Today the Fed had has released its senior loan officers survey, the ISM has its survey of manufacturers. (Both of these are rarely revised, and are more reliable than preliminary estimates on GDP etc.) General Motors has declared October to be the worst month since 1945. U.S. consumer confidence fell to the lowest level on record in October as stocks plunged and banks shut off credit. The Conference Board’s confidence index tumbled to 38, which is the lowest reading since monthly records began in 1967. Meanwhile the Treasury is expected to borrow $550 billion in the three months to Dec. 31, compared with the $142 billion predicted in July, after a $530 billion record in the July-September quarter.

I quote mostly from Bloomberg:

The ISM data has showed the weakest level for U.S. export orders in the two decades the ISM has kept the data, a sign of slowdowns in Europe and Asia. The reading for October was the lowest since September 1982.

October’s ISM reading corresponds to a 0.7 percent annualized drop in GDP and the export gauge dropped to 41, the lowest reading since records for this component began in 1988.

GM reported today that its sales of cars and light trucks tumbled 45 percent from a year earlier. Ford Motor Co. reported a 30 percent decline and Toyota Motor Corp. posted a 23 percent drop. Honda’s were down 25 percent, Nissan Motor’s slid 33 percent and Chrysler’s fell 35 percent.

“If you adjust for population growth, it’s the worst sales month in the post-World War II era” for the industry, said Mike DiGiovanni, GM’s chief sales analyst, on a conference call.

Industrywide U.S. auto sales fell for the 12th straight month in October, extending the longest slide in 17 years.

Goldman Sachs projected $400 billion in Treasury borrowing needs for the final three months of 2008, followed by $375 billion for the first quarter next year. Those estimates don’t, however, include borrowing for the Fed’s supplementary financing program, which has already borrowed $220 billion since Oct. 1, Goldman Sachs economists said in a research note.

—-

Blue Mountain Capital Management LLC froze its largest hedge fund after clients asked to pull a “meaningful percentage” of their money even as it outperformed the industry average by almost 10-fold this year.

The $3.1 billion Blue Mountain Credit Alternatives Fund declined 2.4 percent through October, compared with the 19.6 percent loss by the HFRX Global Index compiled by Chicago- based Hedge Fund Research Inc. Withdrawals were suspended so Blue Mountain wouldn’t be forced to sell assets in falling credit markets, the firm said today in a letter to clients.

“This shows that nobody is immune from the huge investor outflows in the industry at the moment,” said Matt Simon, analyst at New York-based Tabb Group, a financial-services consulting company.

Investors fleeing the worst financial crisis since the Great Depression have forced firms such as Deephaven Capital Management LLC and RAB Capital Plc to halt redemptions. In most cases, the funds have underperformed competitors. The Deephaven Global Multistrategy Fund was down 15 percent this year through September and lost an additional 10 percent this month.

Several of Blue Mountain’s fund-of-funds shareholders were under “liquidity pressures” from their own clients, Blue Mountain Chief Executive Officer Andrew Feldstein said in the investor letter, a copy of which was obtained by Bloomberg News.

“We are not comfortable with this state of affairs,” Feldstein wrote. “If we were to unwind or sell positions to meet current redemptions, the severe liquidation costs would be borne inequitably by the remaining investors.”

A spokesman for Blue Mountain, which oversees $5.5 billion from offices in New York and London, declined to comment.

Comment: There’s little need for comment on all these developments, except to note that the Treasury’s continued haphazard accumulation of government debt will make this crisis far worse eventually than what it is even now. There’s no reason to believe that in this environment of extreme volatility the interest rates on Treasury paper will remain this low forever. It may not happen today, nor in six months, but when it does happen, it will bankrupt the US government.

Advertisements

Today the GDP numbers for third quarter have been published, and they came at minus 0.3, defying expectations of a worse number. My own choice is generally to ignore most of these numbers, because they are subject to dramatic revisions, and basing one’s analysis on preliminary data is usually gambling. The contraction in the third quarter of 2000, for instance, was first. reported as a 2.7 percent gain.

