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Regional Bank Failures: The Next Shoe to Drop

by: Larry MacDonald April 11, 2008    
Larry MacDonald

Larry MacDonald

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The mythical Hydra, a serpent-like and multi-headed beast, appears to be gaining currency as a metaphor for the current financial crisis. There are just so many dimensions to it, many of which have the capacity to inflict more negative surprises.

My column today, An uncertain forecast, looked at of some of the shoes (to use another metaphor) that could drop in months ahead. Another I could have mentioned is a wave of regional bank failures. I quote no less an authority than Federal Reserve Chairman Ben Bernanke on this one. In late February, he told the Senate Banking Committee: "I expect there will be some failures (among the regional banks)."

In early March, billionaire investor Wilbur Ross echoed Bernanke’s comments. On CNBC, he said: "I think (bank failures) are going to be the next wave …. it's the medium-sized banks, and particularly some of those that got overextended with the subprime and other kinds of mortgage debt.”

The Federal Deposit Insurance Corp. [FDIC], which insures deposits at U.S. banks, is girding for the work to come. It announced plans to add 140 workers – a 60% increase – to its division responsible for handling bank failures.

According to RBC Capital Markets managing director Gerard Cassidy, 150 banks will go under within the next three years. Most at risk will be those in states with overheated real estate markets, notably California and Florida.

The FDIC’s fourth-quarter report on the state of the U.S. banking industry drew attention to the dark clouds rolling in. It pointed out that loans overdue 90 days or more surged 32.5%, the largest quarterly increase in 24 years. Current loans exceeded reserves for first time since 1993.

In 2005 and 2006, there were no U.S. bank failures. Since then, there have been five, as this list shows. Chances are this list will be much longer this time next year.

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This article has 28 comments:

  •  
    Apr 11 11:35 AM
    Hi - If some regional banks are likely to fail then I would expect that some candidate banks would be obvious and ones to watch. - Doug
    Reply
  •  
    Apr 11 01:13 PM
    Construction loans and any loans to sub contractors are just two dominos after the subprime domino.
    Reply
  •  
    Apr 11 01:21 PM
    You are 100% correct. Regional banks will fail because they will not be bailed out by the FED.
    Reply
  •  
    Apr 11 07:50 PM
    I think he said Florida and California. After that you can look at the call reports of the banks in each state and they stand out rather clearly. I think Downey is prominant as are a number of Florida banks holding reams of bad mortgages. The larger question what are you going to do? This is not an easy play. The attractive moves are in some good quality treasury or agency bonds and ride it out as the bank pop and the markets jump out the window. No need to get mean here, its a done deal.
    Reply
  •  
    Apr 11 10:39 PM
    This comment has been edited for abusive language. - Ed.
    The Fed simply can't afford to let any major bank fail. Peiod. That includes regionals if they're in the top tier. Not that I want to make a list, but I would roughly suggest the top 10-15 or so are safe. They may be more shotgun marriages or creative backstops. Outright failures? No!

    Why not you may ask. Because you can't unring a bell anymore than you can stop panic selling once it starts. The Feds learned a bitter lesson from the 1929 crash. This is the reason Bears was given to JPM on a silver platter. If the Feds didn't arrage a hasty shotgun marriage the Far Eastern markets would have taken a nose dive that Monday morning, followed by Europe and the DOW Jones and SP500 tanking with likely several big name financials going South within days. The Feds couldn't and won't let that happen no matter what because it would cause a panic in global financial markets.

    There are ALWAYS the gloom and doom guys. Most are either dumb or have motives to drive stocks lower. We are already at or very close to a bottom. The best signal of all we are is all the gloom and doom guys saying we're on the Tiantiac.
    Reply
  •  
    Apr 11 11:55 PM
    Voice of Reason, not many true voices of reason call people dumb and idiotic. And especially not when both Greenspan and Bernanke have stated clearly that there will be numerous bank failures coming.

    Bear Stearns was a bank failure. Having Chase take over their accounts doesn't mean it wasn't a failure and yes, there will be more including some of the top 15. The Fed has gotten a LOT of criticism over the fact that BSC likely has negative equity yet BSC's shareholders are walking away with $10 per share (to try and prevent lawsuits) so it's unlikely that shareholders of the next failure will get anything other than condolences.

    When you have banks operating at 35 to 1 leverage, all it takes is a couple of percentage points loss on their total assets and they're insolvent. Guess what? Most of the banks that dealt in sub-prime mortgages (like Bear) are experiencing default rates of up to 30% and are now insolvent.

