing recession, with declines now seen in co-operatives and condominiums of every size and price. Private-sector employment in the city dropped by 91,200 jobs, or 2.8 percent, in the 12 months through May as Wall Street losses and asset writedowns topped $1.4 trillion.

The price of studio apartments declined 16 percent from a year ago to a median of $405,000, according to Miller Samuel. One-bedrooms dropped 17 percent to $650,000 and two-bedrooms fell 23 percent to $1.27 million. Three-bedroom units fell 37 percent to $2.35 million and four-bedrooms plummeted 47 percent to a median of $3.92 million.

Wake me when the housing bottom arrives, please.

Sources:

“US Home Prices Seen Falling 40% Overall: Analyst”
Reuters, July 2, 2009

“Manhattan Apartment Prices Drop as Lehman Hits Home (Update1)”
Oshrat Carmiel
Bloomberg, 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

Congress Scrutinized For Potential Conflicts-Of-Interest

Washington lawmakers are receiving more attention these days for possible conflicts-of-interest relating to the taxpayer bailouts and the proposed health care system overhaul. From the Washington Post’s Paul Kane and Carol D. Leonnig last week:

Top House lawmakers had considerable holdings in major financial institutions that took billions of dollars in taxpayer bailouts at the end of last year, according to annual financial disclosure reports released yesterday.

From stock holdings to retirement funds to mortgages, more than 20 House leaders and members of the House Financial Services Committee had large personal stakes in the Wall Street powerhouses whose collapse last year led to an unprecedented government intervention in the marketplace. In some instances those lawmakers, like millions of other investors, sold their holdings at steep losses while others retained the stocks at greatly diminished value.

House Speaker Nancy Pelosi (D-Calif.) and her husband lost hundreds of thousands of dollars investing in American International Group, which has received $170 billion in government loans and cash injections, making it by far the largest recipient of federal bailout dollars. Republican Whip Eric Cantor (R-Va.) and his wife held stock, retirement plans and other investments worth at least $183,000 and as much as $495,000 in firms benefiting from federal government rescue efforts, including Goldman Sachs and Morgan Stanley.

At least 18 members of the House Financial Services Committee — which oversees the banking and housing industries at the core of the economic meltdown — held stock last year in firms that received federal bailout assistance, according to a review of the forms that were available yesterday.

As President Obama pushes his universal health care program, more potential conflicts-of-interest involving lawmakers have surfaced. From the Associated Press’ Larry Margasak and Sharon Theimer last Friday:

Influential senators working to overhaul the nation’s health care system have investments and family ties with some of the biggest names in the industry. The wife of Sen. Chris Dodd, the lawmaker in charge of writing the Senate’s bill, sits on the boards of four health care companies.

Members of both parties have industry connections, including Democrats Jay Rockefeller and Tom Harkin, in addition to Dodd, and Republicans Tom Coburn, Judd Gregg, John Kyl and Orrin Hatch, financial reports showed Friday.

Jackie Clegg Dodd, wife of the Connecticut Democrat, is on the boards of Javelin Pharmaceuticals Inc., Cardiome Pharma Corp., Brookdale Senior Living and Pear Tree Pharmaceuticals…

Other publicly available documents show Mrs. Dodd last year was one of the most highly compensated non-employee members of the Javelin Pharmaceuticals Inc. board, on which she has served since 2004. She earned $32,000 in fees and $109,587 in stock option awards last year, according to the company’s SEC filings.

Mrs. Dodd earned $79,063 in fees from Cardiome in its last fiscal year, while Brookdale Senior Living gave her $122,231 in stock awards in 2008, their SEC filings show. She earned no income from her post as a director for Pear Tree Pharmaceuticals but holds up to $15,000 in stock in Pear Tree, which describes itself as a development-stage pharmaceutical company focused on the needs of aging women.

Sources:

“Lawmakers Invested in Bailed-Out Firms”
Paul Kane, Carol D. Leonnig
Washington Post, June 11, 2009

“Key health care senators have industry ties”
Larry Margasak, Sharon Theimer
Associated Press, June 12, 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”
YouTube Video Link

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

Ron Paul Gives Update On ‘Audit The Fed’ Bill

Momentum is growing with the “Audit The Fed” bill. Congressman Ron Paul (R-TX) talked about House Resolution 1207, the Federal Reserve Transparency Act, earlier today:

“Audit The Fed Update”
YouTube Video Link

Stephen Webster, of the alternative news site “The Raw Story,” discussed Paul’s take on the legislation yesterday and wrote:

Congressman Paul, in defense of his proposal to audit the bank which controls America’s currency, argues not just for transparency. He wants to close it down.

“Detractors have [...] argued that the Fed must remain immune from the political process, and that that more congressional oversight would distort their very important decisions,” Paul wrote in an editorial titled, [4] ‘Audit the Fed, Then End It!’ “On the contrary, the Federal Reserve is already heavily entrenched in the political process, as the Fed chairman is a political appointee. High-level officials routinely make the rounds between positions at the Fed, member banks, Treasury and back again, taking care of friends and each other along the way.”

He continued: “As far as the foolishness of placing complex monetary policy decisions in the hands of politicians – I couldn’t agree more. No politician or central banker, no matter how brilliant, is smart enough to know more than the market itself. The failure of central economic planning has been witnessed over and over. It is frankly beyond me why we ever agreed to try it again.

“To understand how unwise it is to have the Federal Reserve, one must first understand the magnitude of the privileges they have. They have been given the power to create money, by the trillions, and to give it to their friends, under any terms they wish, with little or no meaningful oversight or accountability. Thus the loudest arguments against greater transparency are likely to come from those friends, and understandably so.”

Source:

“US House to debate Ron Paul’s ‘Audit the Fed’ bill”
Stephen C. Webster
RawStory.com, June 12, 2009

Advice For The Hotshot Fund Manager

Investor, commentator, and author Jim Rogers was recently interviewed by staff of the Economic Times (India) website. One statement from the former partner of George Soros stood out in particular:

What will you tell a confused fund manager who seeks your advice?

Become a farmer. The world has tens of thousands of hotshot fund managers right now. If I am correct, the financial community is not going to be a great place to be in for the next 30 years. We have many periods in history when financial people were in charge, we had many periods when people who produced real goods were in charge — miners, farmers, etc.

The world, in my view, is changing and is shifting away from the financial types to producers of real goods, and this is going to last for several decades as it always has. This may sound strange but it always happens this way.

Ten years from now, it may be farmers who will drive the Lamborghinis and the stock brokers will drive tractors or taxis at best.

Source:

“Fund Managers can become farmers: Jim Rogers”
Economic Times (India), June 3, 2009

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

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

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

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