Large U.S. bank collapse seen ahead

[Tom Joad]

I think there is about an 80% chance that FDIC will run dry within a year. Then the Fed will have to bail them out.

http://biz.yahoo.com/rb/080819/usa_banks_crisis.html

Large U.S. bank collapse seen ahead
Tuesday August 19, 1:07 am ET
By Jan Dahinten

SINGAPORE (Reuters) - The worst of the global financial crisis is yet to come and a large U.S. bank will fail in the next few months as the world's biggest economy hits further troubles, former IMF chief economist Kenneth Rogoff said on Tuesday.

"The U.S. 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'," he told a financial conference.

"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," said Rogoff, who is an economics professor at Harvard University and was the International Monetary Fund's chief economist from 2001 to 2004.

"We have to see more consolidation in the financial sector before this is over," he said, when asked for early signs of an end to the crisis.

"Probably Fannie Mae and Freddie Mac -- despite what U.S. Treasury Secretary Hank Paulson said -- these giant mortgage guarantee agencies are not going to exist in their present form in a few years."

Rogoff's comments come as investors dumped shares of the largest U.S. home funding companies Fannie Mae and Freddie Mac on Monday after a newspaper report said government officials may have no choice but to effectively nationalize the U.S. housing finance titans.

A government move to recapitalize the two companies by injecting funds could wipe out existing common stock holders, the weekend Barron's story said. Preferred shareholders and even holders of the two government-sponsored entities' $19 billion of subordinated debt would also suffer losses.

Rogoff said multi-billion dollar investments by sovereign wealth funds from Asia and the Middle East in western financial firms may not necessarily result in large profits because they had not taken into account the broader market conditions that the industry faces.

"There was this view early on in the crisis that sovereign wealth funds could save everybody. Investment banks did something stupid, they lost money in the sub-prime, they're great buys, sovereign wealth funds come in and make a lot of money by buying them.

"That view neglects the point that the financial system has become very bloated in size and needed to shrink," Rogoff told the conference in Singapore, whose wealth funds GIC and Temasek have invested billions in Merrill Lynch and Citigroup

In response to the sharp U.S. housing retrenchment and turmoil in credit markets, the U.S. Federal Reserve has reduced interest rates by a cumulative 3.25 percentage points to 2 percent since mid-September.

Rogoff said the U.S. Federal Reserve was wrong to cut interest rates as "dramatically" as it did.

"Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States."

[Underhill]

And if he had raised rates people would be bitching because the debt would mushroom even faster than it has not to mention the housing problem would be much worse.

The fed is in a loose loose situation.

[potter]

Any dibs on which of the big banks it will be? Might as well have fun with it.

What are the main banks? Once we have a list we can do quarter bets....

[Underhill]

Bank of America?

The article seems to name F May and F Mack. But I still have a hard time seeing congress let that happen.

[Tom Joad]

Originally Posted by Underhill

Bank of America?

The article seems to name F May and F Mack. But I still have a hard time seeing congress let that happen.

They won't let it happen. However to stop it they will have to "borrow money with the nation's future as collateral" as your signature says. All that will do is slightly delay the financial and economic Apocalypse.

[potter]

The indications I see are Fanny Mae and Freddy Mac...I guess they are banks?

It's very discouraging as a taxpayer to realize that the very people my taxes are "bailing out" are the same people that the republicans work so hard reducing and eliminating taxes on.

It's also discouraging because in the process of bailing out these fat cats the republicans are putting social security and medicare in a more perilous position...but then again they benefit the middle class more than the fat cats so why should the fat cats care?

We have a class war going on here in the US, and it's the government and industry against the average taxpayer...and the average taxpayer seem oblivious to their own demise.

[Tom Joad]

Originally Posted by potter

We have a class war going on here in the US, and it's the government and industry against the average taxpayer

That war is just about over Potter, and "we the people" lost.

[potter]

Originally Posted by Tom Joad

That war is just about over Potter, and "we the people" lost.

[optimism]

I'm not yet willing to concede....there are too many good people out there, both lefties and righties who are fighting the direction in which we are headed.

[/optimism]

[Underhill]

Originally Posted by potter

[optimism]

I'm not yet willing to concede....there are too many good people out there, both lefties and righties who are fighting the direction in which we are headed.

[/optimism]

But I increasingly feel like we are the minnows swimming against the tide.

[LottomagicZ4941]

Banks should have never approved such expensive houses.

Should have said, "No" more but commisions would have been lost 'cuz someone else may have said yes.

House prices still need to come down. It is insane. Just common since people. Then again if we had common since this mess could have been avoided. If the banks had been ethical and pushed 15 year mortages. Awe but then people would pay down debt faster.

[Tom Joad]

Originally Posted by LottomagicZ4941

Should have said, "No" more but commisions would have been lost 'cuz someone else may have said yes.