    The Fed has ordered them to either raise capital to replace their lost capital or die. Those that can (GS, UBS, Citi) are scrambling to raise capital. Those that can't (NCC, SOV, and many others) are already in the process of dying.

    Meredith Whitney has been the true voice of reason. Loaning billions of dollars to people with sub-700 credit scores and no equity at a 35 to 1 leverage ratio was an exercise in gross negligence that is about to bring down a LOT of banks over the next 24 months...
    Reply
  •  
    Apr 12 12:10 AM
    I live in Florida and every other corner in the past 3 years has had a new bank branch put up. There are more bank branches than Walgreens or CVSs. If some of them fail it will be no great loss.
    Reply
  •  
    Apr 12 01:59 AM
    Agree with Itsjustme: sentence 1 para 1: the voice of reason is not shrill. Tone please!
    Reply
  •  
    Apr 12 08:28 AM
    I am more concerned about the rising delinquencies on car loans and consumer debt than I am about the banks. The average consumer gives me more cause to pause than those who ventured into unwise banking and lending practices.

    Isn't it true under the Fed Bank charters that if a bank fails the FED can essentially take over the bank and its books? That is something George Bailey in " A Wonderful Life" didnt have.
    Reply
  •  
    Apr 12 09:27 AM
    Employment in Financial will drop significantly more.
    I have posted a chart of employment in financials relative to natural resources. This ratio falls during inflationary periods as P/E contraction occurs(now).
    It rises when financial markets are prospering.
    assets-part-two.html
    Reply
  •  
    Apr 12 10:22 AM
    One good street-level way to spot if the bank in town is at-risk, is to watch for a sudden rise in their CD rates; in fact as long as you stay under $100K at the bank, a 6-12 month high rate CD at a bank on the verge of 'failure' is a great high return - low risk (really 'no' risk with FDIC backing) way to park some $$$.

    Even if the CD gets called or redeemed, it's no loss to you because you should still receive the full amount of your original deposit plus any unpaid accrued interest.
    Reply
  •  
    Apr 12 10:31 AM
    I am seeking regional bank stocks to short; anyone have any juicy ones ripe for the kill?
    Reply
  •  
    Apr 12 11:45 AM
    I'm not worried about regional bank failures. In fact I hope all the banks fail, and drag down the corrupt federal government with them. Hard times are ahead, but brighter times are ahead if J6P is forced to recognize the fact that wealthy banking cartels have been fleecing him his entire life, and will continue to do so if allowed. I'm weathering this storm in Au and Ag, friends, and I suggest you do the same.
    Reply
  •  
    Apr 12 11:53 AM
    Let's look at the top banks in terms of Assets and you will see that none of them are going to fail.
    1. Citigroup - Sound and Safe Over 50% of Revenues International, Mexico, Brazil, Chile and Asia are growing.
    2. Bank of America. Sound and Safe.
    3. JPMorgan & Chase. No need to say how safe this is.
    4. Wachovia Bank, 10% Capital/Total Assets, excess capital, should survive this crisis easily.
    5. Wells Fargo. Sound and strong. Some California exposure, but this bank is good.
    6. WAMU. Horrible Management, but with the recent Capital injection will not fail.
    7. Bank of New York Mellon. No problems with any JUNK.
    8. USBank. Great Management, and strong franchise, safe as a rock.
    9. Sun Trust. Questionable Loans but should be able to survive. With under 200K Billion in assets, could be easily be assumed by one of top 2-5, or Foreign Barclays, RBS, HSBC or STD.
    10-15 don't know the exact order, but all in the range of 100-150 Billion in Assets.
    10. National City. With 150K Billion in assets, selling at .45 cents on Book, deeply discounted, and has 13 Billion in Capital, greatly above the Bacilea Requirements. Can take up to $6 Billion in Chargeoffs can still make it because, it has a $1Billion profit from its stake in VISA.
    This one can be bought by BNS at a big Premium from where is selling right now.
    11. Regions Financial. Some Exposure to Florida, and Construction Loans. Selling at .75 cents to Book Value. This one will make it, has excess capital, and could be an easy Takeover.
    12. KEY Bank. This one was looking to acquire National City I don't see that coming, but it is possible that some merger with National City, Key or Fifth Third could arise as a result of this. These are banks based in Cincinnati, and Cleveland, and could make a stronger franchise by merging two of the three. Their market values make them takeover candidates by foreign banks looking to expand.
    13. Fifth Third Bank- Look at 12 and 10.
    14. BBT- Strong Franchise with no subprime JUnk, good profit and steady fees, not subject to deterioration.
    15. DOn't know who really holds this spot, but could be the U.S. Branch of Barclays PLC, or RBS, or ING, 3 great international Groups, looking to grow in the U.S. and willing to buy anything cheap above this least.
    Overall, none of this Banks is going under, and except for WAMU I would be buying any of them of Weakness. WAMU's Management is just HORRIBLE! and they gave out over 30% of the Bank to Private Equity for FREE, no creativity, just STUPIDITY, Killinger should be fired immediately, and that transaction should be voided! With Lehman Bros, doing a convertible Preferred Stock yielding 7.5%, WAMU, should have done the same thing with the best Mortgage Loans in its portfolio as a colateral (Those written over 5 years ago), the recent transaction just shows how horrible some of these institutions management are, and that they should be taken over by decent foreign Banks, who really know how to manage Capital.
    Buy Barclays at 7 times earnings, ING at 6.5 times earnings, LYG at 7 Times earnings or STD at 10 times earnings. All of them have dividends of 5.5% or more, without the SUBPRIME JUNK, and are stable franchises looking to take advantage of mispriced US Banks.
    HSB can also be added to this recent list.
    I love Banks!!!!! NOne of this will fail, don't need to wait until they are up 20% in two days to buy them, because you will miss the biggest opportunity in history.
    Reply
  •  
    Apr 12 12:45 PM
    Read this on banks " NON-BORROWED" reserves! ,Jim is one of the best www.financialsense.com...

