At the moment, there’s political instability in Malaysia, Pakistan, Japan, Russia, Ukraine, and Turkey. Mexico, Iceland, Turkey, Russia, and Pakistan were or are also facing runs on their currencies. Banco de Mexico sold $2.5 billion in the market yesterday and early today to stem a rout in the peso and said it would offer an additional $400 million when the peso weakens more than 2 percent in a day.

VIX today exceeded 60 for the first time as the DJIA fell to a five- year low below 9,000. as Treasury Secretary H. Paulson is weighing plans government to invest in banks as the next step in trying to resolve the credit crisis.

Libor for three-month loans rose to 4.75 percent, the highest level since Dec. 28. The Libor-OIS spread widened to a record. The overnight dollar rate fell to 5.09 percent, still 359 basis points more than the Fed’s 1.5 percent target rate. The three-month rate in euros held at a record high of 5.39 percent.

ECB offered banks as much cash as they need for six days at its benchmark rate of 3.75 percent, also loaned banks a record $100 billion in overnight dollar funds, allotting most of the cash at 5 percent, down from 9.5 percent yesterday.

“Libor rates are now more or less meaningless because everyone is just doing business with the European Central Bank,” said Jan Misch, a money-market trader at Landesbank Baden- Wuerttemberg, Germany’s biggest state-owned bank, via Bloomberg.

South Korea, Taiwan and Hong Kong cut interest rates today, after yesterday’s coordinated reductions. The U.K. government also pledged to spend 50 billion pounds ($87 billion) to stave off a collapse of the British banking system.

Money-market rates rose in Hong Kong, Singapore and Japan to the highest levels in at least nine months. Hong Kong’s three-month interbank offered rate jumped to 4.4 percent, a one- year high. Singapore’s comparable rate for dollar loans increased to 4.51 percent, the highest level since Jan. 8.

Overnight borrowing costs for companies dropped to the lowest in almost two weeks after yesterday’s rate cuts and the Fed committed to buying commercial paper.

Iceland seizes a bank

One of the earliest victims of this crisis was Iceland. Their troubles have been intensifying since the collapse of Bear Sterns in March of this year.

 

From Bloomberg:

 

Iceland‘s government seized control of Kaupthing Bank hf, the nation’s biggest bank, completing the takeover of a financial industry that collapsed under the weight of foreign debt.

 

Iceland is guaranteeing Kaupthing’s domestic deposits and helping manage the banks to provide a “functioning domestic banking system,” the country’s Financial Supervisory Authority said in a statement on its Web site today.

 

Glitnir Bank hf, Landsbanki Island hf and Kaupthing are unable to finance about $61 billion of debt, 12 times the size of the economy. Their collapse has affected 420,000 British and Dutch customers, and frozen assets held by universities, hospitals, councils and even London’s police force. The government is seeking a loan from Russia and may ask for aid from the International Monetary Fund to help guarantee deposits. 

 

All trading in Iceland’s equity markets is suspended until Oct. 13 due to “unusual market conditions,” the country’s exchange said today.

 

Currency Peg

 

Trading in the krona ground to a halt today after the central bank yesterday ditched an attempt to fix the exchange rate at 131 krona to the euro. Nordea Bank AB, the biggest Scandinavian lender, said the krona hadn’t been traded on the spot market today, while the last quoted price was 340 per euro, compared with 122 a month ago.

 

Assets at Iceland’s three biggest banks had grown five-fold since 2004 as the companies looked to expand beyond the confines of an island with a population of 320,000, half that of Las Vegas. Much of that growth was debt financed, helping send gross external debt to 9.55 trillion kronur at the end of the second quarter, equivalent to $276,622 for every person on the island.

 

U.K. taxpayers will probably face a bill of at least 2.4 billion pounds ($4.1 billion) to compensate about 300,000 U.K. holders of accounts at Icesave, a unit of Landsbanki, the Financial Times reported, citing unidentified U.K. officials.

 

`Severe Recession’

 

“The economy may well contract more than 10 percent between now and the end of this crisis,” said Lars Christensen, chief analyst at Danske Bank A/S in Copenhagen. “Inflation will jump to at least 50 percent to 75 percent in the coming months.”

 

To avert the collapse, Iceland will start talks with Russia on Tuesday to secure a loan of as much as 4 billion euros ($5.48 billion), Prime Minister Geir Haarde said late yesterday. He added that loans from the IMF and Russia “are not mutually exclusive,” though the government hadn’t, “at this point at least,” asked the IMF for a standby loan or an economic program.