That's the problem. The people underwriting the loans had no stake in them. They were making a killing on commisions and then unloading the loans onto someone else.

[Underhill]

Originally Posted by LottomagicZ4941

Banks should have never approved such expensive houses.

Should have said, "No" more but commisions would have been lost 'cuz someone else may have said yes.

House prices still need to come down. It is insane. Just common since people. Then again if we had common since this mess could have been avoided. If the banks had been ethical and pushed 15 year mortages. Awe but then people would pay down debt faster.

30 year loans aren't the problem. They are a bad idea for consumers, but they don't hurt much in the big picture.

The real problem was with the ratings they gave these loans. They rate them as A+ then sell them off to unsuspecting investors.

[Tom Joad]

Looks like WAMU is a good bet for the next big bank failure. If not the next, close to it.

http://biz.yahoo.com/ap/080908/washi...utual_ceo.html

Washington Mutual ousts CEO Kerry Killinger
Monday September 8, 10:46 am ET
Washington Mutual ousts Chief Executive Kerry Killinger; former Sovereign exec named successor


NEW YORK (AP) -- Washington Mutual Inc., ravaged by losses from sour mortgages, replaced Kerry Killinger as chief executive of the nation's largest savings and loan on Monday, adding him to the growing list of banking bosses ousted by their boards. Its shares fell almost 12 percent.

Killinger, who was stripped of his chairman title in June, became CEO of the Seattle-based thift in 1990 and built WaMu into one of the country's largest banks.

Killinger is being replaced by Alan H. Fishman, the former president and chief operating officer of Sovereign Bank and president and CEO of Independence Community Bank.

WaMu also said Monday that it has entered into a memorandum of understanding with the Office of Thrift Supervision concerning aspects of its operations. WaMu has committed to provide the OTS with an updated, multiyear business plan and forecast for its earnings, asset quality, capital and business segment performance. The plan will not require the company to raise capital or increase liquidity, WaMu said.

Killinger's exit follows that of Wachovia Corp. CEO Ken Thompson, Merrill Lynch & Co.'s Stanley O'Neal and Citigroup Inc.'s Charles Prince.

Battered by rising mortgage delinquencies and defaults, and by the sinking value of its mortgage portfolio, WaMu has lost nearly 70 percent of its market value this year.

In July, the bank reported a $3 billion second-quarter loss -- the biggest quarterly loss in its history -- as it increased its loss reserves to more than $8 billion to cover bad loans.

Washington Mutual's shares fell 50 cents, or 11.7 percent, to $3.77 in morning trading Monday. They have traded in a 52-week range of $3.03 to $39.25.

[potter]

Well send em' a check Tom...let's bail them fat cats out!

[Tom Joad]

Originally Posted by potter

Well send em' a check Tom.

Wonder if the Chinks will float us another loan so that check doesn't bounce?

[Dave]

"Probably Fannie Mae and Freddie Mac -- despite what U.S. Treasury Secretary Hank Paulson said -- these giant mortgage guarantee agencies are not going to exist in their present form in a few years."

Were they not bailed out today by the Federal Govt? Which is great news, not just for the US economy but for the world economy as a whole.

[Francois Cellier]

Originally Posted by Dave

Were they not bailed out today by the Federal Govt? Which is great news, not just for the US economy but for the world economy as a whole.

Indeed ... but the post in question dates from August 19, i.e., is three weeks old.

For the moment, the market reacted very positively to the news. Also the stocks of international banks (like UBS and CS) rose sharply (temporarily by more than 10%, 8% up by the end of the day). Yet, the long-term effects are still to be seen. The bailout money has to come from somewhere, and it won't be paid by the stock owners of Freddie and Fanny who lost their shirts in the deal. Those are peanuts in comparison with the overall mortgage debt. Interestingly enough, even the Dollar got strengthened by the move, but I wonder whether this is rational behavior or just temporary euphoria.

[Tom Joad]

Originally Posted by Francois Cellier

The bailout money has to come from somewhere

No problem. Crank up the presses. Seen the design for the new million dollar bill?

[Tom Joad]

And with all that new cash in the economy the high price of heating your home won't be a problem this winter.

[Fredfredson]

Federal bank insurance fund dwindling
By MARCY GORDON, AP Business Writer Tue Sep 16, 7:49 PM ET

http://news.yahoo.com/s/ap/20080916/...eposits_safety

WASHINGTON - Banks are not the only ones struggling in the growing financial crisis. The fund established to insure their deposits is also feeling the pinch, and the taxpayer may be the lender of last resort.

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.

Treasury has already come to the rescue of several corporate victims of the housing and credit crunches. The government took over mortgage finance companies Fannie Mae and Freddie Mac, and helped finance the sale of investment bank Bear Stearns to J.P. Morgan Chase & Co.

Eleven federally insured banks and thrifts have failed this year, including Pasadena, Calif.-based IndyMac Bank, by far the largest shut down by regulators.

