It's About to Get REAL Ugly, Folks!

[Woodchuck]

Analysts Say More Banks Will Fail
by Louise Story
Monday, July 14, 2008
provided by


As home prices continue to decline and loan defaults mount, federal regulators are bracing for dozens of American banks to fail over the next year.

But after a large mortgage lender in California collapsed late Friday, Wall Street analysts began posing two crucial questions: Just how many banks might falter? And, more urgently, which one could be next?

The nation’s banks are in far less danger than they were in the late 1980s and early 1990s, when more than 1,000 federally insured institutions went under during the savings-and-loan crisis. The debacle, the greatest collapse of American financial institutions since the Depression, prompted a government bailout that cost taxpayers about $125 billion.


But the troubles are growing so rapidly at some small and midsize banks that as many as 150 out of the 7,500 banks nationwide could fail over the next 12 to 18 months, analysts say. Other lenders are likely to shut branches or seek mergers.

“Everybody is drawing up lists, trying to figure out who the next bank is, No. 1, and No. 2, how many of them are there,” said Richard X. Bove, the banking analyst with Ladenburg Thalmann, who released a list of troubled banks over the weekend. “And No. 3, from the standpoint of Washington, how badly is it going to affect the economy?”

Many investors are on edge after federal regulators seized the California lender, IndyMac Bank, one of the nation’s largest savings and loans, last week. With $32 billion in assets, IndyMac, a spinoff of the Countrywide Financial Corporation, was the biggest American lender to fail in more than two decades.

Now, as the Bush administration grapples with the crisis at the nation’s two largest mortgage finance companies, Fannie Mae and Freddie Mac, a rush of earnings reports in the coming days and weeks from some of the nation’s largest financial companies are likely to provide more gloomy reminders about the sorry state of the industry.

The future of Fannie Mae and Freddie Mac is vital to the banks, savings and loans and credit unions, which own $1.3 trillion of securities issued or guaranteed by the two mortgage companies. If the mortgage giants ever defaulted on those obligations, banks might be forced to raise billions of dollars in additional capital.

The large institutions set to report results this week, including Citigroup and Merrill Lynch, are in no danger of failing, but some are expected to report more multibillion-dollar write-offs.

But time may be running out for some small and midsize lenders. They vary in size and location, but their common woe is the collapsed real estate market and souring mortgage loans. Most of these banks are far smaller than the industry giants that have drawn so much scrutiny from regulators and investors.

Still, only six lenders have failed so far this year, including IndyMac. In 1994, the Federal Deposit Insurance Corporation listed 575 banks that it considered to be troubled. As of this spring, the agency was worried about just 90 banks. That number may go up in August, when the government releases an updated list.

“Failed banks are a lagging indicator, not a leading indicator,” said William Isaac, who was chairman of the F.D.I.C. in the early 1980s and is now the chairman of the Secura Group, a finance consulting firm in Virginia. “So you will see more troubled, more failed banks this year.”

And yet IndyMac, one of the nation’s largest mortgage lenders, was not on the government’s troubled bank list this spring — an indication that other troubled banks may be below the radar.

The F.D.I.C. has $53 billion set aside to reimburse consumers for deposits lost at failed banks. IndyMac will eat up $4 billion to $8 billion of that fund, the agency estimates, and that could force it to raise more money from the banks that it insures.

The agency does not disclose which banks it thinks are troubled. But analysts are circulating their own lists, and short sellers — investors who bet against stocks — are piling on. In recent weeks, the share prices of some regional banks, like the BankUnited Financial Corporation, in Florida, and the Downey Financial Corporation, in California, have stumbled hard amid concern about their financial health. A BankUnited spokeswoman said the lender had largely avoided risky subprime loans.

In his “Who Is Next?” report over the weekend, Mr. Bove listed the fraction of loans at banks that are nonperforming, meaning, for example, that the assets have been foreclosed on or that payments are 90 days past due. He came up with what he called a danger zone, which was a percentage above 5 percent. Seven banks fell in this category.

An important issue for the regional and community banks will be whether they have managed to sell their riskiest loans to Wall Street firms.

And the government may have fewer failures than in the past because private investment funds might buy some troubled lenders. Regulators are considering rule changes that would allow private equity firms to buy larger shares of banks, and several prominent investors, like Wilbur Ross, have raised funds to leap in.

Eric Dash contributed reporting.

[moomoocajoo]

Quick! Withdraw all your cash and stuff it under your mattress!!

...no wait that's part of the problem D:

[FL Knifemaker]

A good time for me to buy another property

[Woodchuck]

I wonder if the gov't is bailing out Freddie Mac and Fannie Mae mortgages because the Chinese gov't is the largest boldholder of those mortgages.