 

Fitch Ratings Ltd. cut Iceland’s long-term foreign currency issuer default rating to BBB- from A-. The rating remains on negative watch, Fitch said.

 

Ukraine seizes a bank

Ukrainian lender Prominvestbank had its credit ratings cut three steps by Moody’s Investors Service after the country’s central bank seized control.

The National Bank of Ukraine appointed its deputy governor, Volodymyr Krotyuk, as the temporary head of Prominvestbank yesterday and imposed a moratorium on payments to creditors for six months.

Ukraine‘s government has the worst creditworthiness among Europe’s emerging markets, based on the cost of credit-default swaps. It joins Iceland, Germany, the U.K. and Belgium among a growing number of European countries taking control of banks.

Prominvestbank, Ukraine‘s sixth-largest lender, had 27.6 billion hryvnia ($5.1 billion) of assets as of Sept. 30, according to its Web site.

And RBS is loudly struggling with solvency issues.

FerroChina Says It Can’t Repay Loans

FerroChina Ltd., a Chinese steelmaker, said it is unable to repay loans totaling 706 million yuan ($104 million) because of the “current economic crisis,” and a further 4.52 billion yuan in loans and notes may also be at risk.

Production at FerroChina’s plants has been suspended and the mill is in talks with creditors and potential investors, the company said today in a statement to the Singapore Stock Exchange, without identifying companies.

The escalating credit crunch has toppled banks in the U.S. and Europe, frozen credit markets and slowed economic growth, curbing demand for China-made products. Steel prices and demand in China have been declining.

The company, which has a market value of S$436 million ($297 million), requested on Oct. 7 that its Singapore-listed shares be suspended from trade. The stock, which last traded at 54.5 Singapore cents, has slumped 70 percent this year.

“Due to the current economic crisis, the group is unable to repay part of its working capital loans aggregating approximately 706 million yuan which has become due and payable,” the statement said. “The management is seeking new equity and loan funding.”

Further loan facilities and notes of about 2.03 billion yuan and “some other working capital loans” totaling 2.49 billion yuan may potentially become due, it said.

Changshu Plants

FerroChina has plants in Changshu City and Changshu Riverside Industrial Park in Jiangsu province, according to today’s statement. The company produced 1.65 million metric tons of steel in 2007, according to Kelly Chia, an analyst at OCBC Investment Research Pte.

“It could be because some of its customers weren’t able to pay up, or the price of its products weren’t enough to fund its working capital,” Chia said by phone from Singapore.

FerroChina reported net profit more than tripled to 230.4 million yuan in the second quarter from a year earlier, according to a slides presentation from the company on Aug. 14.

“Given the weak capital market and poor economic conditions, there is no assurance that we can be successful” in the talks with potential investors and creditors, today’s statement said. The talks with would-be investors were announced in a company statement on Sept. 16.

“As a zinc-galvanizing steel sheet producer, the slowdown in building, manufacturing and home-appliance industries hurt the company’s sales,” JPMorgan Chase’s Qin said.

The Chinese price of hot-rolled coil, a benchmark product, has fallen 29 percent to 4,230 yuan a ton from a record 5,957 yuan on June 5, according to Beijing Antaike Information Development Co.

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Damage from the credit crunch accelerated last week as Washington Mutual collapsed, and Wachovia was sold. In Europe, BNP Paribas agreed to buy Fortis’s units in Belgium and Luxembourg for 14.5 billion euros after the failure of a government rescue, while the German state and financial institutions formed a 50 billion euro package to save Hypo Real Estate. Germany also declared on Sunday a guarantee on all private German bank accounts – currently worth €568bn – to prevent panic withdrawals, covering existing accounts and others which savers will open in the future. Germany’s previous protection scheme had guaranteed 90% of all bank deposits but only up to €20,000 per account. Ireland last week also guaranteed the liabilities of six of its banks.

Libor is slightly down today (one month dollar at 4.09 per cent vs 4.11 per cent), though the dollar-OIS spread is at about 290 — way above historical levels. Three-month Libor is at 4.29 percent, the biggest premium over the Fed’s benchmark since the FED began using a target for the overnight federal funds rate between banks as its main tool around 1990.

In response, the Federal Reserve will double its auctions of cash to banks to as much as $900 billion and is considering other ways to unfreeze short-term lending markets. Since the collapse of Lehman, around 2 trillion dollars have been injected into the system, with barely any effect.

“The Federal Reserve stands ready to take additional measures as necessary to foster liquid money-market conditions,” Fed and Treasury officials are “consulting with market participants on ways to provide additional support for term unsecured funding markets”.

