I made two posts on this website about the inevitable demise of BankUnited. The charade finally ended, as the FDIC shuts the bank down. Here’s the link to the FDIC statement.
We insisted that the bank would be closed in two separate articles here and here, both of them in September 2008. Needless to say, there are many more such banks in this great crisis of the industry, but we have neither the interest nor the time to screen all of them here.
September 17, 2008
That in order to calm the markets the Fed now needs to bailout a couple of financial firms, instead of only cutting rates, demonstrates that we’re in a new stage of this crisis.
From Fed’s statement:
“The Federal Reserve Board … to lend up to $85 billion to the American International Group under section 13(3) of the Federal Reserve Act.
The Board determined that … a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.”
“The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points.
The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government … has the right to veto the payment of dividends to common and preferred shareholders.”
AIG will relinquish a 79.9 percent stake to the government and senior managers will leave their posts. The shares will not be eliminated, but it’s unlikely that the company will survive in its present shape, as it will be forced to unwind assets and sell its parts and subsidiaries to pay the government back. In the meantime, the Fed’s balance sheet keeps getting worse and worse, with stocks, asset backed securities, failed companies, and just about anything problematic on Wall Street finding its way there when there are tensions.
It’s clear that the private sector is out of solutions to this crisis. The Fed had attempted to convince JPMorgan, and Goldman Sachs to loan 70 billion to AIG, but as it has been the custom, the attempt failed. It’s not for no reason that these large firms refuse to take part in saving their peers. Having resigned themselves to expect that the government will continue to assume their responsibilities, along with their bad paper and troubled assets, they have even less incentive to bear the burden of the trouble that they created. The government has created the expectation that it will bail out everyone that is too big to fail; that if someone fails abruptly, the Fed and the Treasury will take its losses on their own balance sheet. It is all very well, but one should ask the question, where will this money come from? That it’s only the treasury secretary, and the Fed chief who want to assume these risks has only one reason – the funds that they risk are not their own.
But what else can the government do? The mortgage borrower who expects government aid, the lender who expects a bailout, the speculator who demands rate cuts, the banker who wants guarantees are all collectively responsible for this situation. Just yesterday, Bill Gross was commenting “But we don’t plan to sell our MBS at these low prices, since the government has announced a buy back plan, why will we sell our paper at these distressed prices, when we can sell them to the government, later, for more?” Very well, but it’s this bailout culture of the past decades that is facing bankruptcy today. The financial sector has no responsibility, how can one expect them to apply proper risk controls?
Another problem with this bailout is the freeze in financial markets. The situation is likely to get quite worse from here, as we’re nowhere near the end of this crisis; banks will fail, corporates will fall, consumers will have to save instead of spending. So how will the government actually dispose of all these bad assets that it has on its books? That it can’t sell them in the US is obvious – if they could be disposed of in the foreseeable future, JPM, and Goldman would have undertaken this task, and in the meanwhile acquired control of the largest insurance company in the US. But they do not, because they know how difficult the market is.
The US government is already running a 500 billion deficit, if anything, it needs lenders. Only international action, essentially a bridge loan to the US government itself will save the US economy. It’s crucial to observe the treasury’s data on capital flows. These past months have shown a significant decrease, but we need more than a few months to speak about a loss of appetite for government paper in the rest of the world.
Nonetheless, it must be remembered that foreigners, especially exporters are likely to receive less revenues from taxes and business as the global economy, and possibly global trade contract. So even if they wanted to, there will not be sufficient excess cash to justify continued exuberance toward dollar denominated assets.
September 15, 2008
Only Morgan Stanley and Goldman Sachs remain from the former powerhouses of US investment banking. These are stronger than their dead colleagues, and perhaps it is now fair to say that the lighter, more focused first phase of liquidation in the financial markets is over. The first phase was mostly focused on Wall Street; the second phase begins when commercial banks, with far greater size and significance in the wider economy, face the same problems that their more sophisticated peers have been facing for a whole year. With consumer defaults and prime mortgage defaults accelerating, with little in loss reserves, and an extremely difficult market for accessing capital, the liquidity measures of the Federal Reserve can delay the inevitable for only so long.