A more significant development is the 3.1 percent contraction in private consumption, and although it’s worse than expected, there’s no surprise in the result, as it would contradict logic if the US consumer, whose profligacy always depended on borrowing, could continue his habits during this unprecedented period of credit tightening. What must be realised is that this is only the beginning of a phase that will last for at least another year in the mildest scenario, and the chain reaction will have consequences for not only the US economy, but the rest of the world too, in particular for exporters such as Japan and China, Singapore and others, who made the most of the irrational excesses of the American consumer.

At this stage there is very little merit in preaching the obvious to the pious. The bankruptcy of Lehman was an event similar to those of August 2007, when the collapse of several hedge funds, and the reesulting inability to price mortage related assets caused a general paradigm shift in how the market valued certain asset classes. The demise of Lehman should only be seen as a further escalation of this trend, in which impossibles become possible, causing panic among speculators. It is meaningless to speak of investors at this stage, as volatility compels us to redefine “long term” within the span of a few months. Until a number of bankruptcies brings clarity to the situation, very few serious actors will be willing to assume long term exposure to the markets, and this will only make life harder for the governments.

Much is made of the recent easing in overnight rates, and the slight softening of the tensions in unsecured interbank lending. But while the governments’ massive injections of liquidity, and cash grants in the form of share and asset purchases appear to have made some banks and others more willing to accept higher levels of risk in overnight lending, with the Libor-OIS spread at 253 bp, one can only speak of lessening tensions in relative terms, comparing the situation to the period before the Lehman event. Otherwise it is clear that there’s very little lending going on between banks, and financial actors continue to be fearful in their dealings with each other. This is confirmed by the continued contraction in lending to consumers and the real sector, with both consumer credit, and corporate borrowing becoming more anemic by the day.

Others tie their hopes to the TARP and the Fed’s mergency lending and swap facilities, but while the latter may be of some use in alleviating the severity of the crisis, the former, in my opinion, will only make the problems worse, as there appears to be an irrational assumption in many quarters that throwing money at insolvent institutions can jump-start lending, and thereby the economy.

But this is deeply flawed reasoning. As I have stated here many times before, what the financial sector needs, and in fact, in an indirect way, demands, is bankruptcies. It’s very easy to gain a general idea on the status of many banks in the US by examining the FDIC’s statistics, or easier still, by visiting the FED’s website. What we see in the former is that banks have no money to cover their bad loans, and that this is a general phenomenon. The cover ratio of non current loans on banks’ balance sheets is only 70 percent at this stage, which is by far the lowest on record, and the situation is almost certain to deteriorate further from here. And on the Federal Reserve’s website one can see that they have been lending more than 100 billion dollars to commercial banks for the last two weeks, and although a bit crude as a measure, this serves well to demonstrate the difficulty in obtaining funding from other channels.

And so, why is the TARP counter-productive? Because it is funding institutions that have only one use for the funds they receive: patching up their books, covering their losses, and sustaining themselves. But what is the purpose of a bank, from the point of view of the public? It is to expand credit to the real economy and consumers. If the numerous banks that the TARP and the Fed are funding cannot expand credit, and are using the funds which they receive only for continuing their existence, isn’t the TARP prolonging and perpetuating the crisis, by helping those institutions that cannot, will not, and should not survive in the first place? If the program succeeds, and the complete mess of a system that we have now survives, will the financial system be in a better form where it is led and directed by players who exist as parasites on government subsidies, and whose only purpose is continued existence through government help? With the balance sheets that they have, and the managements that have brought them to where they are, can the American financial system have any hope of recovery if it expects the recovery to be financed by credit from institutions which are, for all intents and purposes, bankrupt, and which only exist at the mercy of the FDIC, and the federal government?

The TARP is a mistake, but given the way that the government has been reacting to each crisis, it’s not a surprising mistake.