Also, Fed will increase its auctions under the 28-day and 84-day Term Auction Facility operations to $150 billion each. The two forward TAF auctions in November will be increased to $150 billion each, obviously in preparation for the year-end cash squeeze.

Assets on the Fed’s balance sheet expanded $285 billion last week to $1.498 trillion, the biggest one-week increase ever, according to JPMorgan Chase & Co. The Fed’s loans to commercial banks through the discount window rose about $10 billion to $49.5 billion last week. Borrowing by securities firms totaled $146.6 billion, up from $105.7 billion. American International Group Inc., the largest U.S. insurer, drew down $61.2 billion of its $85 billion credit line from the Fed.

“For the most part this is the Fed acting as a replacement for private banks,” said Lou Crandall, chief economist at Wrightson ICAP LLC, in Jersey City, New Jersey. “It is moving private-market functions into the public sector because the private market has reduced capacity.”

Meanwhile, to finance the Treasury’s new rescue plans, officials are considering changes to federal government debt sales, including a reintroduction of three-year notes. Changes will be released at the Treasury’s Nov. 5 quarterly announcement on sales of long-term debt.

The Treasury also said that some of its cash-management bills may be “longer-dated.” The expansion in issuance is needed to “allow Treasury to adequately respond to the near- term increase in borrowing requirements”. Treasury officials last month also started a special program of bill auctions to help the Fed expand its balance sheet.

In yet another step announced today, Fed will also begin to pay interest on the reserves it holds for banks, and payments on required reserves will be made at the average targeted federal funds rate established by the Federal Open Market Committee over each so-called reserve maintenance period less 10 basis points.

In addition to the cash banks must hold at the Fed, lenders also sometimes place excess reserves. The central bank said today it will pay interest on those funds at the lowest targeted federal funds rate for each period less 75 basis points. That will put a floor under the actual fed funds rate each day and let the Fed “expand its balance sheet as necessary to provide the liquidity necessary to support financial stability.”

The New York Fed has been having difficulty controlling the overnight federal funds rate – while the target is 2 percent, the effective rate was below that level every day from Sept. 19 to Sept. 29.

In the CDS markets, Monday saw price-setting for settling up to $500bn of contracts related to Fannie Mae and Freddie Mac. This price is called the recovery value, and will determine the payouts to be made by insurers and banks that offered credit cover on the mortgage financiers in recent months. Unwinding and settling these derivatives is expected to be the biggest test yet for the thus-far unregulated $54,000bn credit derivatives market. The Fannie/Freddie payouts could amount to $75bn, assuming a recovery value of 85 cents in the dollar, but the exact number of credit default swaps which reference Fannie and Freddie is not known, although analysts estimate a range from $200bn to $500bn.

The Federal Reserve Bank of New York will meet tomorrow with banks and investors in credit-default swaps to gauge progress on an initiative to create a clearinghouse to curb risks in the market, a spokesman said. The Clearing Corp., a Chicago clearinghouse owned by some of the biggest credit-default swap market-makers, has faced delays in setting up a system for guaranteeing trades as the Fed pushed it to obtain a banking license that would place it under the central bank’s watch. The company and the banks are “moving aggressively to launch the CDS clearing platform by the end of this year,” Clearing Corp. said in a Sept. 29 statement.

—–

Jim “Mad Money” Cramer today has urged investors to get out of the stock market, as the DOW fell below 10000, and VIX reached levels above 50:

“Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now I don’t care where stocks have been, I care where they’re going, and I don’t want people to get hurt in the market,”

“I’m worried about unemployment, I’m worried about purchases that you may need. I can’t have you at risk in the stock market.”

With respect to the Treasury’s plan, the so-called TARP, a lot is unclear, but the chief economist of BNP-Paribas has some pithy points:

1. Participation is voluntary. As with the 1992 Cooperative Credit Purchasing Corporation in Japan, some potential participants may not offer assets for fear of having to crystallise losses. Side conditions such as the restrictions on executive pay may reduce participation further.

2. Despite its gargantuan size and massive grant of powers to the Treasury Secretary, it has failed to convince the markets it will break the back of the crisis.

3. The mechanism to set prices remains obscure. If auctions are restricted to single assets then there may be very few bids because there are very few holders (one or two in some cases). If heterogeneous assets are included in the same auction then setting a price becomes very difficult.

4. There is no clear idea how the cut off price will be calculated or what proportion of offers will be accepted and other aspects of the pricing mechanism.