[WRBass]

I hate stating the obvious, but if your money is in an FDIC insured bank, you are insured for up to $100,000. Who keeps $100,000 in a bank account? If you do, I would suggest opening multiple accounts!

Even the article you quoted says "The nation’s banks are in far less danger than they were in the late 1980s and early 1990s, when more than 1,000 federally insured institutions went under during the savings-and-loan crisis."

There are 1,000s and 1,000s of banks in the US. There will be bank failures. Nothing unusual.

Now, if everyone starts withdrawing money, then we will have a crisis.

[wld3]

Originally Posted by WRBass

Even the article you quoted says "The nation’s banks are in far less danger than they were in the late 1980s and early 1990s...'

Yes but they 'whisper' that part after shouting the headline. Such is modern day, so-called journalism.

[Visirale]

Originally Posted by WRBass

I hate stating the obvious, but if your money is in an FDIC insured bank, you are insured for up to $100,000. Who keeps $100,000 in a bank account? If you do, I would suggest opening multiple accounts!

That's easier to say when only a few hundred thousand are involved. My grandma has her money spread out over a lot of places, but inevitably quite a few are more than $100k. She's redistributing them into CDs in family members names.

That being said, the fact that my grandma is worried (she was raised in the great depression) shows me alot of this is hooey. First off the writer has no real economic background:

"She earned her Master's in Journalism at Columbia University, and she earned her M.B.A. and B.A. in American Studies at Yale University. She was raised in Florida."

Impressive as it is, no studies of economics. An MBA is nice, but doesn't even touch eco very much. Her ramblings are really no different from me writing a bunch of my feelings on the banks.

With ALL of that being said, I think the economy is just in one of its many natural down turns. We're not even in a recession because real growth has not been negative for two quarters.

Everyone just likes to get their panties in a bunch .

[burk48237]

Originally Posted by Visirale

That's easier to say when only a few hundred thousand are involved. My grandma has her money spread out over a lot of places, but inevitably quite a few are more than $100k. She's redistributing them into CDs in family members names.

That being said, the fact that my grandma is worried (she was raised in the great depression) shows me alot of this is hooey. First off the writer has no real economic background:

"She earned her Master's in Journalism at Columbia University, and she earned her M.B.A. and B.A. in American Studies at Yale University. She was raised in Florida."

Impressive as it is, no studies of economics. An MBA is nice, but doesn't even touch eco very much. Her ramblings are really no different from me writing a bunch of my feelings on the banks.

With ALL of that being said, I think the economy is just in one of its many natural down turns. We're not even in a recession because real growth has not been negative for two quarters.

Everyone just likes to get their panties in a bunch .

No one who is claiming this is the next great depression (most of our media - who are clueless when it comes to economics) seems to remember the late Seventies. This is a picnic compared to that. Gas quadrupled in price and you couldn't get it. We had inflation over 10%, unemployment pushing 10%, and home loan interest was at credit card rates. I got an adjustable rate mortgage for 14.5%! The best deal I could get. Most of the people alive today in their 20's and 30's have no idea what a bad economy feels like. The US has had an unprecedented (at any time in history) period of uninterrupted economic growth since about 1982, despite a few hiccups, no one in any other part of the planet can say that. Are we due for some adjustments?

As far as dangerous areas of the economy, I'm much more worried about the liquidity of the public sector then the private sector. The public sector is facing far more serious challenges in the long term then the private sector is in dealing with these near term housing value issues. The fact of the matter is housing values (the value of these loans) will go up again. Why? Because their are less houses then people who want houses.

[Lalabadie]

As long as the inflation stays under the one in zimbabwe. They started emitting 1, 5 and 10 million Z$ bills.

There's a live estimation of a beer's price somewhere on the Internet.

Ha! found it. http://www.worldometers.info/fr/vue/zim/

[burk48237]

Originally Posted by Woodchuck

I wonder if the gov't is bailing out Freddie Mac and Fannie Mae mortgages because the Chinese gov't is the largest boldholder of those mortgages.

This is ties into one of the biggest myths of economics. The foreighners are taking over everything myth so they can destroy our economy. This is stupid on many obvious levels. 1) You don't invest in something because you want it to fail. You invest in things to make money. The fact that so many foreign investment funds are investing here is a good thing. It shows they think the future is good for our economy. 2) Second the Chinese own a lot of dollars. All those MP3 players and CD players and Flat screen TV's. The last thing they want is those dollars to fall in value. For us this is a good thing, at least we have 39.99 CD players to show for our 39.99 worth of dollars. All they have is those "worthless" dollars.

