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Tuesday, 7 October 2008
More Lenders Expected to Collapse Despite US$700b Rescue
Here is a safe bet for uncertain times: A lot of banks will not survive the next year of upheaval despite the US government’s US$700 billion plan to restore order to the financial industry. PDF
More Lenders Expected to Collapse Despite US$700b Rescue
AP in San Francisco 7 October 2008
Here is a safe bet for uncertain times: A lot of banks will not survive the next year of upheaval despite the US government’s US$700 billion plan to restore order to the financial industry.
The biggest question is how many will perish and how they will be put out of their misery - in outright closures by regulators scrambling to preserve the dwindling deposit insurance fund or in fire sales made under government pressure.
The banking industry is now on the shakiest ground since the early 1990s, when more than 800 federally insured institutions failed in a three-year period. The government’s commitment to spend up to US$700 billion buying bad debts from ailing banks is likely to save some institutions that would have otherwise died, but analysts doubt it will be enough to avert a major shake-out.
“It will help, but it’s not going to be the saving grace” because a lot of banks are holding construction loans and other types of deteriorating assets that the government will not take off their books, Stanford Financial analyst Jaret Seiberg predicted. He expects more than 100 banks nationwide to fail next year.
Not as many banks are likely to fail as in the savings-and-loan crisis, largely because there are about 8,000 fewer today than there were in 1988. But banks are much larger than they were 20 years ago, thanks to laws passed in the 1990s.
“I don’t see why things will be that much different this time,” said Joseph Mason, an economist who worked for the US Treasury Department in the 1990s and is now a finance professor at Louisiana State University. “We just had a big party where people and businesses overborrowed. We had a bubble and now we want to get back to normal. Is it going to be painless? No.”
With more super-sized banks in business, fewer failures could still dump a big bill on the Federal Deposit Insurance Corp, the government agency that insures bank and savings-and-loan deposits. The FDIC’s potential liability is rising under a provision of the bailout that increases the deposit insurance limit to US$250,000 per account, up from US$100,000.
Through the first nine months of the year, 13 banks and savings and loans have been taken over by the FDIC, more than in the previous five years combined.
The FDIC may be underestimating, or least not publicly acknowledging, the trouble ahead. On June 30, the agency had 117 insured banks and savings and loans on its problem list, just 1 per cent of the nearly 8,500 institutions insured.
The list did not include two huge headaches - Washington Mutual Bank and Wachovia Corp. Combined, Washington Mutual and Wachovia had more than US$1 trillion in assets; the assets of the 117 institutions on the FDIC’s watch list totalled US$78 billion. Late last month, Washington Mutual became the largest bank failure in US history.
After Mani Behimehr, a home designer in Tustin, California, heard the news that Washington Mutual had been seized and sold to JP Morgan Chase, he rushed out to withdraw about US$150,000 in savings and opened a new account at Wachovia - only to learn two days later it had agreed to sell its banking business to Citigroup.
“I thought this is the strongest economy in the world; nothing like that happens in this country,” said Mr Behimehr, who is originally from Iran.
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More Lenders Expected to Collapse Despite US$700b Rescue
AP in San Francisco
7 October 2008
Here is a safe bet for uncertain times: A lot of banks will not survive the next year of upheaval despite the US government’s US$700 billion plan to restore order to the financial industry.
The biggest question is how many will perish and how they will be put out of their misery - in outright closures by regulators scrambling to preserve the dwindling deposit insurance fund or in fire sales made under government pressure.
The banking industry is now on the shakiest ground since the early 1990s, when more than 800 federally insured institutions failed in a three-year period. The government’s commitment to spend up to US$700 billion buying bad debts from ailing banks is likely to save some institutions that would have otherwise died, but analysts doubt it will be enough to avert a major shake-out.
“It will help, but it’s not going to be the saving grace” because a lot of banks are holding construction loans and other types of deteriorating assets that the government will not take off their books, Stanford Financial analyst Jaret Seiberg predicted. He expects more than 100 banks nationwide to fail next year.
Not as many banks are likely to fail as in the savings-and-loan crisis, largely because there are about 8,000 fewer today than there were in 1988. But banks are much larger than they were 20 years ago, thanks to laws passed in the 1990s.
“I don’t see why things will be that much different this time,” said Joseph Mason, an economist who worked for the US Treasury Department in the 1990s and is now a finance professor at Louisiana State University. “We just had a big party where people and businesses overborrowed. We had a bubble and now we want to get back to normal. Is it going to be painless? No.”
With more super-sized banks in business, fewer failures could still dump a big bill on the Federal Deposit Insurance Corp, the government agency that insures bank and savings-and-loan deposits. The FDIC’s potential liability is rising under a provision of the bailout that increases the deposit insurance limit to US$250,000 per account, up from US$100,000.
Through the first nine months of the year, 13 banks and savings and loans have been taken over by the FDIC, more than in the previous five years combined.
The FDIC may be underestimating, or least not publicly acknowledging, the trouble ahead. On June 30, the agency had 117 insured banks and savings and loans on its problem list, just 1 per cent of the nearly 8,500 institutions insured.
The list did not include two huge headaches - Washington Mutual Bank and Wachovia Corp. Combined, Washington Mutual and Wachovia had more than US$1 trillion in assets; the assets of the 117 institutions on the FDIC’s watch list totalled US$78 billion. Late last month, Washington Mutual became the largest bank failure in US history.
After Mani Behimehr, a home designer in Tustin, California, heard the news that Washington Mutual had been seized and sold to JP Morgan Chase, he rushed out to withdraw about US$150,000 in savings and opened a new account at Wachovia - only to learn two days later it had agreed to sell its banking business to Citigroup.
“I thought this is the strongest economy in the world; nothing like that happens in this country,” said Mr Behimehr, who is originally from Iran.
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