5. Capital will be injected to firms who may not need it and to those who may not survive in any case. This is poor value for money indeed.

6. There is no matching requirement for shareholders to inject capital or to suspend dividends to match the capital put in by the public sector. Warrants are a poor substitute.

7. The plan does not tackle the fundamental source of the bad loans afflicting the system – falling house prices and an excessive debt burden being faced by US households.

More bank failures

September 29, 2008

Washington Mutual is dead already. It was one of the four major originators of option-adjustable mortgages, in which unpaid interest was added to principal; three of those originators are now dead. Wachovia is the remaining one, and it will surely disappear soon too.

In Europe, governments have lent Fortis about 11 billion euro to forestall a collapse, as it had great difficulty finding anyone to deal with. UK seized Bradford & Bingley Plc. Hypo Real Estate Holding AG was rescued by the German government and a group of private banks for 35 billion euros. Iceland has nationalised Glitnir Bank, though this nations banks have been having problems for a long while already.

Not much commentary is necessary on the above, save that the avalanche of bank failures will continue through the year end, and will intensify.

With respect to overnight libor:

Overnight USD Libor At 2.56% Vs 2.31% Friday
Overnight Sterling Libor At 5.26% Vs 5.00% Friday
Overnight Euro Libor At 3.71% Vs 4.06% Friday
3 month USD Libor Fixed At 3.88250% Vs 3.76188% Friday
3 month Sterling Libor Fixed At 6.26% Vs. 6.25% Friday
3 month Euro Libor At 5.22% Vs. 5.13% Friday

Overnight is holding below three percent for dollar so far, but the massive gap in three month libor over government bonds is extremely worrying. These numbers virtually guarantee further bank failures. Those who read this should understand that there’s no lending going on in tyhe interbank area, and as banks are exposed to risk of failure on any day because of the leveraged and confidence-based nature of their business, chance will dictate who will survive and who will not among weaker institutions.

In all these conditions, I believe it’s trivial to say that a global recession will be occurring during next year. IMF defines a global recession as growth below two and a half percent, but I think an actual global contraction is the likelier scenario, given how debt-laden, or overinvested all the economic actors are.

However, provided that this string of bank failures can be halted at some point, and panic can be prevented by governments, I still expect some sort of risk rally during October.

We do not yet have the details of Treasury’s plan. With respect to its effectiveness, if they do plan to buy most the troubled paper from banks, there’s one crucial question that must be answered, as Benjamin Graham would say, how much? This is crucial, because it’s even now not impossible to find buyers for CDO’s and ABS; as long as the seller is satisfied with a price in the order of 10-20 cents on the dollar, such paper can be disposed off. But such a disposal doesn’t ease the problem, as it will only cause further writedowns for the capital-constrained institutions, contracting credit further.

 

We must wait to see what the details of the Treasury’s proposal are. There is a suggestion that the purchases will be at market prices – such a choice would be accepted by very few of the troubled banks.

 

The goverment is faced with an extremely difficult situation. I have written before that the psychological pressures, the disasters that an uncontrolled unwinding of today’s problems can create, do not allow policymakers much calm or peace as they formulate their responses. The speed at which they modified their vision, in a few days, from no bailout for AIG, to a general bailout for the entire banking industry, demonstrates the lack of direction and calm at the highest levels. 

 

There’s no justification for blaming the government for all that is unfolding, the heavier part of which, in my opinion, lies with Alan Greenspan, and the private sector. But the lack of a unified vision, the ad-hoc nature of the solutions, are likely to complicate the developments.

 

The markets are delighted at the Treasury’s announcement, and as I wrote on 16th September, we do have euphoria now. On the other hand, a deeper analysis shows that there’s no reason to expect that taking out CDO’s and some ABS will necessarily clear bank’s balance sheets. The problem is not a housing industry crisis anymore, it’s the collapse of the triangle of high debt, high leverage, and overspending that has been fueling growth and bubbles during the course of more than a decade. Of course, if we had not had the direction change in August 2007, the build up could have continued indefinitely.  But now that the direction has reversed, rising unemployment, collapse in confidence, and continued bankruptcies show that this structural disease needs more than a financial solution, and more than a few quarters, in order to be eradicated. In that sense, if the Treasury’s remedy had been applied 6-8 months ago, I believe that there would have been a very high chance of success; now however, with almost every source of credit and financing constricted or shutdown, the problem is not only banking sector losses or failures, but failures and bankruptcies on a universal level. As far as I’m concerned, this will probably prevent the Treasury’s plan from succeeding.