Naturally, the reader will expect me to propose my own solution after this negative assessment of the government’s plan. In my opinion, what the economy needs is a dismantling of today’s system: the failed and bankrupt actors of yesterday should be nationalised when this is unvoidable, but for the greatest part, the government should manage a controlled liquidation of all firms that are clearly inoperable, and insolvent. Under normal circulmstances, this would have been managed by the free market, but there’s too much risk, excessive political costs, and too much uncertainty that make this choice undesirable and impractical. We should never try to forgo the cathartic period of the free market system, but the process should be managed and gradual. If this is the case, we need an organisation similar to the TARP, but its explicit purpose should be the liquidation of the firms that it helps for a brief period. The government could seek authority from the Congress for this purpose, and given the loathing that many of these financial firms arouse everywhere nowadays, such powers would be much easier to obtain than legislation that would sustain them. If, however, the government continues to throw money at these firms, it will only have the impact of feedings cancerous cells, it will surely bring no benefit, and is likely to cause much harm in the longer run.

Tomorrow I hope to write about emerging markets. Fed has recently been lending them billions over swap channels, and this is a phenomenon that is likely to go for quite a while. I believe the next phase of this crisis will be experienced in its severest form by developing nations.

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.

 

 

 

 

 

 

 

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.

 

 

 

 

 

 

 

There’s extreme worry about the tightness in overnight funding. Interbank dollar funding is tight across the world, from Asia, to Europe, to US. While spreads have eased somewhat today,  there’s still an undeniable need for further injections. With 235 billion in total over the past two days, central banks may not be so willing to add the vast sums needed.  They must, however, because the situation is dire. And the hope and expectation is that they will act soon.

overnight libor-16th September

overnight libor-16th September

Look at the spike; that’s for 16th September. The TED spread today has reached the highest levels since Black Monday of 1987.

The fear is that the lack of will for short term funding will cause cash squeeze for banks and other financial institutions; overnight rates are around 5-6 percent, more than twice the Fed’s target. This is by far the most important problem for financial markets right now, as short term rates have only responded slightly to massive liquidity pumping recently.

This is the kind of situation that used to occur in the developing and thirld world, in places such as Argentina, Turkey, during past financial crises. There’s no question that the market is clearly and unmistakably worried about the system’s stability, and unless some way is found to ease the short term, a cascade of bankruptcies is possible.

With Reserve Primary Fund breaking the buck, and Lehman paper promising more failures, there has been a general flight from money market funds, and as they create a lot of the liquidity in short term money markets, there’s an incredible shortage of cash everywhere.

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.

 

 

 

 

According to this article at the Wall Street Journal, the FDIC has been urging the Office of Thrift Supervision, which is a division of the Treasury Department, to be more active and stringent in urging banks to strengthen their balance sheets. According to the same article, the OTS isnt very fond of the idea of pressing on banks. This is hardly surprising – it is the FDIC that will have to pay the depositors, and eventually reorganise these banks somehow, which is going to drain its reserves. There are more than 8400 banks in the United States, and a sustained streak of failures could put in jeopardy the strength of any insurer, however well-prepared it may be.

 

Sheila Bair has so far been relatively open about the risks to the banking system, given the secretive nature of her profession. She has given the public repeated warnings about the prospect of banks failures, while at the same time trying to inspire some sort of confidence by insisting that the government is in control of the situation.

 

But it is not enough that this serious matter is being dealt with by relatively lower ranking members of the government. There’s no reason to wait until the problem reaches catastrophic proportions. The credibility of Mr. Paulson’s intervention in the GSE issue has suffered for the reason that also made his sponsorship of last year’s SIV deal a failure – too little, too late. He and Mr. Bernanke seem to be unable to grasp the need for preemptive, far-sighted solutions, choosing instead to focus on saving the day. To see that the economic situation is not going to get any better any time soon requires only a brief glance at two pieces of data: FED’s lending survey, and mortgage defaults. And under these conditions, if the government is to have any credibility, it must act preemptively and with clear goals. Otherwise the patchwork of impromptu solutions is likely to be torn apart in the whirlpool of financial turmoil.  

 

As year end approaches, funding pressures are likely to intensify, along with bank failures. There’s even a possibility that some large bank will also default on its obligations.  The last two months of last year were nightmarish for interbank funding, and now, with the ECB actually discussing reducing or closing the window of lending for certain types of collateral, we’re likely to see an even worse year end scenario. Arguably the worst will hit British and Spanish banks, as they have been increasingly turning to the ECB to deal with problematic paper, but the general air of insecurity should permeate all sectors of the financial market, from bonds and currencies, to credit default swaps.