So far, September has brought the end of two giant governments-sponsored enterprises, and two giant investment banks. I did not expect Merrill to disappear as an independent firm so fast; the acquisition of Merrill Lynch by Bank of America deserves John Thain a lot of praise. Bank of America is not going to pay any cash for this settlement, it will be a stock swap at a ratio of 0.8595, with the deal closing during the first quarter of next year. This means that Merrill’s shareholders will get less than what they have now, as it’s likely that the share price of Bank of America will fall between now and then. It appears that they’re gaining the ownership of Merrill in exchange for protecting it from short sales, and therefore, bankruptcy. Bank of America is an enormous institution, and as I noted here before, the herding behaviour of depositors is likely to make it even larger eventually. It may therefore be argued that it’s one of the best positioned institutions to absorb the coming losses at Merrill.
The questions to be asked are on whether Merrill can be a good choice for investment banking anymore, and if its reputation can survive the debacle of the subprime crisis. There’s no shortage of investment bankers in the US; there are likely to be even more of them idle as Bank of America and others shed their excess capacity in order to restructure and restrain costs. So one must ask if an investor, supposing he’s willing to take risks in this environment, would choose failed Merrill as a manager for his investments, or another new firm untarnished by the excesses of the last years. My belief is that the few remaining players in the investment banking field have parted with their glory for a very long time to come: they’re extremely unlikely to be the dominant players again in the field of financial speculation, just like what happened to the savings and loans after the crisis of the 80s.
Bank of America’s chief Kenneth Lewis believes that acquisitions are crucial, in spite of the experience of its cousin Citigroup with scale. A focused, innovative, well-managed company is better than a less wieldy behemoth: management usually suffers when dealing with giants such as these. Nonetheless, Mr. Lewis seems convinced that his institution will survive these difficulties, and will emerge to become a hegemonic player in the US banking sector. One is tempted to question the wisdom of increasing risk and exposure to acquisitions in an environment where the survival of the present US financial model appears to be in jeopardy; increasing government involvement, and regulation are now the panacea, but those were until recently seen as the bane of properity and development. In any case, those who are willing to buy or merge can always do so at much lower prices. While the incentive for acting early is keeping the employees and expertise of these firms intact, the demand for financial services expertise appears to be diminishing, and employers probably are in a better position than they were a few quarters ago.
So will the markets rally on this outcome after this week’s coming sell-off? There’s still a lot to be sorted out during this month apart from the immediate shock of Sunday’s double funerals. Earnings reports for third quarter may be less than delightful, and quarter-end funding problems are expected to be a preliminary for the arguably very nervous and chaotic year-end period. I expect the present downward movement to persist until the Federal Reserve is forced to cut rates by the markets. While it’s not clear that lower rates will reduce the problems of solvency that banks and others are facing, it does have a psychological role, and more importantly, in a situation as severe as this, the choice is usually to use every medicine that offers any possibility of cure.
September 12, 2008
It’s always better to provide evidence when arguing against the financial health of an institution with employees and depositors. Unfortunately, BankUnited is almost in default already, and the numbers don’t require much elaboration.
June 30, 2008
March 31, 2007
Earnings coverage of net loan chargeoffs
Loss allowance to noncurrent loans
Net chargeoffs to loans
The loss allowance of BankUnited at 23 percent is much worse than that of Florida average, which is one of the worst in all US. This number should be more than 100 percent in an average bank. What this implies is that BankUnited does not have enough funds to cover its losses, and with funding conditions getting tighter by the day, and capital injections more and more difficult, it is only a matter of time before BankUnited is dead. Let me emphasise, this bank should have been closed down a long time ago; that it’s still operating is nothing short of incredible.