 

Eventually, the government has the means to defuse this crisis, but at a cost. By issuing more debt, the government is capable of paying off every household and bank’s delinquent debt, but the cost will almost certainly be high inflation. And what does high inflation mean? It means general turmoil and continued crises in emerging markets, which are the only pillar on which the limping world economy is leaning at the moment.

 

 

 

 

 

 

 

Money market funds manage about three and a half trillion dollars. They have to hold investment grade debt, and are a major source of short term funding for banks and corporations, and finance their day to day operations. They now seems to be facing a run. It is almost unbelievable that both corporate bond market and commercial paper market are imploding at the same time. From Bloomberg:

Putnam Investments LLC closed its $12.3 billion institutional Putnam Prime Money Market Fund yesterday and plans to return all cash to investors.

The fund, which as valued yesterday at $1 a share, experienced “significant redemption pressure,” the Boston- based company said in a statement. A drop below $1 a share, known as breaking the break, would have exposed investors to losses.

The fund had no exposure to securities issued by Lehman Brothers Holdings Inc., Washington Mutual Inc. or American International Group Inc., the company said.

Reserve Primary Fund, the oldest U.S. money-market fund, on Sept. 16 became the first in 14 years to break the buck. Investors pulled 60 percent of their money from the $62.6 billion fund on Sept. 15 and 16 before withdrawals were delayed.

Putnam is a unit of Canadian insurer Great-West Lifeco Inc. ”

“An institutional fund run by Bank of New York Mellon, designed to work like a money-market account fell to less than $1 a share after losses on debt issued by bankrupt Lehman Brothers Holdings Inc.

The $22 billion BNY Institutional Cash Reserves fell to $0.991 a share on Sept. 16, according to an e-mail sent by a bank representative to one client. BNY Mellon has “isolated the Lehman assets in the fund into a separate structure,” Ivan Royle, a spokesman for the New York-based company, said today in an e-mailed statement.

The fund invests cash deposited as collateral by clients who borrow securities from BNY Mellon, the world’s largest custody bank. Lehman debt represented 1.13 percent of the fund’s holdings, according to the statement. Royle declined in an interview to say whether investors withdrawing money from the fund would realize losses.

The BNY Mellon fund, while not a registered money-market fund, is “generally managed to be compliant with the investment-related provisions of” U.S. law governing the accounts, according to a bank brochure.

Reserve Primary Fund, the oldest U.S. money-market fund, on Sept. 16 became the first in 14 years to fall below the $1 a share price, known as “breaking the buck.” Investors pulled 60 percent of their money from the $62.6 billion fund on Sept. 15 and 16 before withdrawals were delayed”

What we are now facing is a general extension of last year’s collapse in commercial paper to all other kinds of funding sources in the wider economy. Short term, long term, capital markets, money markets, financial, and non-financial, nominal and derivative, every kind of asset and funding source except federal government paper is facing contraction, posing severe and unprecedented risks to both the global and US economies.  That many banks and corporations will declare bankruptcy or be sold is beyond doubt. The markets have finally realised how serious the problems are, and while temporary relief is possible, the tensions of the past week will continue to deepen and cause shrinking economic activity for a long time to come. Unemployment will reach double digits, and consumption will shrink for at least a year. The chain reaction will cause bankruptcies worldwide, and many emerging markets will probably go through banking and currency crises as well.

 

The root of the problem lies in the fact that the arteries that allow financing to flow through the economy are clogged. Even as central banks add hundreds of billions of dollars, banks cannot consider lending, because they are having difficulty financing their day-to-day operations through the money markets. Lehmans collapse has caused losses to several money market funds, and in turn, the unprecedented run on money market funds has cut off a major source for short term funding for corporates and financials. To repeat, not a single market is functioning properly at the moment. Last night there was a report that Deutsche Bank was greatly tightening the risk controls of its CDS desk; as the very large widening in the CDS spreads for many corporations and sovereigns show, liquidity is fleeing this market too. As the CDS spreads widen, financials firms cannot gain insurance on corporate bonds at reasonable prices, so they’re refraining from buying corporate paper. In short, a vicious circle has been created, andThe situation can only be compared to the 1930’s. The Wall Street Journal agrees, here.

 

Voluntarily, or otherwise, the banking system is attempting to bankrupt a number of institutions, to allow the cascading effect to take place, so that the remaining institutions can trust that the surviving counterparties do not present a large risk. In other words, there’s a desire to kill the weaker players, so that the survivors can have confidence in each other. This is an irrational desire, because the cascade of bankruptcies, instead of allowing any confidence, will cause the public to panic, and will bring about a general meltdown. Central Banks are trying to fight this development, but they’re fighting against the banking system, so they’re unlikely to succeed. To repeat, at the moment the banking system has no desire to function until some major players have fallen.