[Georynn]

Not to make this political, but do you think its a coincidence that it just happens to be an election year? I mean all the candidates benefit from the perception of a crisis, it makes people vote with their emotions and not their (OK, maybe not so)clear thinking logical minds...

[Relic]

Originally Posted by FL Knifemaker

A good time for me to buy another property

I seriously suck at financial analysis and gaging the stock market and all that sort of thing, in fact I'd call myself downright naive.
Hence this stupid question - is it REALLY a good time to buy a property(ies) right now? Some say it is, some say it isn't...
I'm in the market to buy a new house, but with all of the crazy stuff going on at the moment I honestly don't know if I should take the plunge or just stay put where I'm comfortable financially. Crazy times we live in..

[Lalabadie]

Originally Posted by Relic

I seriously suck at financial analysis and gaging the stock market and all that sort of thing, in fact I'd call myself downright naive.
Hence this stupid question - is it REALLY a good time to buy a property(ies) right now? Some say it is, some say it isn't...
I'm in the market to buy a new house, but with all of the crazy stuff going on at the moment I honestly don't know if I should take the plunge or just stay put where I'm comfortable financially. Crazy times we live in..

Good question. In Quebec the value of properties has gone up a good 50-60% in the last ten years. Maybe the statement has a lot more truth in the US.

[Mark Latimour]

Originally Posted by Relic

I seriously suck at financial analysis and gaging the stock market and all that sort of thing, in fact I'd call myself downright naive.
Hence this stupid question - is it REALLY a good time to buy a property(ies) right now? Some say it is, some say it isn't...
I'm in the market to buy a new house, but with all of the crazy stuff going on at the moment I honestly don't know if I should take the plunge or just stay put where I'm comfortable financially. Crazy times we live in..

Its a good time to buy a property if you have the money to do so and get a good deal. Consider the situation where property prices might fall 20% over the the next two years.

If a price is asking $250,000 now and I buy it for the asking price then in two years it may only be worth $200,000. Assuming you borrowed the whole of the price (good luck trying to find a lender), then you owe more than your property is worth. Even if prices turn around and grow at 10% per annum for the next five years, it would take you 3 years before you back above the $250,000 (ie $220k the first year, $242k the second, $260+K the third). Then you are making money again, but you have been paying interest for 5 years and you are only up a little bit on your original price. If you had just stuck all that money in a bank even at 5% you would be better off.

However, if you can buy that property at say $200,000 (ie undervalue), then you might be okay if the market turns around. Further you may not care if you are going to hold the property for a long time and put as much money into it as equity, rather than interest. You have already accounted for the price drop in the purchase price therefore you borrowings are lower and the actual price at which you could sell it, even in the first two years, might be sufficient to cover the value. Once prices start to turn around, you start to make profit straight away.

In short, you need to do the math yourself and don't forget what the current and future price of money may be (ie interest) as if you are paying interest at a high rate and your property isn't growing in value, maybe its better to put your money in the bank and have the bank pay you interest?

[thumpbass1]

Originally Posted by Georynn

Not to make this political, but do you think its a coincidence that it just happens to be an election year? I mean all the candidates benefit from the perception of a crisis, it makes people vote with their emotions and not their (OK, maybe not so)clear thinking logical minds...

Good point, yet the reality is that a lot of folks at the lower end of the economic spectrum are taking it in the teeth and the chin big time; while some pundits pour forth sweet tea and rosy sounding platitudes of ' It's really not that bad.' to the rest of the sheep.

In my hometown of Omaha which historically weathers bad economic times better than most other big cities the applications for food pantry and other charities is at a record setting pace this year! Sorry folks but the poor and the lower middle classes are getting slapped hard already, and I think we are just on the front edge of some hard economic times.

I was forced out my day gig of 32 years last year and I exhausted my unemployment back in April. As a conservative registered republican I'm greatful for those in both houses and both parties that passed the extended unemployment benefits act that so many out of work americans really need. I got a repreive that I'm greatful for!

I'm trying hard as a person with skills to find a job, but nobody wants a middle aged guy with a heart condition that limits me to some extent but I'm still very employable. I still get gigs but even the regional market for music is in a bit of downturn as many clubs are'nt getting the patronage they were used to. The record setting oil prices and the attendant rising costs of everything as a result is putting real hurt on a lot of folks. It's not an illusion as some would say, and I think it's heading towards being a lot like the 70's again and not in a good way. That's my two cents worth of rant.