More on the unhealth of the banking industry can be found here.
September 11, 2008
Last week the regulators closed down another bank. Silver State Bank has disappeared. It now appears that they’re closing a bank on every Friday, every week.
I have been following bank failures carefully for quite a while now. Vineyard Bank, Buckhead Security Bank, California’s Imperial Capital Bank, Gateway Bank, Liberty Bank of Florida, Community National bank of Sarasota, Alpha Bank, and Haven Trust of Georgia are on my personal watchlist; I believe that the failure of these banks is imminent. I also expect Bankunited to fail at some point. The numbers that document the bankrupt situation of BankUnited are here. Of course it’s certain that there are more banks than these that will fail.
All the banks that have failed and were reorganised by the FDIC in the past two weeks were on this list that was published here. Visitors can use that list to reach their own conclusions.
September 2, 2008
NY Times ran an article on August 6th about Bankunited of Florida. According to the article, the bank, the shares of which after having reached $15 before the credit crisis are on course to become a penny stock soon, has had its non-performing assets rise five-fold since the beginning of the downturn. After allowing the share of option adjustable-rate mortgages, a kind that used to be favoured by subprime borrowers, take up 75 percent of its mortgage portfolio, the bank is now struggling to stay afloat and is seeking to raise capital to solidify its balance sheet. Florida’s economy is likely to fall into a depression as the wider US economy suffers its recession, and as house prices fall, panic in the financial markets becomes acuter, it’s hard to see the long term viability of this institution.
Bankunited is one of the typical examples of the low interest rate intoxication of the financial system during the first part of this decade. Bankunited’s non-performing asset ratio is double that of National City Corp. which is not a stellar bank by any means. It and other banks in Florida will have a lot more to deal with as we move through the year, as defaults are likely to be even higher as house prices keep falling.
From the same article at NY Times: “The bank is currently well capitalized,” Douglas Rainwater, a banking analyst at Janney Montgomery Scott, said of Bank United. “But given the amount of nonperforming loans and the trend in their growth, losses would most likely increase substantially at some point.”.
What puts Bankunited more at risk in comparison with some of its peers is the cluelessness of its management – it appears that until very recently they were unable to recognize the failure of their business model, and the severity of the risks that they were facing. This is unacceptable in normal times, and probably is lethal during a financial crisis. The bank needs to raise capital, and will need to raise even more as the year progresses, and certainly during 2009. That it has failed to raise capital earlier in the year, for instance, during the March-June euphoria. is a great mistake, and it’s hard to see if this bank will survive its many mistakes.
Florida was one of the hotbeds of irrational mortgage activity during this crisis. It garnered the greatest benefits during the warm and breezy days of the boom. It will now be one of the states that will pay the heaviest price for its lack of financial sensibility.
August 30, 2008
Although this website is only six days old and hardly well-known, it has received 118 searches about bank failures/ Here’s a list:
The greatest number of searches is on Integrity Bank of Georgia, followed by Alpha Bank, Vineyard Bank, Vanguard Bank and Haven Trust.
And these are the recent spike in searches for bank failure, according to GoogleTrends. The massive spike corresponds to the failure of Indymac. If this data is any guide, that failure has been a wake up call for the public.
August 29, 2008
A bank has a number of sources of income: Interest income from commercial, consumer and mortgage loans, fees for usual services such as transfers, safe deposits, currency exchange, and others, but by far an ordinary bank’s activity is concentrated in greatest part in paying and receiving interest.
Thus, there are a number of ways in which a bank’s income may be constrained. A flat or inverse yield curve, unfavorable economic conditions, loss of confidence in the bank itself or the banking system in general, excessive competition, or excessive regulation, and restructuring are some of them.
Of all these the most vital is confidence. It’s common knowledge that in the fractional reserve system, a bank never has enough cash or equivalents to satisfy the demands of all of its customers at a time. The expectation is that under normal circumstances, when the public has confidence in the banking system as a whole, most individuals will be disinclined to withdraw funds before maturity, and the bank can therefore use most of the deposits to lend and expand activity in the economy, which is to the benefit of everyone.
