July Sets Record For Bank Failures

[Medic]

http://money.cnn.com/2009/07/29/news/economy/failed.banks.fortune/index.htm?postversion=2009072912

The month isn't over yet and one of the things I harped on in a previous thread (2 months ago) is coming to a grim fruition. The additional 750 billion in ARMs are starting to bury smaller banks. Even though Bernanke assured us that all the money the Fed was pumping into banks to free up credit (which they didn't, they used it as a reserve) and would help the banks stay solid, apparently they are failing at nearly double the rate of any other month.

One of Mich97c's concerns is also coming to fruition, something I didn't think would happen but is rapidly approaching.

The rash of failures over the past year and a half has come at heavy cost to the fund, which is now 75% below its statutory minimum balance.
*WOW* The bond and treasury holders holders are getting absolutely buried on these deals too, which ties into my argument that we are destroying wealth at record pace. This now puts the US banking system in an even more precarious position as these enormous banks that are trying to absorb smaller failed ones attempt to stay solvent themselves. Do they now become "too big to fail"? If there is no discernible improvement in the credit markets by December, you can bet these larger banks will be in the same boat as AIG was but in a far more dire way.

In addition to the FDIC being almost completely drained and the Fed assuming over 13.7 trillion in additional liabilities this year, you have to wonder when the bottom is going to fall out.

[michAGAIN]

I'm just glad we have an experienced President that understands you can't tax your way to prosperity.

[Medic]

I know you're being sarcastic :)

But honestly I don't see how they can feed the beast unless there is an *enormous* tax increase in all brackets. An addition, as Market-ticker stated:


Do you believe that within the next five years we can sell $200 billion of T-bills a week, every week?

I sure don't. And remember that would simply retire the existing debt we've created over a period of 30 years. Good luck with that.

[Wolvrin704]

This cannot be good. Will this get worse for the banks once inflation starts to hit this fall?

[Mich97c]

This cannot be good. Will this get worse for the banks once inflation starts to hit this fall?

Supposedly the Fed has a plan to pull excess liquidity out of the market once the signs of inflation hits.

[Medic]

Supposedly the Fed has a plan to pull excess liquidity out of the market once the signs of inflation hits.

http://www.youtube.com/watch?v=KIaEjgXZR04

:01 - 2:06

Ben explains (albeit vaguely) the ways in which the Fed plans on dealing with the inflation issue. If the solution he mentions (raising interest rates) the question becomes policy, how much does he have to raise it to keep the banks from lending it? Outside of forcing banks to hold the money you cause a serious problem in corporate inventories.

Anyway, at this rate with Bernanke we're kinda of in a "we'll wait and see" at this point.

[Mich97c]

http://www.youtube.com/watch?v=KIaEjgXZR04

:01 - 2:06

Ben explains (albeit vaguely) the ways in which the Fed plans on dealing with the inflation issue. If the solution he mentions (raising interest rates) the question becomes policy, how much does he have to raise it to keep the banks from lending it? Outside of forcing banks to hold the money you cause a serious problem in corporate inventories.

Anyway, at this rate with Bernanke we're kinda of in a "we'll wait and see" at this point.

All the banks would have to be on board with holding money at the Fed vs lending. What are you referring to in regards to corporate inventories - the lack of credit?

[Medic]

All the banks would have to be on board with holding money at the Fed vs lending. What are you referring to in regards to corporate inventories - the lack of credit?

Yes.

Sorry I should have been more specific. Lack of credit but also housing inventories.

[Mich97c]

Wanted to add something about the ARM resets - not that concern and here's why:
1. Most ARMs that are going to reset will probably reset lower. Traditional 3/1, 5/1 ARMs have a rate plus margin, the rate set on the 1 year LIBOR or T-bill rates. LIBOR is under 2% right now so in most cases the reset would be at around 4.25 to 4.75 plus they reset on the new principal balance meaning you can see your monthly payment drop.
2. In the case of interest only loans, a lot of banks are extending the term of the interest only portion because they would rather receive something rather than nothing. They've already had to mark to market these securities close to zero so any performance is better than nothing. I've actually had friends in CA who called their lender when they had an interest only loan reset and the bank gave them another 3 years and lower the rate.
3. If you were going to default due to job loss or negative equity, then you've already probably done it.

Just my two cents.

[Medic]

Some interesting info and good points.

I don't see the resets happening. If you have some data on it I'd love to see it. The original point I made amount bank failures was a tie in to that 750 billion in ARMs that were starting to come due this spring, you're starting to see the results of that in the amount of banks starting to fail. Banks have been trying to squeeze blood out of turnips and end up with a default and don't seem to care.

Future ARM resets may not have the same terrible results with Libor hovering around 1.6%. But this latest round that runs through September is still running it's course through the banks with predictably awful results.

As job losses continue to grow, the default issue becomes more systemic. Your point about banks working with the owners is well taken. Some banks are being more forgiving than others and are in fact giving extensions, but if anecdotal evidence is worth anything, that seems to be the exception more than the rule.

You should come visit your friends in CA :) I'll buy you a drink if you make it down this way.