[Barkless Dog]

A house near me that can't sell has big yellow signs on it now that say "Foreclosure Sale"

The first time I have ever seen that anywhere where I have lived (I'm 48)

The real issue that should be the focus of our attention is gay marriage, abortion rights & immigration.

[NJL]

Originally Posted by FL Knifemaker

A good time for me to buy another property

depending of location, you bet!!

[Relic]

Originally Posted by Mark Latimour

Its a good time to buy a property if you have the money to do so and get a good deal. Consider the situation where property prices might fall 20% over the the next two years.

If a price is asking $250,000 now and I buy it for the asking price then in two years it may only be worth $200,000. Assuming you borrowed the whole of the price (good luck trying to find a lender), then you owe more than your property is worth. Even if prices turn around and grow at 10% per annum for the next five years, it would take you 3 years before you back above the $250,000 (ie $220k the first year, $242k the second, $260+K the third). Then you are making money again, but you have been paying interest for 5 years and you are only up a little bit on your original price. If you had just stuck all that money in a bank even at 5% you would be better off.

However, if you can buy that property at say $200,000 (ie undervalue), then you might be okay if the market turns around. Further you may not care if you are going to hold the property for a long time and put as much money into it as equity, rather than interest. You have already accounted for the price drop in the purchase price therefore you borrowings are lower and the actual price at which you could sell it, even in the first two years, might be sufficient to cover the value. Once prices start to turn around, you start to make profit straight away.

In short, you need to do the math yourself and don't forget what the current and future price of money may be (ie interest) as if you are paying interest at a high rate and your property isn't growing in value, maybe its better to put your money in the bank and have the bank pay you interest?

Mark - thanks for that. It lays it out quite nicely.
My concern is also the actual job market in regards to the economy. Will there still be a job available for me to meet those mortgage payments with the way things are going? That's a big issue for me. While I'm comfortably employed at the moment, I'm not so sure I will be in a year/two/three if things continue as they are now. Scary stuff

[jkritchey]

Originally Posted by Woodchuck

I wonder if the gov't is bailing out Freddie Mac and Fannie Mae mortgages because the Chinese gov't is the largest boldholder of those mortgages.

With all due respect, the Gov't. isn't bailing these institutions out. No taxpayer money is going towards these companies.

Yet. And probably won't. It's their stock that is in worse shape than their portfolio's, a much different issue. They seem to be underneath an aggressive bear market, short selling, and some accompanying fear mongering. In fact, there are now investigations of wrongdoing by 'analysts' with short positions shouting about insolvency and making money.

Disclosure: Wife and brother long time Freddie employees.

[Woodchuck]

Originally Posted by jkritchey

With all due respect, the Gov't. isn't bailing these institutions out. No taxpayer money is going towards these companies.

Yet. And probably won't. It's their stock that is in worse shape than their portfolio's, a much different issue. They seem to be underneath an aggressive bear market, short selling, and some accompanying fear mongering. In fact, there are now investigations of wrongdoing by 'analysts' with short positions shouting about insolvency and making money.

Disclosure: Wife and brother long time Freddie employees.

Chinese Government is Top Foreign Holder of Fannie Mae, Freddie Mac Bonds
$376 Billion in Chinese Agency Bond Holdings Subject to Taxpayer Bailout Proposals According to FreedomWorks Analysts

Last update: 11:08 a.m. EDT July 11, 2008

WASHINGTON, Jul 11, 2008 (BUSINESS WIRE) -- As politicians call for taxpayer bailouts and a government takeover of troubled mortgage lenders Freddie Mac and Fannie Mae, FreedomWorks would like to point out that a bailout is a transfer of possibly hundreds of billions of U.S. tax dollars to sophisticated investors and governments overseas.
The top five foreign holders of Freddie and Fannie long-term debt are China, Japan, the Cayman Islands, Luxembourg, and Belgium. In total foreign investors hold over $1.3 trillion in these agency bonds, according to the U.S. Treasury's most recent "Report on Foreign Portfolio Holdings of U.S. Securities."
FreedomWorks President Matt Kibbe commented, "The prospectus for every GSE bond clearly states that it is not backed by the United States government. That's why investors holding agency bonds already receive a significant risk premium over Treasuries."
"A bailout at this stage would be the worst possible outcome for American taxpayers and mortgage holders, who have been paying a risk premium to these foreign investors. It would change the rules of the game retroactively and would directly subsidize the risks taken by sophisticated foreign investors."
"A bailout of GSE bondholders would be perhaps the greatest taxpayer rip-off in American history. It is bad economics and you can be sure it is terrible politics."
SOURCE: FreedomWorks
FreedomWorks
Adam Brandon, 202-942-7612
abrandon@freedomworks.org