Small Banks Next in Line for Credit Crunch - Housing Tracker

Quote of the Day

“There is no pill to take away the credit gluttony. People hate hearing the solution. It will take time and a lot of hard work and a radically new lifestyle. There is no credit market liposuction.” (Dr. Housing Bubble, May 12th)

“Are you concerned the the $6 billion Fannie has promised to raise in capital will not support new lending and greater mortgage market liquidity, but instead go to cover more of its losses?” - Senators Chuck Hagel (R-NE), John Sununu (R-NH), Elizabeth Dole (R-NC), and Mel Martinez (R-FL) jointly asked in a letter sent to OFHEO head James Lockhart. The letter questioned the wisdom of loosening regulatory controls over Fannie when the government-backed mortgage lender was losing so much money. (Housing Wire, May 13th)

Subprime Fallout

BofA Sees Higher Losses on Home Equity Loans: Report. “Bank of America Corp. (BAC) said Tuesday that it now expects losses on home equity loans to reach above last month’s Q1 estimates… suggesting that the credit crunch that hit financial institutions with epidemic force during H2’07 is now moving towards leveraged consumers as well. Bloomberg: BofA’s Liam McGee, president of the company’s consumer and small business division — 77% of the bank’s revenue base in Q1 — said yesterday that the bank now expects losses in its $118 billion HEL portfolio to top the 2.5% ceiling the company estimated in early April. McGee did not provide an estimate of how high the HEL loss rate might actually go.” (Housing Wire, May 13th)

John Hussman: Home Price Erosion Will Continue. “Far from the credit crisis being over, it's likely that we will see a troublesome second round that eventually provokes government intervention. The financial markets shouldn't take too much comfort from the idea of intervention, since it will almost surely be of the sort that forces the lenders to take losses while providing some sort of reduced principal workout to homeowners. Some of these proposals are already being discussed, but with limited urgency. My guess is that all of that is likely to change in the months ahead.” (John Hussman in Seeking Alpha, May 13th)

Republican Senators Question Fannie Mae’s Capital Position. “In a letter sent Monday to Office of Federal Housing Enterprise Oversight director James Lockhart… Four key Republican Senators... expressed concern at OFHEO’s loosening of an excess capital surcharge on Fannie in light of continuing losses, and a plan to raise an additional $6B in capital. They also signaled concern over $9.3B in unrealized losses on securities held in Fannie’s portfolio [and its effect on their capital position]… Fannie held roughly $42.7B in core capital at the end of Q1… Losses of just 5% on either firms’ massive mortgage portfolio would likely be enough to wipe out shareholders.” (Housing Wire, May 13th)

Get Ready For More Bank Failures. “ANB Financial, a small bank in Arkansas… with $2.1 billion in assets, was closed on Friday by the Office of the Comptroller of the Currency [Treasury]. Apparently, ANB got into trouble by making bad loans for construction projects in Idaho, Wyoming and Utah in addition to Arkansas. It is the third bank failure of the year… According to the most recent figures from the FDIC, the government agency which insures bank deposits of up to $100,000, 76 banks were on the FDIC's "problem list" as of the end of December… [Large subprime lender] Fremont General (FMNT)… warned Friday that despite [raised capital,] it may still have to file for bankruptcy.” (CNN Money, May 13th)

The Fed Scorecard: 9 Months of Cutting and Red Queen’s Race. Is the Fed Done Cutting Rates? “The only thing that the Fed’s irresponsible rate slashing has brought is a negative real Fed Funds Rate which if left unchecked is bound to cause stronger pressure on inflation. If we are to look at the real rate, which is the fed funds rate minus the inflation rate we are now negative by about 1.25%. Keep in mind the historical average has been positive 1.75% since 1975. So given that the Fed is on a mission to inject liquidity… where are we now 9 months later? Fed futures [indicate an] 80% probability [of] no rate cut in the next meeting in June.” (Dr. Housing Bubble, May 12th)

Guy Hands Rejects Bank LBO Debt Offers, Sees Subprime Parallels. “British financier Guy Hands: Private equity firms that are buying leveraged buyout loans risk repeating the mistakes of investors in subprime mortgages. Hands's Terra Firma Capital Partners Ltd. rejected offers from banks for the loans because they didn't offer an attractive enough risk-adjusted rate of return. Citigroup Inc. (C) and Deutsche Bank (DB) are selling $22 billion of LBO loans to free up capital. The banks are trying to lure private equity buyers… by offering the debt at a discount and providing financing... If the global rate of company defaults rises five-fold to 10%, buyout firms' equity in the loans will disappear and the debt will return to the banks.” (Bloomberg, May 13th)

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Comments

[sivere]

We have to solve this problem. We need to renationalize the Fed completely, open their books, create more strings for Fed help in the case of out-of-jurisdiction loans (i.e., investment banks), Once we see the extent of the problem, we will likely have to bankrupt the current system, or parts of it, and start over.

TakeBackTheFed.com

[PCScipio]

Nice wrapup, Judy. It's your kind of cogent news survey/summary a busy person like me finds most useful. So much more valuable than the wanks who just talk their book.

[iThinkBig]

Interesting about the bank failure in Arkansas that lent to construction in Idaho and Wyoming. Many have said that defaults on commercial real estate will be a much bigger problem then residential.

To Sivere's point, I partially agree. As the losses continue spreading to the consumer, real GDP will further contract. The U.S. as a massive debt ridden nation and easy liquidity system is basically defaulting and taxation without representation through inflation caused by devaluing the currency is the solution (not fair but has happened over centuries of modern economies).

This time, the U.S. taxing the global citizen because they peg to our currency. The taxpayer sees spin from Washington propogated by mainstream media about food crisis, caused by using biofuels for food etc. While these factors do effect food supply it is so small as to be non-measurable in real terms. Where's the statistical report showing how much less wheat we have because we have farmed an additional 30 million acres for ethanol? I haven't seen one, have you? Not that I believe ethanol is the answer to our energy woes but just making a point.

Inaffordability of the food that causes runs on supplies (rice, flour etc.) and hoarding is the source of shortages and the cause is the devaluing of the currency.

The Fed has a place and purpose to lend to the financial system to prevent catastrophic crisis. However, the collusion of politics, investment banking and the Fed is now proving extreordinarily damaging. This has happened before during the Nixon era and years following. First massive inflation then raising interest rates to slow inflation leading to lack of investment and horrible economic conditions.

The Fed need not be abolished but I disagree big time on expanding the Fed's powers. It also appears that the Fed was preferential to the investment community although this is mere perception. The Fed was preferential in the last decade to politicians in tampering with interest rates from Clinton through Bush and especially this last year leading up to election. Human nature leading to overexpansion and some banker greed seem to play a part in the financial system and this seems to run in 20 year cycles dating back to 1867 where financial crisis begin building and by the end of the 20 years economy is booming.