Van Santos

Last August I wrote a piece about “The Syk Falling” or the banking collapse. My position then reflected my belief that what the nation was facing at the time was NOT a banking collapse, but part of a free market boom and bust.

Shortly after I commented, the FDIC came out with their update in the hopes of providing a bit of stability to the market. The highlights they pointed to:

• bank profits are down 86%
• 117 banks and thrifts are considered to be in trouble
• 8500 banks reserved $50.2 billion to cover losses from bad mortgages

The results at that point were very ugly. By no means a total banking collapse. So what would be total collapse? How about the closure of 9000 financial institutions, much like 1930 to 1933? That is a collapse. What the public is seeing now is the “key” financial institutions facing rough times and having government money pumped into them. Even if the Top 5 banks failed – with trillions of dollars in securities under their umbrella – they would be picked up by other institutions and life would go on.

But back to “the sky is falling” mentality. Let’s look at just how bad bank industry is doing, based on number of closures this year… and you have 36. Not as bad as some may have you think.

For your records, here is the full list.

So, to sum it up, the economy and the banking industry face a number of hurdles. Interest rates are expected to say low in order to stimulate lending, and more banks will fail. But we are not at a system wide collapse.

The 2008 bank failures reached 25 on Friday when the Feds closed Haven Trust Bank in Georgia and Sanderson State Bank in Texas after market close.  Just a reminder, if you happen to have money in these two financial institutions, there is no reason to panic as the FDIC has insurance on all account up to 250K.

One bright spot in this news, the FDIC has already found purchasers who will re-open all branches on Monday.

With just over 2 weeks to go in the year, 25 bank failures is only 3 more than 2007.  While that is a high number, it’s not crisis mode (yet).  The rest of the economy may be…. Oh, and if you want the list of all 25 Banks that have failed this year, you can find it the the FDIC website.

It was just a matter of time WaMu was either shut by the government or sold (in this case both happened).

In the largest bank seizure of all time, rougly 310 billion in assets, the FDIC stepped in and closed WaMu down but did not need to use insurance funds as the FDIC was able to broker a deal in which J.P. Morgan purchased Washington Mutual assets for 1.9 billion dollars.  As a result, JP/Chase will write down roughly 31 billion in bad mortgages WaMu had owned.

The J.P. Morgan/Chase purchase of Washington Mutual’s retail banking business, which is incredibly strong, is a huge victory for the bank.  In the long wrong this purchase has the ability to give JPM a HUGE retail footing and grow into territories previously unavailable to the bank.

With the excitement in the market last Friday, chances are you missed the fact that regulators closed Ameribank, which is based in West Virginia.  This raises the number of retail banks closed to 12 for 2008.

Ameribank was a small, $104 million dollar, operation that got into trouble with construction rehabilitation loans in low income real estate markets.

It’s all part of the shake out, nothing to fear… yet…

From very early on I have held the belief that we are not in the middle of a banking collapse, rather we are in the middle of a market correction. It is also important to separate banks that are going under from the likes of Freddie Mac, Fannie Mae, Lehman and AIG. While all can be tied to the same cause, they fall into three separate categories.

Category 1

The retail banking industry, where you and I have our money, has seen 11 organizations close to date. Closures were directly connected to bad debt and an inability to provide liquidity for all deposits within the bank. It important to note, deposits in such banks are federally insured up to $100,000 per account.

Category 2

The recent bankruptcy of Lehman Brothers, a money center bank, falls into the commercial category. They are not a retail bank, nor did they do retail business, which means the government did not need to utilize the Federal bank insurance fund to cover monies. Again, the failure was tied to illiquidity due to bad debt.

Category 3

AIG is neither a retail bank nor a money center bank (brokerage) but an insurance provider to a number of industries, including banking. The liquidity crunch currently facing this organization is due to the insurance underwritten to cover banks debt (both retail and brokerages). No FDIC coverage, no “man on the street” unable to obtain his or her money because of the situation.

Retails banks will continue to fail due to bad debt, and would even fail in good markets due to mismanagement, I think it would be hard to say we have a banking collapse unless people were having difficulty obtaining their money. At that point we would truly be facing a banking collapse, which is why I am concerned to see that the Federal bank insurance fund dwindling and regulators consider options for replenishing it.

From the article:

The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation’s largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday.

Basically, if a large retail bank goes under the FDIC is out of money and needs to find additional funds, most likely in the form of a loan from the treasury. What happens, though, if several large retail banks collapse at the same time?

The FDIC predicts difficulty with one large retail institution; several closings could cause a shortage of funds available to the public. Take it on step further – what if the FDIC cannot obtain the money from the government in order to cover the deposits?

This is what a true banking collapse would be.

Another bank hit the skids today - Silver State Bank in Nevada.

Silver State had 12 branches in Nevada and Arizona as well as loan offices in Nevada, Utah, Colorado, Washington, Oregon, California and Florida.  As of June 30th, Silver State had $2 billion in assets and $1.7 billion in deposits.  All insured deposits will be assumed by Nevada State Bank and brances will be open on Monday.

Ok, a small bank isn’t too bad but there is news that Fannie Mac and Freddie Mac will be taken over by the government this weekend.  In terms of big business events, this one is HUGE.  According to the article the cost to the tax payer is yet known but you can be 99.999% sure that any share holder equity will be wiped out.  (Translation - the stock will be worthless)

While I would never have been a long term share holder of either company, I think it is highly irresponsible for for Treasury Secretary Henry Paulson to come out and claim there would be no Bail Out of either company. Also, in July, each company said they had plenty of capital to withstand the mortgage meltdown.  Either conditions drastically changed or the companies were lying to investors, as well as the public.

Expect banks to continue to fail over the next several months but, remember, we are not in a banking collapse, we are experiencing a correction.

Another bank found itself closed by the Government today.  Integrity Bank of Alpharetta, Georgia, is the 10th to be shut down due to liquidity issues.

It turns out Integrity Bank was ordered to raise capital in May of this year but was unable to find the 40 million in financing they needed.  As a result of the closure Regions Financial Corp. will purchase the roughly 34 million in deposits and continue to serve the failed bank’s customers.

Without a doubt, it must be scary to have your money in a bank that goes under.  I would hate to be in that position myself.  While institutions will continue to report losses as well as go under for the next year, this is not a financial collapse.

As of follow up to my post from yesterday, I wanted to highlight data just released from the FDIC.

Here is a quick summary:

• bank profits are down 86%
• 117 banks and thrifts are considered to be in trouble
• 8500 banks reserved $50.2 billion to cover losses from bad mortgages

By no means are the results stellar and, frankly, they are down right ugly; however, the industry is NOT on the verge of collapse.

The most interesting quote from the entire article was glossed over, contained to only one line:

The majority of U.S. banks “will be able to weather” the economic and housing storms, with 98 percent of them still holding adequate capital by the regulators’ standards, Bair said.

Interesting how single piece of good news, the bit of information that is the most pertinent, is given no real attention or priority. The FDIC Chairman is telling the world that 98% of the US banks are fully funded as of today but the press doesn’t seem to care about that. Why? It doesn’t grab your attention, it doesn’t “sell papers.”

Look past the doom and gloom fed by the press and you’ll see that, despite the hard times the industry is facing, it is not the end of the world.