Banking Crisis Entering a New Stage?
by
Mike Larson
I'm going to cut
to the chase here: The U.S. financial industry is facing unprecedented
challenges. Unlike past crises, which tended to be isolated in one or
two parts of the credit market, this one is different ...
We are seeing
major credit problems popping up in everything from residential
mortgages to commercial mortgages to leveraged buyout loans to credit
cards to auto loans. (And I'm probably forgetting a few!)
This is having a
widespread impact on the entire banking sector. For proof, look no
further than the Federal Deposit Insurance Corp.'s latest Quarterly
Banking Profile.
This report,
which comes out every three months, always has a treasure trove of
information on the banking industry.
Let me share
just a few of its more colorful headlines ...
"Quarterly Net Income Declines to a 16-Year Low"
"Noncurrent
Rate on Mortgage Loans Reaches New High"
"Net
Charge-Off Rate Rises to Five-Year High"
"Three
Failures in 2007 Is Most Since 2004"
Are you seeing a
pattern here? I mean, this is not light, airy reading for a day at the
beach.
It's a major red-flag warning coming straight from one of
the top banking regulatory agencies in this country!
And once you dig
into the nitty-gritty of the report, you see things look even worse. A
few choice tidbits:
-
In the fourth
quarter, aggregate profits at the 8,533 institutions the FDIC tracks
slipped to $5.8 billion. That was a drop of more than 83% from a
year earlier, and the lowest absolute level of net income since the
fourth quarter of 1991.
-
Return on
assets — a key measure of how much profit banks are generating from
their assets (loans, securities, etc.) — plunged to 0.18% in the
quarter, driven by problems at a few of the nation's largest
institutions. That was down from 1.2% a year earlier and the worst
performance since 1990.
-
Provisions
for loan losses — money banks add to their loss reserves when they
expect credit performance to sour — soared to $31.3 billion in the
fourth quarter. That's the highest level in any quarter ... EVER
... and more than triple what we saw in the same period of 2006.
-
Net
charge-offs — the hit banks take when they determine that
nonperforming loans are essentially a lost cause (adjusted for
recoveries on previously charged off loans) — surged to $16.2
billion from $8.5 billion a year earlier.
-
And again, it
wasn't just one category of loans. Charge-offs rose 33% in credit
cards ... 58% in the other loans to individuals ... 105% in the
commercial and industrial loan category ... and 144% in the
residential mortgage business. And there's every indication to
believe charge offs will continue rising for the foreseeable future.
You know what I
see in all this?
More
Shades of the Savings & Loan Crisis
Back in
November, I penned a piece called "The
New Savings and Loan Crisis." As I said then:
"Indeed, [the
nation's largest banks and top investment firms] are facing the
biggest credit meltdown since the Savings and Loan Crisis of the
late 1980s and early 1990s!"
Since that time,
I've done even more work on the parallels (and differences) between
what happened in the S&L crisis and what's happening now. That
includes reviewing several essays in a book called The Savings and
Loan Crisis: Lessons from a Regulatory Failure.
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I don't see any sign of a bottom in housing, and that
means more trouble for financial firms. |
Here's my
current thinking ...
Interest rate
gyrations in the late 1970s and early 80s greatly eroded the capital
of the entire S&L industry. Lenders made long-term, fixed-rate loans
and funded them with short-term borrowings.
When short-term
rates rose, their funding costs increased, but they couldn't do
anything about those long-term loans. They were stuck holding old
mortgages that didn't yield as much as new mortgages ... and the value
of those old mortgages plunged.
Legislation then
allowed the S&Ls to aggressively expand into new markets, like
commercial real estate, in the mid-1980s. The intent was to help the
financial firms "earn their way out" of the interest rate problems.
But tax law
changes and regional economic downturns struck later in the decade,
dealing a death blow to the industry. Failures surged, and we as a
country ultimately had to spend around $150 billion cleaning up the
mess.
Banks were much
better capitalized heading into this crisis than they were
back in the S&L days. Yet the lending problems they face are also more
widespread, in my judgment. The decline in home prices is
unprecedented in modern history too, and that's driving mortgage
delinquencies and losses into uncharted territory.
Do I expect
as many failures as we saw during the S&L crisis? No. But ...
I Do
Expect Some Banks to Go Under, And So Do the Banking Regulators!
Heck, we're
already seeing the number of "problem institutions" flagged by the
FDIC rise. It climbed to 76 in the fourth quarter of 2007 from 65 a
quarter earlier and just 50 at the end of 2006. Problem banks are
those with "financial, operational, or managerial weaknesses that
threaten their continued financial viability," in the words of the
FDIC.
Regulators can
see the writing on the wall. So I also wasn't surprised to see the
Wall Street Journal run a story this week headlined "FDIC to Add
Staff as Bank Failures Loom." It said:
"The Federal
Deposit Insurance Corp. is taking steps to brace for an increase in
failed financial institutions as the nation's housing and credit
markets continue to worsen.
"The FDIC is
looking to bring back 25 retirees from its division of resolutions
and receiverships. Many of these agency veterans likely worked for
the FDIC during the late 1980s and early 1990s, when more than 1,000
financial institutions failed amid the savings-and-loan crisis.
"FDIC
spokesman Andrew Gray said the agency was looking to bulk up 'for
preparedness purposes.' The division now has 223 employees, mostly
based in Dallas.
"The agency,
which insures accounts at more than 8,000 financial institutions, is
also seeking to hire an outside firm that would help manage
mortgages and other assets at insolvent banks, according to a
newspaper advertisement."
Bottom line:
When it comes to the financial sector, I'll repeat what I've been
telling you for months:
Bargain
hunting in the housing and financial stocks still looks like a
high-risk, suckers' game to me!
There is NO
evidence I can see that a definitive "bottom" for housing is in. The
magnitude of the credit challenges facing the financial industry is
enormous. And the potential for outright bank failures to roil market
confidence in the coming months is high.
So I think
you're better off staying away, keeping your money safe, and taking
advantage of the massive profit opportunities elsewhere.
Martin and I
will show you precisely how and where in our blockbuster Safe
Money Report going to subscribers next week.
In the meantime,
to help you get ready ahead of time, we've just prepared an amazing
package of profit-opportunity reports that you can download right now.
Click here for all the details on what's happening, why it's
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Just remember: The deadline is this coming Wednesday, March 5.
Until next time,
Mike |
