This blog noted in May, thanks to comments from Chris Whalen of Institutional Risk Analytics, that the well publicized losses at large banks were soon to be followed by significant writedowns at mid and smaller sized banks. Whalen saw the wheels starting to come off in the June-July timeframe, meaning they would show up in third quarter earnings reports.
Whalen’s forecast is panning out. From the Financial Times:
Higher loan losses weighed on quarterly results at a clutch of US regional banks on Tuesday amid continued consumer weakness and turbulence in financial markets.
Ohio’s largest banks all suffered losses. National City said it planned to cut about 4,000 jobs, or 14 per cent of its workforce, over the next three years after the bank posted a net loss of $729m, or 85 cents a share. Fifth Third reported a quarterly loss of $56m, or 61 cents per share, and KeyCorp lost $36m, or 10 cents per share.
Profits fell at US Bancorp, which operates in the western two-thirds of the country, as well as at south-east bank Regions Financial and at M&T Bank, based in the mid- Atlantic region. US Bancorp said profits dropped 47 per cent to $576m. Regions’ profits fell 80 per cent to $79.5m and profits at M&T Bank fell 54 per cent to $91.1m.
All the banks more than doubled their reserves for loan losses from a year earlier, and net write-offs for bad loans also soared. “We have experienced the most severe financial crisis any of us has known in our business lifetime,” said Henry Meyer, chief executive of KeyCorp.
The results echoed signs of deteriorating consumer credit and further housing weakness at big rivals such as Bank of America, Citigroup, JPMorgan Chase and Wells Fargo, which have experienced losses on mortgages and credit card loans. Regional banks have suffered from losses on second mortgages and residential construction and development loans.
Several regional banks reporting on Tuesday also suffered losses from holdings of preferred shares issued by Fannie Mae and Freddie Mac, which were virtually wiped out when the two US mortgage agencies were taken into government supervision last month.
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quelle surprise. This is not really news.
Off topic although comp like provision is an expense. As it relates, the question is not so much provision as it is reserve to embedded losses. No one really knows what the embedded losses are so, the provisioning will be a death by a thousand cuts until many of the regions whiter, die or consoldiated.
Why is compensation such a third rail? I mean that both ways. Employees in companies outside FIRE not seeing increases in years while I banks raise capital from the government subsidized and belabor the idiocy that if they don’t pay X they will lose “talent.” [not surprising that I bankers themselves are virtually the only people in the world who think themselves value added].
The idea that shareholders (EPS) outrank employees is merely a cast off of the trickle down lunacy. I haven’t looked at profit margins versus compensation historically, but it’s pretty well tread that the it has gapped out substantially on the average. The return of the S/P to 500 may finally put the lie to the 401K sales pitch (401K was a risk shifting measure by cooperation’s and a boon for the annuity it produces as both a long term subsidy to the equity markets and their handlers). Capping labor costs (both at home and the wage labor arbitrage) to enrich shareholders was nothing more than looting in yet another form. And now the 401K gains that were the positive externality have gone by the wayside.
The rationale that lowers margins means lower profitability means capital flight is a red herring when it comes to competing against $2 workers. Discussions lately of a coordinated developed market fx devaluation had me thinking what if all major indices components decided to take a 6% hit to margins as a stimulus (housing and other). Would the potential bottom up demand and potentially higher top line growth in the out years – think DCF) outweigh the low NPV from reduced margins?
This reminds me of the debate about China revaluing not having the intended effect because capital flight would take hold and work to numb the expected blow out of the Yuan.
All that said, the market has been horrible wrong in allocating capital (Austrian’s like Mish would agree). So why is there such a religious zeal surrounding variable compensation expense? Perhaps it is because it really is the only truly variable cost left for companies to control. The unintended consequences mount as the race to the lowest common denominator.
They have TARP. See my previous post about Wachovia.
Don the libertarian Democrat
Given this Bloomberg Headline
“Fed Raises Rate It Pays on Banks’ Reserve Balances”
Isn’t this contradictory to Paulson’s demands banks loan out the money given to them?
Am I missing something? Won’t they just hoard cash?
Any comments welcome!
Who are banks going to loan to? We are on the fringes of a depression. Regional banks can just get cash from the electronic printing press to stay afloat no matter how much it hurts the dollar.
A once in a lifetime credit crisis has three components.
1st Numerous homeowner defaults
2nd Large number of banks become insolvent
3rd Large number of governments default on their debt
FYI this was 1932 not 2008….
Oh god we are screwed
Yves, I think the big news item of the day is the Fed announcement that they’re upping the rate they’ll pay on reserves.
http://federalreserve.gov/newsevents/press/monetary/20081022a.htm
For a couple of weeks now, everyone has been pointing at the symptom that LIBOR is over the moon. Today the Fed announces a measure that arguably sucks even more funds out of the LIBOR supply pool. In the release, they argue that they’re doing it because it …
“would help foster trading in the funds market at rates closer to the target rate.“
That rationale is somewhere between incompetent and insane.
Something’s going on that we are not seeing, that we are not privy to. Any idea? Anybody?
More Panicked Than Ever said…
Effective funds this am was 0.
65% . As santelli is on top of the fed is effecting a quatitative ease via this mechanism anyway. JJ oata cross cuive is saying the eurodollar market is pricing in an 50 bps cut fully. perhaps the excess reserve which are being paid less than the target rate hurst banks profitability and thus the 5 yeear plan to recapitalize. Seems the only logical explanation. This action would seem to bolster the case for Libor convergence as banks have a defacto next best option nearer the target. Not sure there is anything sinsiter happening but might be well off the mark..
The government(s) follow the markets. Runs on the banks, they guarantee the banks. Run on deposits, they up the limit on insured deposits. No lending, they lower the lending rates. No spending, they send you a check. Loan risk to great, they raise the rates. No jobs, they make jobs……
More Panicked Than Ever said…”Something’s going on that we are not seeing, that we are not privy to. Any idea? Anybody?”
Karl Denninger on Market Ticker today explained what was happening (hope this helps) — “Among other things, today we learned that The Fed has lost control of the Effective Fed Funds Rate – their own overnight lending rate. They were forced to change their interest rate on reserves in order to try to get it back under control – and there is no reason to believe their efforts will be effective.”
For the full article (well worth the read): http://market-ticker.denninger.net/index.html