 

Banks failures are accelerating. It is certainly possible that they will reach levels of the savings and loans crisis. As demonstrated by the OIS spread, institutional actors already have little confidence in each other, what is not needed now is panic by the public. The FED and the Treasury already have considerable difficulty managing the relatively sophisticated players of the financial system, and a generalization of the problems is the last development that we need.  

Although this website is only six days old and hardly well-known, it has received 118 searches about bank failures/ Here’s a list:

 

Search Views
banks at risk of failure 15
fdic banks at risk of failure 13
fdic problem list, vineyard bank 4
list of banks at risk of failure 4
list 117 banks with default policies 3
“liberty bank” florida trouble 3
bankrate 117 banks risk 3
“haven trust bank” negative 3
integrity bank of florida 3
is alpha bank,atalanta,ga in trouble 3
117 banks at risk 3
how many banks are at risk of failure? 2
“silver state bank” 2
banks as possible failures 2
list of “problem” banks at risk of failu 2
fdic problem bank list pff bank 2
united states banks at risk of failure 2
which banks are in financial trouble 2
banks at risk for failure 2
117 banks at the risk of failing 2
alpha bank & trust 2
a list of banks at risk of failure 2
integrity bank georgia 2
bank in financial trouble 1
rank banks for risk 1
integrity bank, georgia, failure 1
haven trust bank ga 1
list of banks risk failure 1
risk of failure of vanguard 1
integrity bank default 1
california bank and trust real estate ex 1
mcintosh commercial bank 1
unlimited support to indymac bank 1
vineyard bank “vineyard bank” 1
at risk banks commerce bank ? 1
vineyard bank loan default 1
first guarantee bank and trust jacksonvi 1
paramount bank mi risk 1
“first heritage bank” reason failure 1
bank of america failure risk 1
fdic watchlist m&i 1
american national bank failure 1
at risk bank list california 1
bankunited fsb troubles 1
banks at risk august 2008 1
integrity bank georgia wall street journ 1
century bank fsb 1
haven trust bank fdic list 1
which 117 banks will possibly fail 1
failure of bank in denmark 1

 

 

 

 

 

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.

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

California

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
County Bank
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

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
Bankunited, FSB
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
Freedom Bank of America
Great Eastern Bank of Florida
Integrity Bank
Key West Bank
Landmark Bank of Florida
Liberty Bank
Marco Community Bank
Marine Bank
Ocala Nation Bank
Ocean Bank
Old Harbor Bank
Partners Bank
People’s First Community Bank
Pilot Bank
Republic Federal Bank, N.A.
Riverside Bank of the Gulf Coast
Southbank, A Federal Savings Bank
Sunrise Bank
The Oculina Bank
The Bank
Vanguard Bank and Trust Company
Vision Bank

Nevada

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

Arizona

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
Parkway Bank
Valley First Community Bank

Ohio

In general, Ohio is better than most other states in this list.

Bramble Savings Bank
Centerbank
Century 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

Georgia

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
Eank
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
Firtcity Bank
Freedom Bank of Georgia
Gainesville Bank & Trust
Georgia Banking Company
Georgia Heritage Bank
Haven Trust Bank
Heritage Bank
Hometown Bank of Villa Rica
Integrity Bank
McIntosh Commercial Bank
Mountain State Bank
Neighbourhood Community Bank
Northside Bank
Omni National Bank
The Park Avenue Bank
The Peach Tree Bank
The People’s Bank
Plantersfirst
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

Michigan

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
Crestmark 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
Oxford Bank
Paragon Bank & Trust
Paramount Bank
People’s State Bank
Select Bank
Sterling Bank & Trust, FSB
West Michigan Community Bank

Colorado

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 FSB
Colorado National Bank
Kit Carson State Bank
Premier Bank

Utah

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.

Centennial Bank
Magnet Bank

Virginia

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.