In those rare situations, however. when banks do lose the confidence of their clients and insecurity pervades the financial system, the benefits that the fractional reserve system provides to the economy contribute to the creation of a vicious cycle in which the more people lose their money, the more people lose their confidence, and even those banks with relatively solid balance sheets cannot escape the consequences.
And, for more sophisticated banks that are or were more active in such novel activities such as securitisation and the derivatives markets, the risks and problems are likely to be more complex and painful. New instruments that have not been tested before under conditions of stress often lose their entire credibility once panic prevails. The heroes of yesterday are likely to be demons of today, and, as a it is so often emphasised, past performance is in no way a guarantee of future gains.
What are the signs of a bank that may be in difficulty meeting its obligations?
Perhaps the crucial point to comprehend is that in times of financial trouble the vast majority of financiaL participants will attempt to reduce risk exposure. In crisis times emotions overtake reason, and volatility across all asset classes rises, often to unusual levels. This results in a loss of predictibility, as a financial actor is more and more unable to discern the future direction of his investments. Less predictibility necessitates less leverage, and consequently less trade, less interest, less earnings, less revenue, less optismism, and more savings, more losses. more reserves, and fear and pessimism.
Interest rates are the best expression of market participants’ risk perception about an institution. The more risk the market perceives about an actor the more risk premium he has to pay, even more so in an environment where traditionally less favored intruments such as the treasuries attract much greater than usual interest. Usually, the investor is willing to accept a lower return for safety, and this creates a kind of herding behaviour, in which those that are safe gradually become the safest, while those that are more risky, in time lose all their credibility. In other words, a credit or banking crisis is likely to drive the interest rates of those banks with the safest assets lower, while those with the riskiest balance sheets will find themselves paying higher and higher, until some of them suffer such high costs of funding that they’re forced to become bankrupt.
A prudent person will not take risks during a severe banking crisis. Crises always end – there will be far more opportunities once the coast is clear, so to speak, and with much less risk. While there are those who do successfully invest at a time of trouble and receive great returns, of all those who try to do this, those who achieve success are a tiny fraction. The idea of investing when everybody is selling has burned more homes than it has built. Shorting is, of course, a viable way to profit from the crisis, but only if one has discipline and confidence to survive the periods of inevitable euphoria.
1. High interest rates
2. High loan to risk capital ratio
3. Cheap stock price (penny stock, very low p/e ratio)
should be avoided when choosing a bank.
Savers should shun those banks that were most active in mortgage lending activity during the heated days of the real estate bubble. They should also avoid those that are subject to rumours – in a banking crisis, even a strong institution can be a victim of rumours, and with surprising speed. While Indymac wasn’t a strong institution by any stretch of the imagination, the speed of its demise demonstrates the might of the rumour mill.
What are the signs of a turnaround, or end to the banking crisis and recession?
1. As indicated by Alan Greenspan, a narrowing of the LIBOR spread to 25 over the FED funds rate.
2. At least a twenty percent lessening of tightening for mortgage loans by banks,
3. A bottom in the stock market, preferably a double bottom
4. A twenty percent decline in bank failures from their peak.
5. An end to house price falls
We’re nowhere near these, as of yet.
August 28, 2008
During the housing bubble, house prices appreciated by 60 percent above their long term trend. Those economists who expect house prices to fall by another 15 percent are basing their expectation on a return to this long term trend. But it is very possible that after such a wild swing toward the appreciation side, house prices will actually correct with a similar irrational swing to the depreciation side, falling actually below the long term trend, and if this happens, it is hard to see how hundreds of banks can avoid failure unless there’s meaningful government intervention.
