Served by Jesse of Le Café Américain
This analysis from Bloomberg is based on some fairly modest economic assumptions. Most of the banks in question are state and regional banks that have not enjoyed the largesse of the Fed and Treasury like the free-spending, Wall Street money center banks, who are sharply curbing lending and raising rates on credit cards and other revolving debt aggressively even for customers with excellent credit and no history of non-payment.
As you might suspect, even the worst of the banks with large percentages of non-performing loans all claim to be ‘well capitalized’ by regulatory standards.
If as indicated more of the smaller banks fail, we will be left with a few, larger, more potentially lethal financial institutions.
The Obama Administration policy decisions, particularly the programs and reserves decision enabled in October 2008, appear to be favoring Wall Street heavily, monetizing debt for the Primary Dealers and the Wall Street market players, while choking off the consumer and the state and regional banks.
Policy decisions have impact, especially when they have the weight of the Federal Reserve, the Treasury, the Congress, and a powerful President behind them. The question becomes are they the right policy decisions? How were they crafted?
Regretfully, most of them were done behind closed doors, with little public discussion or scrutiny, crafted by an army of lobbyists, campaign donors, and crony capitalists galore.
Bloomberg
Toxic Loans Topping 5% May Push 150 Banks to Point of No Return
By Ari Levy
Aug. 14 (Bloomberg) — More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.
The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.
The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound.
“At a 3 percent level, I’d be concerned that there’s some underlying issue, and if they’re at 5 percent, chances are regulators have them classified as being in unsafe and unsound condition,” said Walter Mix, former commissioner of the California Department of Financial Institutions, and now a managing director of consulting firm LECG in Los Angeles. He wasn’t commenting on any specific banks.
Missed payments by consumers, builders and small businesses pushed 72 lenders into failure this year, the most since 1992. More collapses may lie ahead as the recession causes increased defaults and swells the confidential U.S. list of “problem banks,” which stood at 305 in the first quarter.
Cash DrainNonperforming loans can eat into a company’s earnings and deplete cash, leaving banks below the minimum capital levels required by regulators…. “This is a fairly widespread issue for the larger community banks and some regional banks across the country,” said Mix of LECG, where William Isaac, former head of the Federal Deposit Insurance Corp., is chairman of the global financial services unit.
Ratios above 5 percent don’t always lead to failures because banks keep capital cushions and set aside reserves to absorb bad loans. Banks with higher ratios of equity to total assets can better withstand such losses, said Jim Barth, a former chief economist at the Office of Thrift Supervision. Marshall & Ilsley and Synovus said they’ve been getting bad loans off their books by selling them…
‘Off the Charts’
“These numbers are off the charts,” said Blake Howells, an analyst at Becker Capital Management in Portland, Oregon, referring to the nonperforming loan levels at companies he follows. Banks are losing the “ability to try and earn their way through the cycle,” said Howells, who previously spent 13 years at Minneapolis-based U.S. Bancorp….
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Jesse
Thanks for shining the spotlight on the continuing financial train wreck.
The Obama policy which is just a continuation of the Paulson policy is to benefit the Wall Street & NY money center banks. They'll get bigger and even more powerful. TBTF on steroids. The overt policy of the state strengthening the bankster oligarchy. There should be no doubt that they have effectively taken over the government. The march to fascism!
Based on this news, banks should rally another 50% (sarcasm …kind of).
Couple this with the Congressional Oversight Panel's August report released this week that showed the current and true scope of the credit problems still facing the 19 TARPed banks and you've got a situation that's anything but "under control," as the Obama administration would call it. But does anyone really care? So what if 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival? So they fail? Ignore it long enough and the problem will go away, right? Right?!?
When the housing bubble burst on August 9, 2007, it was inevitable that essentially the whole banking sector, large and small, was going to become effectively bankrupt. On September 15, 2008 when the financial meltdown occurred after the unthought through decision to let Lehman go bust, that going to become bankrupt became were bankrupt. Multi-trillion dollar interventions were made to save the TBTF and players in the shadow banking system but not that much to the smaller banks that had more direct exposure to the collapse in housing and fewer connections to get big bailouts. Even writing down debt and pumping up asset value can not save them. That should tell us a lot about how bad their financial situation is, and remind us of how bad the underlying condition of the financial industry remains.
It is also another in a series of economic events like job losses, collapses in housing and commercial real estate, that form a counter-narrative to the greenshoots, end of recovery story we are being sold.
I just want to make sure that no one else thinks that the Bank Credit chart intends to show that the Fed's reserves action caused a spike in lending, credit growth. that spike is probably anomalous
Rather the chart intends to support the hypothesis, that the Fed and Treasury have done little or nothing to actually promote bank lending, leaving the consumer and small businesses high and dry while nourishing Wall Street.
Watch what the largest holders/buyers of our debt (China and Japan) do when using their own time scales this economy doesn't recover.
Bank debt, consumer spending, bailouts, States defaulting, etc. are just indicators pointing to what?
this post needs to be read after the post by Yves Smith this AM on debt repudiation.
Weak banks coupled with underwater and angry borrowers make for trouble ahead.
Not to worry. We nay sayers are all wrong. Jim Cramer is right. He says BAC and C are screaming buys. Not…
As I recall, the 'primary dealer' banks hold about 70% of the nation's demand deposits and they are the priamry intermediators of the national debt. How many of these primary dealer banks are in this group of 150 banks? These are the banks that the Treasury and the Fed will work (and have worked)to protect.
The Congressional Oversight Panel makes a strong case that there remains a very substantial quantity of bad debt to be liquidated. The message that I get is that we will be in the toilet for at least another 10 years, quite possibly much longer than that. It is also my sense that the public shares my foreboding.
This Congress and Administration gives every appearance of being incapable of coming to grips with the problem. Wouyld that it were as simple as a monetary problem. The monetary problem has infected social structures and set the stage for class warfare.
As the rate of economic decline slows we get increasing palaver that a recovery is in the offing. For those who are waiting for a recovery to be 'offically' announced I say you are waiting for Godot!
Hi Jesse –
I am pretty sure that the October 2008 spike in lending is due to the fact that JPM took over WaMu. WaMu had been a thrift, and I am pretty sure that it therefore hadn't previously been included in the Fed's "bank lending" figures. Once it became JPM's loans, then it was.
Not sure if anyone else can verify this for certain, but I am pretty sure this is the case.