 

Meanwhile, with respect to Wall Street, it now seems like a certainty that Morgan Stanley will need to be sold, and it’s probable that Goldman Sachs will not survive this debacle either. The problem is that the market has zero confidence in any financial firm that has leverage in the double digits at this time, and as Morgan and Goldman are both highly leveraged firms as a definition of their business model, they will not be able to survive this period in an independent form.

 

Asian acquirers would suit the present scheme of events, since even US commercial banks have very high levels of exposure to all the domestic problems, and are not as well-placed to absorb the losses and writedowns that some Asian firms can endure without facing severe balance sheet problems. There’s no certainty that Wachovia, with large amounts of subprime exposure, can itself survive this crisis; it’s highly doubtful that it will be able to bailout Morgan Stanley. That KDB was the only firm that was willing to acquire Lehman without seeking government backing from the US is a sign that those institutions with sufficient fundamental strength to deal with the problems of subprime are those beyond the ocean.

 

There’s essentially no money in the US to bail out anyone. As I have written many times before, the US government itself is in a desperate need of creditors, and the belief that it can absorb the problems of the private sector is absurd. If the Asians continue to support the US government through increasing purchases of US government paper that is in danger of becoming worthless in the long run,  then the government can keep buying time, only to possibly default at some point in the future, since it has no real source of increasing revenues with which to pay for the ever increasing size of its sovereign debt, and its continued bailouts.   Moreover, there’s a significant possibility that as soon as the immediate shock of this crisis dissipates, people and institutions will demand much greater interest to hold US government debt; CDS on US sovereign debt is already strongly signalling this possibility. What the government will then do is not clear.

 

Today’s picture is very different from that of a week ago. Sooner or later, the dollar is going to pay a very severe price for the government’s actions.

 

 

 

 

 

 

 

BankUnited will fail

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.

 

Percent

June 30, 2008

March 31, 2007

Earnings coverage of net loan chargeoffs

0.23

79.04

Loss allowance to noncurrent loans

23.43

56.79

Net chargeoffs to loans

2.56

0.02

 

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.

Here’s a table on Florida’s banking sector health. Source for all data is the FDIC.

 

Percent

June 30, 2008

March 31, 2008

December 31, 2007

Net interest margin

3.44

3.45

3.87

Net charge-offs to loans & leases

1.05

0.87

0.55

Percent of Unprofitable institutions 

48.36

41.12

31.34

Nonperforming assets to assets

3.24

2.48

1.96

Core capital (leverage) ratio

9.78

9.90

10.05

Noncurrent loans & leases to total loans and leases

3.80

2.97

2.30

Loss allowance to noncurrent loans and leases

48.00

58.65

70.14

 

The reader should pay particular attention to the last row. Non performing means more than 30 days delinquent. Non current means more than 90 days past due and not accruing interest, in other words, loans that are almost certainly not going to be paid anytime in the future. This table shows that banks’ allowance, meaning the amount in percentage that they have set aside to cover those failing loans, has decreased by 30 percent since the fourth quarter of 2007. But at the same time, the ratio of non current loans to all loans and leases has increased by about 40 percent.

 

What this means is that Florida’s banking system does not have enough funds set aside to cover loan defaults, and is not recognizing its problem either. Since financing conditions are almost certain to deteriorate even further from here, more losses, and bank failures rising to high levels in Florida is assured.

 

Another striking fact is that, for commercial banks, and savings institutions across the US, net interest margin, which is a measure of potential profitability,  has remained about the same for the past six months, despite all the rate cuts by the Fed. This shows how powerless monetary policy has been in this crisis.

 

Here’s the same data for all US commercial banks and saving instituitions, across the country.

 

Percent Value

June 30, 2008

March 31, 2008

December 31, 2007

Net interest margin

3.35

3.38

3.58

Net charge-offs to loans & leases

0.70

0.60

0.43

Percent of Unprofitable institutions  

16.73

13.95

12.15

Nonperforming assets to assets

1.46

1.20

0.95

Core capital (leverage) ratio

8.92

8.98

9.06

Noncurrent loans & leases to total loans and leases

1.94

1.64

1.27

Loss allowance to noncurrent loans and leases

74.23

81.32

101.47

 

The same last row here on this table shows the same kind of deterioration in all US banks. While during the last quarter of 2007, banks in general had set aside an equal amount in percentage to their non current loans, that amount has shrank by about 26 percent since then, while loans in default have increased by about 50 percent. The significance of this situation can never be overstated. To compare this value, banks’ loss allowance to noncurrent loans and leases, which now stands at 74 percent, never fell below 120 percent during the period 2000-2003, which covers  the last recession. In fact, the present ratios are lowest on FDIC’s public data. 