Meanwhile, unemployment is rising, and it’s highly likely that we’ll see at least a fifty percent rise in the unemployment rate from today’s levels, which makes more credit card defaults, and more writedowns for all banks likely. Consumer defaults will eventually trigger defaults on commercial real estate, as the consumer is the main source of revenue for paying the debt back.
Commercial mortgage activity has been declining steadily this year – from 147 billion in the first 6 months of 2007, the amount of completed deals has already collapsed to 12 billion in January- June of this year. The disastrous state of the residential mortgage industry doesn’t require any further detailing, however, the 10 million homeowners who have negative equity in their homes do bear noting.
The momentum of the crisis is still snowballing. All these losses will eventually appear on bank balance sheets which are suffering from extreme distress. It’s well known that consumers who had limited success in extending home equity loans have been resorting to ever increasing credit card borrowing, and as this is fundamentally a consumer-recession, it’s not hard to see accelerating defaults further constraining balance sheets, leading banks to shrink their lending base, leading to more defaults by their customers, and so forth.
The greatest risk for the US and global economy is this feedback loop. Unfortunately, Central banks around the world seem to choose to stick their heads in the sand when confronted with this prospect. Mr. Bernanke’s insistence before the Congress that subprime losses would be limited to 100 billion dollars is common knowledge, and nowadays he seems to believe that the greatest risk of a severe recession has receded. On the other hand, the efficiency of uncoordinated central bank action is doubtful.
As more and more banks default, those that aren’t too big to fail are obviously the ones at greatest risk. A regional bank in Kansas or Florida is far less likely to obtain international or federal backing in the case of trouble or failure. As raising capital becomes more and more difficult, some of these regional banks with the greatest exposure to CMBS and mortgage defaults will face an impossible situation. On the other hand, according to Bloomberg, despite writing down billions of dollars Merril’s Thain still has the confidence of Temasek, and it’s not wise to bet against Asian nepotism, exporter cash or petrodollars.
Finally, according to RealtyTrac.com, the top states with the highest foreclosure per household ratings are Nevada, California, Florida, Arizona, Ohio, Georgia, Michigan, Colorado, Utah and Virginia, in the same order. So far FDIC’s problem banks are scattered across the country, according to their own statements, but as the crisis intensifies, we’re likely to see a greater concentration in these states with highest mortgage default rates. We don’t have the FDIC’s own list, but here’s a possible list of the problem banks in these 10 states, compiled from the list of the lowest ranking banks at Bankrate.com
Loss allowance ratio has fallen by 47 percent in california, which is the second highest in this list. Number of unprofitable institutions has risen by 42 percent in the past two quarters, and the speed of deterioration is very worrying.
1st Centennial Bank CA
Affinity Bank CA
Community Bank of Southern California CA
Desert Commercial Bank
Downey S&L, F.A.
First Federal Bank of California, FSB
First Private Bank & Trust
First Standard Bank
Gateway Bank, FSB
Imperial Capital Bank
Los Padres Bank
Palm Desert National Bank
PFF Bank & Trust
Seacoast Commerce Bank
Security Pacific Bank
Vineyard Bank, National Association
Florida is by far one of the worst states in terms of the health of its banks. Many failures are likely. There’s no sign of any improvement, as of June 30.
The Bank of Bonifay
The Bank of Commerce
Bayside Savings Bank
Centerbank of Jacksonville, N.A.
Century Bank, A Federal Savings Bank
Citrus Bank, N.A.
Coastal Community Bank
Community Bank of Cape Coral
Community Bank of Manatee
Community National Bank of Sarasota County
Cornerstone Community Bank
Espirito Santo Bank
Federal Trust Bank
First Florida Bank
First Guarantee Bank and Trust Company of Jacksonville
First People’s Bank
First Priority Bank
First State Bank
Florida Capital Bank
Florida Community Bank
Freedom Bank of America
Great Eastern Bank of Florida
Key West Bank
Landmark Bank of Florida
Marco Community Bank
Ocala Nation Bank
Old Harbor Bank
People’s First Community Bank
Republic Federal Bank, N.A.