Additional failures of large banks or savings and loans companies seem likely, and that could overwhelm the FDIC's insurance fund, said Brian Bethune, U.S. economist at consulting firm Global Insight.

"We've got a ... retail bank run forming in this country," said Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics.

Treasury Secretary Henry Paulson said Monday that the country's commercial banking system "is safe and sound" and that "the American people can be very, very confident about their accounts in our banking system." FDIC officials also have said 98 percent of U.S. banks still meet regulators' standards for adequate capital.

But fear is growing on Main Street as well as Wall Street about the likelihood of multiple bank failures and the strain that would put on the FDIC.

The fund, which is marking its 75th anniversary this year with a "Face Your Finances" campaign, is at $45.2 billion — the lowest level since 2003. At the same time, the number of troubled banks is at a five-year high.

FDIC Chairman Sheila Bair has not ruled out the possibility of going to the Treasury for a short-term loan at some point. But she has said she does not expect the FDIC to take the more drastic action of using a separate $30 billion credit line with Treasury — something that has never been done.

The FDIC's fund is currently below the minimum set by Congress in a 2006 law. The failure of IndyMac Bank in July cost $8.9 billion.

Next month, Bair plans to propose increasing the premiums paid by banks and thrifts to replenish the fund. That plan is likely to be approved by the FDIC board, which consists of her, Comptroller of the Currency John Dugan, Thrift Supervision Director John Reich and two other officials.

Bair also is considering a system in which banks with riskier portfolios would be charged higher premiums, raising the possibility those costs could be passed on to consumers.

A Washington Mutual failure would dwarf the largest bank collapse in U.S. history — Continental Illinois National Bank in 1984, with $33.6 billion in assets.

By comparison, WaMu and its subsidiaries had assets of $309.73 billion as of June 30 and IndyMac had $32 billion when it shut down.

Arthur Murton, director of the FDIC's insurance and research division, said that when large institutions have failed in recent years, the hit to the fund has been about 5 to 10 percent of the company's assets.

Standard & Poor's Ratings Service late Monday cut its counterparty credit rating on WaMu to junk, action that followed downgrades by both Moody's and Fitch last week. Concern about the Seattle-based thrift, which has significant exposure to risky mortgage securities and other assets, has grown in recent weeks, and the company's stock price has plummeted.

WaMu responded Monday by saying that it did not expect the S&P downgrade to have a material impact on its borrowings, collateral or margin requirements. The bank said its capital at the end of the third quarter on Sept. 30 is expected to be "significantly above" required levels and that its outlook for expected credit losses is unchanged.

Some analyst estimates put the cost of a WaMu failure to the FDIC at more than $20 billion, but other experts say it is very difficult to predict. Unknown, for example, is the amount of advances that institutions may have taken from one of the regional banks in the Federal Home Loan Bank system. Banks and thrifts have significantly increased their requests for advances, or loans, from the 12 regional home loan banks since the mortgage crisis began last year.

These amounts aren't publicly disclosed but must be repaid if a bank or thrift fails, notes Karen Shaw Petrou, managing partner of Federal Financial Analytics.

If the FDIC doesn't have enough cash to cover the initial costs of a bank or thrift failure, one option would be short-term loans from the Treasury. That last happened in 1991-92, during the last part of the savings and loan crisis, when the FDIC borrowed $15.1 billion from the Treasury and repaid it with interest about a year later.

Based on projections of possible scenarios of bank failures, "between the (insurance) fund that we have now and our ability to draw on the resources of the industry ... we do have the resources" needed, Murton said Tuesday.

Though short-term borrowing from Treasury for working capital may be possible, he said, tapping the long-term credit line is unlikely.

But Whalen said the Federal Reserve, the Treasury and Congress should "immediately devise" and announce a plan to backstop the FDIC with up to $500 billion in borrowing authority to meet cash needs for closing or selling failed banks. pop4.gif

"While the FDIC already has a credit line in place and this figure may seem excessive — and hopefully it is — the idea here is to overshoot the actual number to reinforce public confidence," Whalen wrote in a note to clients. "Simply having Treasury Secretary Hank Paulson or Ben Bernanke making hopeful statements is inadequate. Like it says in the movies: 'Show us the money.'"

Before Congress passed the law overhauling deposit insurance in 2006, about 90 percent of all insured banks and thrifts — considered to have adequate capital and to be well managed — paid no premiums to the FDIC. Today, all of them do.

There were 117 banks and thrifts considered to be in trouble in the second quarter, the highest level since 2003, according to FDIC data released last month. The agency doesn't disclose the names of institutions on its internal list of troubled banks. On average, 13 percent of banks that make the list fail. Total assets of troubled banks tripled in the second quarter to $78 billion, and $32 billion of that coming from IndyMac Bank.

Last month, Bair called those results "pretty dismal," but said they were not surprising given the housing slump, a worsening eco