 

The number of unprofitable institutions has risen by 37 percent in the past two quarters.

 

Finally, here’re the same tables for Georgia, Nevada, California, Arizona, Ohio, Virginia, Michigan, Colorado, and Utah, the ten states with the highest foreclosures to total households ratio.

 

Georgia:

 

Percent

June 30, 2008

March 31, 2008

December 31, 2007

Net interest margin

3.20

3.22

3.41

Net charge-offs to loans & leases

0.87

0.82

0.36

Percent of Unprofitable institutions 

34.25

25.42

15.12

Nonperforming assets to assets

2.75

2.23

1.55

Core capital (leverage) ratio

8.32

8.19

8.28

Noncurrent loans & leases to total loans and leases

2.98

2.48

1.69

Loss allowance to noncurrent loans and leases

48.97

53.19

68.40

 

The number of unprofitable institutions has doubled in the past two quarters. Loss allowance to noncurrent loans has fallen by about 30 percent. In general Florida and Georgia are similar, only Georgia is a bit worse in some respects.

 

California

 

Percent

June 30, 2008

March 31, 2008

December 31, 2007

Net interest margin

3.80

3.81

4.11

Net charge-offs to loans & leases

0.85

0.59

0.31

Percent of Unprofitable institutions 

40.17

32.46

28.19

Nonperforming assets to assets

1.67

1.27

0.76

Core capital (leverage) ratio

9.78

9.90

10.05

Noncurrent loans & leases to total loans and leases

3.80

2.97

2.30

Loss allowance to noncurrent loans and leases

72.11

85.34

137.48

Loss allowance ratio has fallen by 47 percent. Amount of unprofitable institutions has risen by 42 percent in the past two quarters. The speed of deterioration in California’s banking sector is the second highest in this list, after Nevada.

 

Arizona

 

Percent

June 30, 2008

March 31, 2008

December 31, 2007

Net interest margin

4.23

4.27

4.88

Net charge-offs to loans & leases

0.41

0.28

0.20

Percent of Unprofitable institutions 

52.14

41.12

29.41

Nonperforming assets to assets

3.03

1.93

1.20

Core capital (leverage) ratio

11.24

11.25

11.45

Noncurrent loans & leases to total loans and leases

2.75

2.02

1.10

Loss allowance to noncurrent loans and leases

47.87

60.18

105.63

 

Similar to California,  Arizona’s banking sector is in great trouble, and is the slowest in this list to recognize the seriousness of the situation.

 

Ohio

 

Percent

June 30, 2008

March 31, 2008

December 31, 2007

Net interest margin

2.92

3.14

3.01

Net charge-offs to loans & leases

0.87

0.65

0.43

Percent of Unprofitable institutions 

13.97

12.24

14.97

Nonperforming assets to assets

1.60

1.42

1.23

Core capital (leverage) ratio

8.31

8.56

8.67

Noncurrent loans & leases to total loans and leases

2.18

1.88

1.57

Loss allowance to noncurrent loans and leases

66.66

62.99

62.97

 

Ohio so far seems healthier than many others in this list.

 

Virginia

 

Percent

June 30, 2008

March 31, 2008

December 31, 2007

Net interest margin

3.63

3.65

5.93

Net charge-offs to loans & leases

0.16

0.20

1.80

Percent of Unprofitable institutions 

16.05

16.05

15.66

Nonperforming assets to assets

0.75

0.65

1.10

Core capital (leverage) ratio

9.78

9.90

10.05

Noncurrent loans & leases to total loans and leases

0.77

0.65

1.45

Loss allowance to noncurrent loans and leases

144.87

169.21

208.89

 

Virginia is the strongest in this group. It doesn’t appear like a state in crisis, with respect to the overall status of its institutions.

 

Michigan

 

Percent

June 30, 2008

March 31, 2008

December 31, 2007

Net interest margin

3.77

3.80

4.01

Net charge-offs to loans & leases

1.50

1.31

0.61

Percent of Unprofitable institutions 

31.30

24.43

22.56

Nonperforming assets to assets

3.01

2.50

1.95

Core capital (leverage) ratio

9.54

9.38

9.76

Noncurrent loans & leases to total loans and leases

3.51

2.89

2.19

Loss allowance to noncurrent loans and leases

53.44

56.04

64.80

 

Starting from an already troubled base, Michigan’s banking sector has been deteriorating continuously during the past quarters. A lot of bank failures are highly likely. 

