Banks Leading The Economy Off The Cliff!

It's awfully hard to like banks.  Let's face it:  they charge us absurd rates on credit cards, are unwilling to lend to even the best of credits and pay themselves ever so handsomely despite being at the forefront of the economic debacle known as 2008-2009.  Leading bankers themselves are smug, out-of-touch with America and in cahoots with the Administration.  It's hard not to want to see them fail miserably!

Unfortunately, we NEED healthy banks.  We NEED good banks.  No economy can prosper without a healthy financial sector.  And sadly, we don't have one.  In fact, the banking sector is quietly deteriorating further despite all the machinations of the Federal Reserve (FED).  The trend is downright alarming AND ominous!

The number of problem banks in the US continued to soar in last year’s fourth quarter, hitting their highest level since 1993, according to a regulatory report released on Tuesday(http://www.ft.com/cms/s/0/334b89dc-2097-11df-9775-00144feab49a.html).

The findings by the Federal Deposit Insurance Corp. (FDIC) suggest that, although the US economy is on the mend, the financial industry, bedevilled by souring residential and commercial real estate loans, will take longer to recover.

The FDIC said 702 banks were considered troubled at the end of 2009, up from 552 three months earlier. Problem assets totalled $402.8 bilion in the final period, compared with $345.9 billion in the third quarter.  By contrast, Lehman Brothers listed $639 billion in assets at the time of its bankruptcy filing in September 2008.

No longer confined to Wall Street, the financial crisis has cascaded over to regional and community banks that are feeling a disproportionate amount of the pain.  “The great recession has very much become a Main Street problem,” said Richard Brown, the FDIC’s chief economist.

Loan losses jumped for the 12th consecutive quarter to total $53 billion, an increase of 37% over the year-ago period.  On an annualized basis the rate of losses accounted for in the quarter was the highest in more than two decades.

Losses rose in all significant categories, including residential mortgage loans and credit card debt.  One of the fastest growing categories for uncollectable debt was commercial real estate.

Bank lending, the lifeblood of the U.S. economy, is falling at a record pace.  U.S. banks  last year posted their sharpest decline in lending since 1942, suggesting that the industry's continued slide is making it harder for the economy to recover  (http://online.wsj.com/article/SB10001424052748704188104575083332005461558.html?mod=djemTEW_h).

While top-tier banks are recovering at a faster clip, the rest of the industry is still suffering, according to a quarterly report from the FDIC.  Banks fighting for survival, especially those plagued by losses on commercial real estate, are less willing to extend loans, siphoning credit from businesses and consumers.

Besides registering their biggest full-year decline in total loans outstanding in 67 years, U.S. banks set a number of grim milestones. According to the FDIC, the number of U.S. banks at risk of failing hit a 16-year high at 702.  More than 5% of all loans were at least three months past due, the highest level recorded in the 26 years the data has been collected!  And the problems are expected to last through 2010!

The struggling U.S. banking industry remains a problem for policy makers eager for banks to lend again. Lawmakers on Capitol Hill and administration officials have pushed banks to lend, particularly in light of the billions in taxpayer aid injected into the financial industry over the past two years.  Banking groups and their members counter that they're under pressure from regulators to be more prudent and that demand from struggling consumers and businesses isn't there.

Some small-business owners say they could expand if they could just get a loan.  Nick Sachs, president of Homewatch CareGivers Cincinnati-Metro, says he's been asking banks for a loan of $150,000 to $250,000 since 2008.  He says his home-health-care franchise could hire 20 to 30 aides and even one or two office assistants.

Most surveys suggest a combination of factors are at play.  A January survey by the FED of senior loan officers showed banks have slowed their efforts to tighten lending standards, but have not backed off the more stringent loan terms they put in place over the past two years.  The same report, however, also showed that demand for loans from businesses and consumers continues to fall.

Bankers, on the other hand, say creditworthy borrowers are hard to come by.  Fifth Third Bancorp recently extended a $3.5 million line of credit to Chicago-based One Hope United after the state of Illinois, beset by a budget crisis, delayed payments to the child-and-family-services provider.

