Financials in Trouble, Part 1-Minyanville

BUSINESS & MARKETS

LIFE & MONEY

VIDEO

COMMUNITY

SUBSCRIPTIONS & PRODUCTS

Financials in Trouble, Part 1

John Mauldin Aug 25, 2008 9:45 am


		Bank failures could total $850 billion.

This is the first installment in a 2-part series. Part 2 can be found here.

Yet another crisis confronts us, as we’ll have to deal with the aftermath of a rather large number of bank failures over the next year, which are likely to overwhelm the ability of the FDIC to insure your bank deposits. The banking system, the FDIC, and Freddie and Fannie aren’t pretty to look at, but as realists we must know what we’re facing.

The US Banking System Is in Trouble

A few weeks ago when I was in Maine, I met Chris Whalen. Chris is the managing director of a service called Institutional Risk Analytics, whose primary business is analyzing the health of banks and financial institutions.

If you’re one of their clients, you can go to their website and drill quite deep into all aspects of every bank in America. And they’ve come up with various metrics to compare how well-capitalized a bank is, how much risk it's taking and what kind of losses (or profits) it can expect. It’s a one-of-a-kind firm, and the data gives Chris a very special perspective on the US banking system.

And what he sees isn’t pretty. There’s a crisis brewing. He expects 100 banks to fail between now and July of 2009. Most of them will be small, but there will be a few large banks. He estimates their total assets at $850 billion (not a typo!). Those are the assets the FDIC is going to have to cover when they take over the banks.

Take Washington Mutual (WM), for example. There are problems there. Their debt now trades at 20%, which is worse than junk. There’s no way they could issue preferred stock to recapitalize their business.

STOCKS
RELATED ARTICLES
ALSO BY...

And they’re going to need more capital, as they have writedowns in their future due to the slowing economy. Any common issue would have to seriously dilute existing shareholders to almost nothing.

There are circumstances in which they can survive, but it would take a remarkable recovery for the US economy - which isn’t likely. Maybe management can pull a rabbit out of the hat, but it will need some strong magic to get the capital they need at a cost they can live with.

The FDIC has about $50 billion. These reserves have been built up over the years from deposit insurance paid by banks that are part of the program. They’re going to need an estimated $20 billion just to cover the failure of IndyMac.

The FDIC will have to cover only a small percentage of the $850 billion, as some of those assets will surely be good. But if they have to cover 10%, then the FDIC would need another $50 billion. Does that sound like a lot? Chris thinks a more conservative number for planning purposes would be 20% to 25% potential losses - and you just hope it doesn’t get there.


Rate this article:			(0 Votes)

more BUSINESS & MARKETS articles »

Daily Article Index �

tags:

NCC

Comment (0)

See All Comments »


discuss this article and more on the mv exchange

No positions in stocks mentioned.

Get real-time options trading ideas from Steve Smith, veteran options trader and newsletter author, plus let him show you the way to cut risk and boost your returns through the strategic use of options. Click here for a free 14 day trial to OptionSmith by Steve Smith.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2009 Minyanville Media, Inc. All Rights Reserved.