    Read this on how the I-Banks are scheming to unload their toxic loans
    www.minyanville.com/ar...
    Reply
  •  
    Apr 12 11:02 PM
    Some people are very naive assuming that the Fed have limitless financial reserves and power.

    Just look at commodity prices and the inflation (I am not talking about bogus official numbers).

    Unfortunately, the Fed are very close to a point of losing control over the economy.

    Remember that the great depression did not start in 1929 with the stock market collapse. No. The Fed were lowering interest rates and stimulating the economy. But, in 1931, the control was lost, the Fed were forced to raise interest rates. The great depression has started and nothing was working...
    Reply
  •  
    Apr 12 11:42 PM
    I got a Bauerfinancial report at work a few weeks ago. I don't have their release in front of me but they said there has been some deterioration in bank quality ratings the past quarter.

    I seem to recall that only 71 out of 7,000 banks were in the one star range, which signals pending liquidation or sale due to wipe out of equity.

    The smaller local and regional banks can just be absorbed by a money center or larger, healthier bank.
    I do not see a chain reaction yet.
    Though Jefferson County is threatening to file bankruptcy in Louisiana. The county, or parish, has 3.2 billion in complicated derivatives rung up. While this is a rating agency and investment bank problem most likely, it would rattle the financials sector some more if it comes to pass.
    If the Fed runs through its last $800 billion this year it will not be regionals or small banks but the Fed that will register a chain reaction bankruptcy.
    And I don't see how Republicrat free-market advocates can turn to the bankrupt US citizenry (factoring in their share of the US public debt) for help. If a steel company can be allowed to fail due to free market pressure from overseas, a central bank will have to fail too from pressure due to corrupt financial practices.
    Reply
  •  
    Apr 13 10:08 AM
    When you actually look at the effects to a family that walks away from their house payment you understand that 1 or 2 adults now have severely damaged credit histories. This will impair their ability to barrow for a long time. Multiply this by millions of affected barrowers. That means any business producing consumer durables is going to have their bottom line affected. Then because of the increased interest these people pay and our governments irresponsible fiscal policy whatever is left of income will buy less affecting other businesses' bottom line as commodity and import prices go up. This is a mess. It will only be corrected when saving is rewarded and barrowing is based on a reseasonable presumption of re-payment of dollars undiminished in value(Government included). It's funny how you can't get away from history we are back to cheap money or crucifying Americans on "a cross of gold."
    Reply
  •  
    Apr 13 10:17 AM
    To Pauly B point about the average consumer; 2007 gdp was $13.8 trillion nominal. Consumer spending at 2/3 gdp would be $9 trillion. Consumer gets the one two punch at the pumps. As you fill your tank at $3.25 per gallon, notice that diesel is a dollar more per gallon, and you will be paying that as well when you shop for anything. Guessing that at least %50 of consumers will not be able to duck and dodge these punches or hit back due to job loss and income loss due to inflation, what happens if gdp shrinks to $8.5 trillion over the next 3 to 5 years?
    Reply
  •  
    Apr 13 07:12 PM
    I believe Jefferson county is in Alabama, not Louisiana.
    Reply
  •  
    Apr 13 07:13 PM
    We are crucifying America on a cross of debt!
    Reply
  •  
    Apr 13 08:21 PM