Clearly, we have a so-called "vicious circle" problem.   The poor condition of borrowers coupled with the poor condition of the economy are making it tougher for banks to lend.  The unwillingness of banks to lend, on the other hand, is contributing to the poor economy and resulting poor credit-worthiness of potential borrowers.  Sadly, before anyone in Washington, D. C., figures this out, we'll be well on our way into the Second Dip of the Double-Dip Hyper-Inflationary Depression.

Disagree?  Think I'm being unfair to Bankers?  TAKE ME ON!

Marko's Take

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Sluggish Loan Demand Spells Economic Trouble Dead Ahead

An ongoing war of words has characterized the frustration among borrowers and lenders.  Those seeking funds frequently complain that "Banks aren't lending".  They're right.  Lenders complain that regulators have tied their hands by imposing much stricter lending standards.  They're right, too.  Unfortunately, this has led to a stalemate, which is precluding economic growth.

Marko's Take?  The problem is the lending market is BI-LATERAL.  The solution is to remove onerous restrictions on banks AND stop bailing them out!  Let shareholders assume the risk.  Let management assume the risk.  Get Washington OUT!

Paul Volcker, backed by President Obama, recently proposed an excellent partial solution to this isssue:  prohibit banks from money-making activities, such as running proprietary trading desks and sponsoring in-house hedge funds.  In so doing, banks will have no option but to make money by LENDING!

Bankers responding to the January 2010 "Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices" indicated that residential loan standards are still contracting.  In addition, consumer demand for mortgage loans continues to decline.

Demand for businesses and households across all major categories of loans weakened over the past 3 months.  Of the survey's respondents, 25% reported a decrease in inquiries about new or increased credit as opposed to 13% that saw an increase.

A substantial number of the respondents reported that credit card limits had been decreased and that fewer new cards were issued.

The decrease in lending, whatever the reason, is impacting bank earnings.  SunTrust, an Atlanta-based institution said its fourth quarter interest income, the revenue from lending, FELL 2% from the third quarter and 18% from a year earlier.  However, profits from lending increased as a result because SunTrust has to pay less interest on deposits.

BB&T had fewer loan losses, so its earnings rose 5% to $1.5 billion, as the result of its purchase of failed Colonial Bank last fall.  The bank's loan book rose 7% to $109.7 billion, but without the acquisition the portfolio would have shrunk.

While higher profits are welcome, it's better to generate revenue from core lending growth than from lower-loss provisions.

Without a dramatic turnaround in the lending activity of banks, the economy cannot grow.  Unfortunately, with the economic recovery now appearing to sputter, this is a most worrisome sign that the Double-Dip is square ahead.

Marko's Take

Bank Failures Continue Unabated

On Friday, an additional 7 banks were seized by the FDIC, bringing the year's total to 140.  As usual, the bank closures occured after closing on Friday and the re-openings were orchestrated such that they could appear unscathed by Monday morning.  God knows, we mustn't see anything like a "bank line" ala the Great Depression!  That just might give the impression that the country was in some kind of trouble, which as we well know, it isn't.  Right?!

The FDIC, which insures deposits at the failed banks, is finding it increasingly difficult to find buyers.  In the case of last Friday's closures, 3 of the 7 have yet to be bought.  Prior policy had been to arrange a buying bank and to enter into a "loss-share transaction" over the weekend.  The FDIC was forced to assume $1.9 billion of failed bank assets for future disposition.  As of September 30th, the amount held for future disposition had been a staggering $30 billion!

The 7 failed institutions had combined assets of $14.4 billion and $11.2 billion in deposits.  The estimated loss to the FDIC Deposit Insurance Fund, i.e. US as taxpayers, was a "mere" $1.8 billion.  At least we're not talking about "real" money!

The 7 closures included 2 in California:  First Federal Bank and Imperial Capital Bank.  The other 5 were located in Florida, Michigan, Illinois, Alabama and Georgia.

As we've been told time and time again, our banks and entire financial system, for that matter, are safe!  Just tell that to the FDIC, which is running in the red and holding a large quantity of assets.

What do YOU think of our banking system?  If you're getting nervous, I wouldn't blame you.  I welcome you to "Take Me On" in the comments section below.

Marko's Take

P.S. 3rd Quarter GDP was just revised downward for the SECOND time to 2.2%.  It had been originally estimated at 3.5%.  Yup, everything in the economy is going swimmingly well!