Riverside Bank of the Gulf Coast
Southbank, A Federal Savings Bank
The Oculina Bank
Vanguard Bank and Trust Company
Nevada is one of the most troubled states.
First National Bank of Nevada
Great Basin Bank of Nevada
Nevada Basin and Trust Company
Nevada Commerce Bank
Silver State Bank
Washington Mutual Bank
Similar to California, Arizona’s banking sector is in great trouble, and is the slowest to recognise the severity of the situation in this list.
Credicard National Bank
First National Bank of Arizona
First State Bank
Valley First Community Bank
In general, Ohio is better than most other states in this list.
Bramble Savings Bank
The Community National Bank
The First National Bank of Germantown
The Guernsey Bank
Indiana Village Community Bank
National City Bank
Ohio Legacy Bank
The Ohio State Bank
People’s Community Bank
The number of unprofitable institutions has doubled in the past two quarters alone. Loss allowance to non current loans ratio has fallen by about thirty percent. Georgia is one of the worst states with respect to banking sector health.
Alpha Bank & Trust
American Southern Bank
American United Bank
Bank of Cometa
Bank of Ellday
The Buckhead Community Bank
Citizens & Merchants Bank
Community Bank of Rockmart
Community Bank of West Georgia
The Community Bank
Community Trust Bank
Crescent Bank and Trust Company
First Century Bank, National Association
First Choice Community Bank 1874
First Commerce Community Bank
First Covenant Bank
First Coweta Bank
First Georgia Community Bank
First National Bank of Gwinnett
First National Bank of the South
First Piedmont Bank
First Security National Bank
Firstbank Financial Services
Freedom Bank of Georgia
Gainesville Bank & Trust
Georgia Banking Company
Georgia Heritage Bank
Haven Trust Bank
Hometown Bank of Villa Rica
McIntosh Commercial Bank
Mountain State Bank
Neighbourhood Community Bank
Omni National Bank
The Park Avenue Bank
The Peach Tree Bank
The People’s Bank
The Private Bank
Quantum National Bank
Security Bank of Bibb County
Security Bank of Gwinnett County
Security Bank of Houston County
Security Bank of North Metro
Southern Community Bank
Sunrise Bank of Atlanta
The Tattnall Bank
United Americas Bank, National Association
United Bank & Trust Company
Unity National Bank
Starting from an already troubled base, Michigan’s banking sector health has been deteriorating continuously during the past two quarters, and before that. Bank failures are highly likely.
Citizens First Savings Bank
Citizens State Bank
Clarkstone Savings Bank
Community Central Bank
Davison State Bank
Detroit Commerce Bank
Farmers State Bank of Munith
First Federal of Northern Michigan
Flagstar BAnk, FSB
Grand Haven Bank
Kent Commerce Bank
Lakeside Community Bank
Macombe Community Bank
Main Street Bank
Mainstreet Savings Bank, FSB
Mercantile Bank of Michigan
Michigan Heritage Bank
Muskegon Commerce Bank
Oakland Commerce Bank
Paragon Bank & Trust
People’s State Bank
Sterling Bank & Trust, FSB
West Michigan Community Bank
There’s a clear trend of deterioration in Colorado’s banking sector, but it hasn’t yet reached the levels of the worst states.
American National Bank
Colorado National Bank
Kit Carson State Bank
The banks of Utah appear to be aggressive in loan loss provisioning, and this should bring better results than in other states. However, the deterioration in profitability is quick and worrying.
Virginia’s the strongest in this group. The overall data on its financial insitutions do not give the impression of a state in a banking crisis.
Alliance Bank Corporation
First State Bank
Greater Atlantic Bank
Imperial Saving and Loan Association
Virginia Savings Bank, FSB
No one knows which banks are going to default, but the list could provide some guidance. The highest numbers are in Georgia, Florida, Michigan, and California.