Evidence of the US Banking System Teetering on the Brink of Collapse

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Hundreds of banks will fail, Roubini tells Barron's

Sun Aug 3, 2008 3:52pm EDT
















NEW YORK, Aug 3 (Reuters) - The United States is in the second inning of a recession that will last for at least 18 months and help kill off hundreds of banks, influential economist and New York University Professor Nouriel Roubini told Barron's in Sunday's edition.
Taxpayers will pay a big price for helping bail out the rest of the financial services industry as well, Roubini said -- at least $1 trillion and more likely $2 trillion.
The banks will become insolvent because of mounting losses as a result of the housing bust and because they have only written down their subprime loans so far, he said. Still in front of them are their consumer-credit losses, for which they lack the reserves, Barron's reported.
He also said there are hundreds of millions of dollars outstanding in home-equity loans that could be worth zero, too.
U.S. consumers, meanwhile, are "shopped out" and saving less, while the Federal Reserve's performance in handling the crisis has been poor, Roubini said, because it failed to see that the problem extended beyond subprime mortgage debt.
Now, Roubini told Barron's, the government is overregulating, bailing out troubled participants and intervening in every market.
"The regulators should investigate themselves for bailing out Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), the creditors of Bear Stearns and the financial system with new lending facilities. They have swapped U.S. Treasury bonds for toxic securities," he told Barron's. "It is privatizing the gains and profits, and socializing the losses as usual. This is socialism for Wall Street and the rich."
He said that sometimes it is necessary to use public money to rescue institutions, but in a way that does not bail out the people who made the mistakes. "In each one of these episodes, the government bailed out the shareholders, the bondholders, and to some degree, management," Roubini told Barron's.
As for the banks that will go bankrupt, they will include community banks that finance homes, stores, downtown areas, commercial real estate and other mainstays of U.S. towns and cities, Roubini said. Continued...
Hundreds of banks will fail, Roubini tells Barron's | Markets | Bonds News | Reuters

 

[raiven]

Is the U.S. Economy Safe?

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What Banks And The Government Are Not Telling Us About 2009—The Next Shoes You Hear Drop May Be Very Loud Ones