    banks are good banks are bad. except for the list by DSX lover no one is picking stocks to buy or short. and DSX, by the way, your "analysis" of the banks is so top level as to be misinformed--e.g. STI has $17+ billion of construction, land A&D loans and $14+ billion of HELOCs on their balance--all in FL and GA and out of $122 billion portfolio. Oh yeah, and $8 billion of car loans from third parties. So 1/3 of all all assets are in crap categories--before even getting to residential mortgage or Alt A or credit default swaps. Are you long or short that stock? This is drivel, and the original column entry makes me want to vomit. I CAN'T BELIEVE I WASTED MY TIME ON THIS. Very annoying.
    Reply
  •  
    Apr 14 01:48 PM
    It never fails to amaze me as to how people forget history. I suffered through the S&L and banking crisis of the 1980s. The present scenario is about the same, except many times larger. Does anyone think that Fannie Mae and Freddie are solvent? Then please remember that a substantial portion of the assets of many banks are Fannie and Freddie stock and bonds. How can anyone with a brain the size of a pea think that loans made to people with no money, no job, no credit, and no assets might actually be a good loan???? The class of people that received sub-prime loans will not pay. Moreover, when that class moves into a neighborhood, the values crash instantly. If you take away the created money pumped into the system by the Feds, it does not take a rocket scientist to see red ink everywhere. There is always a ripple effect that will spread losses to everyone, top to bottom. It has been obvious for several years that a disaster was waiting to happen. I have been waiting for a buying opportunity for hard assets. I would not invest a penny in Wall Street, as it has proven to be unreliable, that is, nothing more than a paper factory. I am going to the source, and investing in land and mineral rights in Oklahoma, Louisiana, and Texas. For the future, "tire-kickin"... assets are the only way to go. Written from my new home in Panama.
    Reply
  •  
    May 19 01:45 PM
    Well, it's been over a month. Has anyone heard of any regional banks crashing? Failing? Stumbling, even? Hmmm.
    Reply
  •  
    May 27 03:11 PM
    It appears now there are some who actually feel the regional banks are ready to benefit from impending economic recovery vs. going out of business:

    Excerpts from:
    “Market Pros Think It's Time To Buy US Stocks Again”
    By Jeff Cox, Special to CNBC.com | 27 May 2008 | 01:48 PM ET

    (Quoting David Twibell, president of wealth management for Colorado Capital Bank in Denver) ...
    “Twibell sees opportunity in a number of beaten-down sectors in the US stock market, with small-and mid-cap companies becoming particularly attractive.

    “Among the areas to benefit, according to Twibell: Community and regional banks....”

    www.cnbc.com/id/247788...
    Reply
  •  
    May 30 09:33 PM
    I stand corrected...

    (Excerpt from...) “Bank regulators shutter First Integrity bank”
    2/30/08

    "Federal regulators on Friday shut down a small Minnesota bank called First Integrity, saying unsafe practices had weakened its financial condition....

    ...The FDIC said all the bank's deposits will be assumed by First International Bank and Trust of Watford City, N.D. ...

    ... It was the fourth failure this year of an FDIC-insured bank — following two small Missouri institutions, Hume Bank and Douglass National Bank, and ANB Financial National Association of Bentonville, Ark., which had about $2.1 billion in assets.

    FDIC officials said Thursday they anticipate an increase in bank failures this year. In March, the agency said it would hire an additional 140 employees to bring staff levels to 360 in the division that handles bank failures...."

    www.cnbc.com/id/248980...

    Copyright 2008 The Associated Press.
    Reply
  •  
    Jun 01 01:33 AM
    Here's more, gatekeeper:

    www.businessweek.com/i...

    seekingalpha.com/artic...

    Best,

    Judy
    Reply
  •  
    Oct 04 11:54 PM
    How foolish many of you look now (DSX Lover) - I laugh at your pitiful prognostications. Enjoying the ride are you? Sub-prime Mortgages is just the tip of the iceburg. Wait until the record default credit cards, car loans and student loans start getting reported...this is just the beginning.
    Reply
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