 

Colorado

 

Percent

June 30, 2008

March 31, 2008

December 31, 2007

Net interest margin

3.93

3.90

4.23

Net charge-offs to loans & leases

0.28

0.23

0.29

Percent of Unprofitable institutions 

11.21

9.65

7.76

Nonperforming assets to assets

1.20

1.11

0.81

Core capital (leverage) ratio

8.59

8.68

8.47

Noncurrent loans & leases to total loans and leases

1.45

1.36

0.89

Loss allowance to noncurrent loans and leases

83.12

87.57

129.84

 

There’s a clear trend of deterioration in Colorado’s banking sector, but it hasn’t yet reached the levels of California or Arizona.

 

Utah

 

Percent

June 30, 2008

March 31, 2008

December 31, 2007

Net interest margin

2.96

2.95

3.17

Net charge-offs to loans & leases

1.50

1.26

1.07

Percent of Unprofitable institutions 

18.97

13.79

8.93

Nonperforming assets to assets

0.74

0.62

0.52

Core capital (leverage) ratio

10.44

10.53

10.27

Noncurrent loans & leases to total loans and leases

1.13

1.13

0.87

Loss allowance to noncurrent loans and leases

136.49

114.47

125.03

 

The banks of Utah appear to be aggressive on loan loss provisioning, and this should be conducive to better results. The deterioration in profitability is worrisome.

 

Nevada

 

Percent

June 30, 2008

March 31, 2008

December 31, 2007

Net interest margin

4.94

5.11

5.33

Net charge-offs to loans & leases

1.82

1.55

0.85

Percent of Unprofitable institutions 

46.88

50.00

32.26

Nonperforming assets to assets

3.79

1.96

1.14

Core capital (leverage) ratio

24.19

24.86

24.57

Noncurrent loans & leases to total loans and leases

4.29

2.24

1.38

Loss allowance to noncurrent loans and leases

57.26

99.66

150.77

 

With about half of its banks unprofitable, Nevada is one the hardest hit states of the credit crisis. The speed of deterioration in bank portfolios is nothing short of horrible. There’s nothing positive to be sad about Nevada’s situation, and bank failures are assured.

 

 

 

Update on bank failures

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.

Loan Type

Charge-off Ratio

Rising since (quarter)

Highest since (quarter)

Credit Cards

5.47

2007 II.

2003 IV.

Residential RE

1.13

2006 II.

All Time

Commercial RE.

0.93

2006 II.

1994 1.

All Loans- Leases

1.24

2006 I.

1992 III.

 

The source of the seasonally adjusted data is the Federal Reserve. All time is since the beginning of Fed’s records.

 

According to Steven Roach, who has a reputation for pessimism and has been warning about a downturn for years now, we’ve completed about 65 % of the credit crisis phase of this downturn. It’s important to note that the credit crisis has mostly been a phenomenon in the developed world. In China, Brazil the problem so far has been excessive credit expansion, not tightening. As we complete the credit crisis phase, the global, real economy phase is only beginning.

 

It’s important to note about the table above that there’s a lag of one or two years between the peaks in total loan and lease defaults, and in credit card loan defaults. It takes about one to two years after the peak of total loans default ratio before a peak in consumer defaults is seen. This is important because it shows us that even in the very unlikely case that we have seen the peak in the total loan-lease default ratio in the US, banks will have far more writedowns on their consumer loan portfolios.

 

It should also be noted that all of the categories above have been rising continuously, with no sign of any easing.

 

Meanwhile, according to a conference call by Jamie Dimon, the head of JP Morgan in July of this year, prime mortgages look “terrible”. They have so far been performing better than subprinme loans,  but there are increasing signs that the contagion is spreading to the prime mortgage portfolio of banks.

 

Here’s a chart of JP Morgan’s prime mortgage delinquency ratio: 

JPM prime defaults

JPM prime defaults

  30-day delinquency trending among JP Morgan’s prime mortgage portfolio. (Source: investor presentation)

 

This graphic is showing the deterioration in the prime portfolio in a way that requires no further explanation. Between April 2007 and Jun 2008 the default rate has quadrupled.

 

And finally, to show why the finance sector needs higher interest rates, not lower, here’s an ad I came across yesterday:

 

It’s clear that both the consumer and the business sector have a lot more to learn…