James Quinn August 4th 2008
Cutting Edge News Contributor

Federal Reserve Chairman Ben Bernanke
It is time for some straight talk about what America is being told about our financial institutions. First: listen to the words or our most esteemed financial leaders. In March of last year, Treasury Secretary Henry Paulson delivered an upbeat assessment of the economy, saying growth was healthy and the housing market was nearing a turnaround. "All the signs I look at" show "'the housing market is at or near the bottom," Paulson said in a speech to a business group in New York, adding that the U.S. economy is "very healthy" and "robust."
At about the same time last March 2007, Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve, told Congress, "At this juncture, the impact on the broader economy and financial markets of the problems in the sub-prime market seems likely to be contained."
Then, in June of 2007, Bernanke declared, "We will follow developments in the sub-prime market closely. However, fundamental factors—including solid growth in incomes and relatively low mortgage rates—should ultimately support the demand for housing, and at this point, the troubles in the sub-prime sector seem unlikely to seriously spill over to the broader economy or the financial system." He followed that up in October of last year with this statement: "It is not the responsibility of the Federal Reserve—nor would it be appropriate—to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy."
Just last March, 2008, Treasury Secretary Henry Paulson reassured us all with these words: "We’ve got strong financial institutions... Our markets are the envy of the world. They’re resilient, they’re... innovative, they’re flexible. I think we move very quickly to address situations in this country, and, as I said, our financial institutions are strong."
What is the truth? The truth is deception. After reading the above quotes, it should be clear that politicians and government bureaucrats are lying to the public when they say that everything is all right. They do not know. Our economy and banking system is so complex and intertwined that no one knows where the next shoe will drop. Therefore, it is in our best interest to cut through all the crap and examine the facts with a skeptical eye.
Last week, bank stocks, which had been falling fast, suddenly soared higher based on earnings reports that were horrific, but not catastrophic.
Talking heads were calling a bottom in the financial crisis. The bank with the largest increase in share price was Wells Fargo. Their earnings exceeded analyst expectations and the stock went up 22% in one day. Wells Fargo owns $84 billion of home equity loans, with half of those in the two leading foreclosure states, California and Florida. Coincidently, Wells Fargo decided to extend its charge-off policy in the 2nd quarter from 120 days to 180 days in an effort to give troubled borrowers more time to reach a loan workout. Or, did they reduce their write-offs for the 2nd quarter to beat analysts expectations.
Many people are still living in houses twelve months after making their last mortgage payment. Their banks have not started foreclosure proceedings. Is this due to incompetence by the banks, or is this a way to avoid writing off the loss? The Financial Accounting Standards Board (FASB), the little-known national agency responsible for establishing standards of financial accounting and reporting, has seemingly joined the cover-up by delaying the implementation of new rules that would have made banks stop hiding toxic waste off their balance sheets. New rules would have made banks put these questionable assets on their balance sheet and require a bigger capital cushion.
Is anyone surprised that bank regulators, the Treasury and Federal Reserve urged a delay in implementation of new FASB rules. They can manipulate the facts because the average American doesn’t understand or care.
Is an FDIC Bailout in Our Future?
During the S&L crisis in the early 1990s, 1,500 banks failed. So far, seven banks have failed in 2008, the largest being IndyMac. The FDIC has about $53 billion in funds to handle future bank failures. The IndyMac failure is expected to use $4 to $8 billion of those funds. Average Americans will lose $500 million in uninsured deposits in this failure. The FDIC says that they have 90 banks on their "watch list." They do not reveal the banks on the list, so little old ladies with their life savings in local banks will be surprised when they go belly up. Based on the fact that IndyMac was not on their "watch list." I wouldn’t put too much faith in their analysis.
Some 8,500 banks operate in the U.S. Based on an independent analysis by Chris Whalen from Institutional Risk Analytics, 8 percent of all banks, or around 700 banks have been identified as "troubled." This is quite a divergence from the FDIC estimate. Should you believe a governmental agency that wants the public to remain in the dark to avoid bank runs, or an independent analysis based upon balance sheet analysis? The implications of 700 institutions failing are huge.
U.S. banks hold roughly $6.84 trillion in bank deposits. Almost $2.6 trillion of these deposits are uninsured. There is only $274 billion of the $6.84 trillion as cash on hand at banks. This means that $6.5 trillion has been loaned to consumers, businesses, developers, etc. The FDIC has $53 billion to cover $6.84 trillion of deposits. Does that give you a warm feeling?
Based on historical trends, some experts estimate that we are only in the early innings of bank write-offs. The write-offs will at least equal the previous peaks reached in the early 1990s. If several more large banks such as Washington Mutual or Wachovia were to fail, it might wipe out the FDIC fund. If the FDIC fund is depleted, guess who will pay? Right again, another taxpayer bailout.

What is a Level 3 Asset?
Other banks have been moving assets to Level 2 and Level 3 in order to put off the inevitable losses. The definitions are as follows: Level 1 Assets that have observable market prices. Level 2 Assets that don’t have observable prices, but they have inputs that are based upon them.
Level 3 Assets are where one or more of the inputs don’t have observable prices. Their value relies on management estimates, often based on computer modeling. In other words, the banks do their own "no doc" asset valuation.
Warren Buffet’s view on the financial institution practice of valuing sub-prime assets on the basis of a computer model rather than the free market price states: "In one way, I'm sympathetic to the institutional reluctance to face the music. I'd give a lot to mark my weight to 'model' rather than to market."
So, the managements of the banks that loaned money to people who could never pay them back are now responsible for estimating what these assets are worth. According to analyst and commentator Bill Fleckenstein: "Recently, the portfolio of Cheyne Finance, one of the more infamous structured-investment vehicles, or SIVs, was sold at 44 cents on the dollar. I suspect that similar assets are not marked anywhere near that valuation on financial institutions' balance sheets. So, the game of ‘everything's contained’ continues, albeit in a different form."
The mountain of Level 3 assets clogging up America’s economic arteries is massive.

