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business newsBank Failure Friday Strikes Again
By
Richard Suttmeier
Apr 26, 2010 8:50 am
All seven of Friday's bank failures were overexposed to C&D and/or CRE loans.
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Editor's Note: This article was written by Richard Suttmeier, chief market strategist at ValuEngine.com, which is a fundamentally-based quant research firm in Princeton, New Jersey, that covers more than 5,000 stocks every day.
Bank Failure Friday
Seven banks in the state of Illinois were closed by the FDIC on Friday, and one was publicly traded and on the ValuEngine List of Problem Banks. Sure, community and regional banks have provided great trading opportunities since March 2009, and I showed the positive performance of the HGX, ABAQ and BKX in the past. Just be careful, as MOJO markets do end badly. If you speculate in a low-priced bank stock. you could lose all on that investment. Amcore Bank (AMFI) failed on Friday and investors get zilch.
- Only 25 banks failed in 2008, as the FDIC was slow closing community and regional banks.
- There were 140 bank failures in 2009 with a peak of 50 in the third quarter.
- In the first quarter of 2010 there were 41 failures, and so far in the second quarter the total is 16.
FDIC Chair Sheila Bair says that failures in 2010 will peak above the 140 in 2009. Then she's optimistic that the worst is behind us. This is the same woman who said that the banking system was healthy two years ago.
My predictions remain that 150 to 200 banks will fail in 2010 on the way to 500 to 800 banks by the end of 2012 into 2013. Since the end of 2007 there have been 222 bank failures. Community bank failures are a big deal, as small businesses on Main Street look to them for their financial needs. When a small business seeks a new banker, it typically faces tougher lending standards.
The Deposit Insurance Fund (DIF) was tapped for $6.5 billion in the first quarter of 2010 and another $2.1 billion so far in the second quarter. This brings the estimated DIF deficit to $29.5 billion excluding the prepaid $46 billion that sits on the sideline for 2010 through 2012. Another prediction that still stands is that the FDIC will tap its $500 billion temporary line of credit with the US Treasury this year. After applying the $15,333 billion prepaid assessments for 2010 the DIF is in arrears by $19.7 billion.
Flaws in Bank Earnings
Earnings for the “too big to fail” banks were mostly proprietary trading, which Dodd’s financial reform bill could eliminate. Financial reform may require that the big banks, those with $50 billion or more in assets to be taxed, to create a $50 to $90 billion “Wall Street Greed” fund. Low interest rates and a steep yield curves have allowed those banks who can lend to borrow short and lend long. This helped in the late 1980s, but this house of cards collapsed when the yield curve inverted. Keep in mind that many toxic assets lie off balance sheet, and FASB rules require that they return to the balance sheet. Note that when the FDIC sells toxic assets it keeps after bank failures they typically get about 22 cents on the dollar. Fed Chief Bernanke still hasn't told us what that $29 billion in toxic assets taken in to facilitate the JPMorgan (JPM) takeover of Bear Stearns are worth. Finally there's the issue of over-the-counter derivatives.
Certain Derivatives should be banned. On Friday I mentioned that Warren Buffet called Credit Default Swaps and Collateralized Debt Obligations as financial weapons of mass destruction, and the SEC fraud allegations against Goldman Sachs (GS) has this issue on the front burner. I say that the housing market and banking system remain on tsunami watch. The effects aren't being felt as housing and financials are floating on an ocean of bailout support programs, but eventually the tsunami reaches a shore line and the devastation can be severe. Today we're watching the shores of Greece, for example.
The quick turnaround for the big banks and even for General Motors illustrates that the economy and banking system may not have been as bad off as we thought in 2007 to 2008. The bets against these companies were exaggerated by extensive shorting of bank stocks, some naked. Then the bets were doubled down via the Credit Default Derivatives market. If these contracts and naked shorts weren't allowed, financial firms may not have cascaded to the degree as fast, which would have given our lazy regulators a chance for preventive action. Take GM. It goes from bankruptcy to paying back a loan five years ahead of schedule.
With proper margin requirements and an up-tick rule for shorting the banking system would have fared much better in 2008. Notice how our regulators just forget problems when things improve, but when a problem arises, they panic. Take that $147-per-barrel crude oil price two years ago. It was caused by speculators and pension funds investing. Guidelines were considered but crude oil dropped; problem resolved without preventive action. The same can be said for the housing bubble. Flipping prevented real homeowners from buying the home of their dreams at a reasonable price. Our country needs to go back to basic banking.
The National Inflation Association says that US food Inflation is spiraling out of control.
When the Bureau of Labor Statistics (BLS) today released their Producer Price Index (PPI) for March, it showed that food prices rose by 2.4%, the sixth consecutive monthly gain and the largest jump in over 26 years. The NIA sees this as a major breakout in food inflation.
Year-over-year fresh and dry vegetables are up 56.1%, fresh fruits and melons are up 28.8%, eggs are up 33.6%, pork up 19.1%, beef and veal up 10.7%, and dairy products up 9.7%. NIA believes price inflation is just beginning to accelerate in many areas, and says that all increases in US retail sales this year will be entirely due to inflation.
No positions in stocks mentioned.
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