Next Shoes to Drop—How High Will the Losses Go?
Banks and security firms have reported $468 billion of losses thus far. Bridgewater Associates, a well respected analytical firm, believes things will get much worse.
According to Bridgewater, the models used have grossly underestimated the actual losses. They doubt the financial institutions will be able to generate enough capital to cover the losses. According to the report: "Lenders would have to curtail loans by roughly 10-to-one to preserve their capital ratios. This would imply a further contraction of credit by up to $12 trillion worldwide unless banks could raise fresh capital."
Not all of these losses are in the sub-prime market. According to the report, more than 90% of the losses from sub-prime loans have already been written off. Unfortunately, the losses from the prime and Alt-A loans, that is loans based primarily on high credit scores, could be much larger than we have already seen. The sizes of these shaky loan portfolios are much larger than the sub-prime portfolios. Further, Bridgewater expects about $500 billion in corporate losses that must be written off. This leads to the current estimates of keen-eyed experts such as Bill Gross, the well respected manager of the world’s largest bond fund, who expects financial firms to write down $1 trillion. Gross predicted, "About 25 million U.S. homes are at risk of negative equity, which could lead to more foreclosures and a further drop in prices. The problem with writing off $1 trillion from the finance industry's cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth." NYU economist Nouriel Roubini believes that losses could reach $2 trillion.
The other shoes have begun to drop. Last week Amex reported a 40% decline in earnings as their wealthy super-prime customers are not paying their bills. So, even the well off are struggling.

CB Richard Ellis, the largest commercial real estate broker in the country has reported an 88% decline in earnings. So, commercial real estate is imploding. Bennigans and Mervyn’s filed for bankruptcy this week. The consumer is being forced to cut back on eating out and shopping. The marginal players will fall by the wayside. Big box retailers, restaurants, mall developers, and commercial developers are about to find out that their massive expansion was built upon false assumptions, a foundation of sand, and driven by excessive debt.
The U.S. banking system is essentially insolvent. The Treasury, Federal Reserve, FASB, and Congress are colluding to keep the American public in the dark for as long as possible. They are trying to buy time and prop up these banks so they can convince enough fools to give them more capital. They will continue to write off debt for many quarters to come. We could have a zombie banking system for a decade.
James Quinn is Senior Director of Strategic Planning, The Wharton School, University of Pennsylvania. This article reflects the personal views of Jim Quinn. It does not necessarily represent the views of his employer, and is not sponsored or endorsed by them.


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The Cutting Edge News

 

[Bhriindan82]

One of the big reasons why they're not willing to list which banks are on the 'watch list' is to prevent a run on that particular bank that would guarantee its untimely demise. It's the financial equivalent of quietly putting out a fire instead of screaming "fire" into the crowded theater.

 

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Credit crunch may take out large US bank warns former IMF chief



Gary Duncan, Economics Editor and Leo Lewis, Asia Business Correspondent


div#related-article-links p a, div#related-article-links p a:visited {color:#06c;}The deepening toll from the global financial crisis could trigger the failure of a large US bank within months, a respected former chief economist of the International Monetary Fund claimed today, fuelling another battering for banking shares.
Professor Kenneth Rogoff, a leading academic economist, said there was yet worse news to come from the worldwide credit crunch and financial turmoil, particularly in the United States, and that a high-profile casualty among American banks was highly likely.
“The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come,” Prof Rogoff said at a conference in Singapore.
In an ominous warning, he added: “We’re not just going to see mid-sized banks go under in the next few months, we’re going to see a whopper, we’re going to see a big one — one of the big investment banks or big banks,” he said.
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Rising anxieties over “worse to come” in the credit crisis sent shares tumbling in Europe and Asia.
In London, the FTSE 100 index extended opening losses as widespread fears over the financial sector's woes led to another battering for stocks. The FTSE closed 129.8 points, or 2.38 per cent, lower at 5,320.4, pushing it into bear market territory — a level 20 per cent below the October 12, 2007 peak of 6730.71 — for the sixth time in two months. Germany's Dax shed 2.4%, while the CAC 40 in Paris lost 2.5%.
Professor Rogoff, who was chief economist at the IMF from 2001 to 2004, predicted that the crisis would foster a new wave of consolidation in the US financial sector before it was over, with mergers between large institutions.
He also suggested that Fannie Mae and Freddie Mac, the struggling US secondary mortgage lending giants, were likely to cease to exist in their present form within a few years.
His prediction over the fate of Fannie and Freddie came after investors dumped the two groups’ shares on Monday after reports suggested that the US Treasury may have no choice but to effectively nationalise them.
The professor also sounded a warning over rising US inflation, which rose last month to its highest since 1991, and criticised the Federal Reserve for having cut American interest rates too drastically. “Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States,” he said.
As investors' edginess over the threat of further financial turbulence sent equity markets into a further spin, bank shares were hit hardest. Among the biggest fallers in London trade were HBOS, down 6 per cent, Royal Bank of Scotland, whose shares plunged by 5 per cent, while HSBC fell 3.6 per cent. In continental Europe, Spain's Banco Santander was off 2.35 per cent, and BNP Paribas lost 3.8 per cent.
Persistent worries over the rapidly deteriorating economic outlook in the UK also saw sterling succumb to fresh losses. The pound lost almost a cent against the dollar, dropping to $1.881, above the near-two year lows plumbed on Friday.
Earlier, there were fresh jitters in Asia, with the region's leading bourses in sharp retreat after a dire overnight performance by Wall Street left the Dow Jones Industrial Average down by more than 180 points. Both Asian markets and Wall Street were unnerved by suggestions over the prospects for Fannie Mae and Freddie Mac.
While Japanese banks have remained relatively under-exposed to sub-prime mortgage products, many fear that they would be heavily exposed to a nationalisation of Fannie and Freddie. The large Japanese financial houses hold around Y9.6 trillion (£47 billion) in bonds and mortgage-backed paper issued by housing finance groups in the US.
“If the recapitalisation talk is realised, there are no assurances that the securities that have been issued [by U.S. mortgage firms] will be 100 per cent guaranteed,” said Yutaka Shiraki, a senior equity strategist at Mitsubishi UFJ Securities.
Financial sector shares were particularly badly hit in Tokyo, where they led the Nikkei 225 Index into a 300-point decline. The selling continued throughout the day, and peaked after a declaration by the Bank of Japan that the world’s second largest economy was now looking “sluggish”.
Although the central bank’s downbeat economic report included vague predictions of a return to growth over time, traders said that the comments had shattered any last hope that Asia’s export-led economy might somehow “decouple” from the woes in the US.
The picture was somewhat more stable in Shanghai, which spent a day in relative limbo following Monday’s 5.3 per cent nosedive. With Chinese stocks beating a daily retreat, investors are focused on the 2001 index high of 2,245-points. Some believe that level will hold up as a technical floor on the selling, others believe that it may shortly fail and unleash a much deeper collapse in stock values

Credit crunch may take out large US bank warns former IMF chief - Times Online

 

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Columbian Bank and Trust of Kansas Closed by U.S. Regulators

By Alison Vekshin and Ari Levy
Aug. 23 (Bloomberg) -- Columbian Bank and Trust Co. of Topeka, Kansas, was closed by U.S. regulators, the nation's ninth bank to collapse this year amid bad real-estate loans and writedowns stemming from a drop in home prices.
The bank, with $752 million in assets and $622 million in total deposits, was shuttered by the Kansas state bank commissioner's office and the Federal Deposit Insurance Corp., the FDIC said yesterday in a statement.
Citizens Bank and Trust will assume the failed bank's insured deposits. Columbian Bank's nine branches will open Aug. 25 as Citizens Bank and Trust offices, the FDIC said. Customers can access their accounts over the weekend by writing checks or using ATM or debit cards.
``There is no need for customers to change their banking relationship to retain their deposit insurance coverage,'' the FDIC said.
The pace of bank closings is accelerating as financial firms have reported more than $500 billion in writedowns and credit losses since 2007. The FDIC's ``problem'' bank list grew by 18 percent in the first quarter from the fourth, to 90 banks with combined assets of $26.3 billion.
Prior to yesterday, the FDIC had closed 36 banks since October 2000, according to a list at fdic.gov. The U.S. shut 12 banks in 2002, the highest in the period, and 2005 and 2006 had no closures.
U.S. bank regulators closed Florida's First Priority Bank on Aug. 1; Reno-based First National Bank of Nevada, Newport Beach, California-based First Heritage Bank, and Pasadena-based IndyMac Bancorp Inc. in July; Staples, Minnesota-based First Integrity Bank and ANB Financial in Bentonville, Arkansas, in May; Hume Bank in Hume, Missouri, in March; and Douglass National Bank in Kansas City, Missouri, in January.
To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net.
Last Updated: August 23, 2008 00:01 EDT
Bloomberg.com: Worldwide