Don’t worry. Be happy.
[img]533|left|||no_popup[/img] That was the message from the U.S. Treasury Department and the Federal Reserve following the completion of the much talked about bank stress tests.
Even though the government bank examiners found a capital gap of around $75 billion in the nation’s 19 largest financial institutions, Treasury Secretary Tim Geithner and Fed Chief Ben Bernanke assured the public that the worst was over. It was a simple matter of the mega-banks finding the additional monies they needed to shore up the holes in their books.
Among the 10 banks needing to raise more capital, Bank of America Corp. needed by far the most — $33.9 billion. Wells Fargo & Co. fell short by $13.7 billion. GMAC, the financial arm of General Motors, was required to raise $11.5 billion. Citigroup was directed to upgrade its balance sheet with another $5.5 billion. Morgan Stanley required only $1.8 billion to resolve its shortfall.
Huge Swelling of Problem Banks
Each of these big banks has made significant progress towards addressing the deficit on their balances sheets. Today, Bank of America, the bank in the widest gulf, reported that it has raised $26 billion, nearly 76 percent of its goal.
Although the conditions at the nation’s largest banks appear to be improving, the rest of the banking industry is still treading on thin ice.
According to a report released this morning by the Federal Deposit Insurance Corp., FDIC, the government agency charged with insuring the country’s depositor banks, the number of problem banks climbed 21 percent in the first quarter, the highest level in 15 years.
The FDIC classified 305 banks with $220 billion in assets as problem lenders, as of March 31. This figure is up from 252 with $159 billion in assets in the fourth quarter of 2008. With the number of bank failures on the rise, the FDIC said its insurance fund slumped 25 percent during that same period.
[img]534|left|||no_popup[/img] The pace of bank failures is accelerating not slowing down. Not since the Great Depression have so many lenders been at risk.
To date this year, FDIC regulators have taken over 36 lenders, including BankUnited Financial Corp. in Florida on May 21 and Silverton Bank of Atlanta on May 1, which, combined, cost the FDIC’s deposit insurance fund $6.2 billion. Twenty-one banks collapsed in the first quarter alone compared with 25 during all of 2008.
While the list of failed banks included regional giant National City of Cleveland, most of the implosions have occurred at smaller local banks. The South and Southwest, including California have seen the greatest numbers of local bank failures.
Frequently, the story is the same; too many risky loans and not enough tangible security to back the paper.
When this happens, a crack team from the FDIC swoops in to seize the troubled bank. It’s the banking equivalent of a Delta Force hostage rescue. Instead of fatigues they’re dressed in business suits and armed with laptops instead of M-16s and flash-bangs.
The field general for the FDIC is Sheila Bair, a holdover from the Bush White House. In a statement released today, FDIC Chairwoman Bair said, “The first-quarter results are telling us that the banking industry still faces tremendous challenges, and that going forward asset quality remains a major concern.”
Bair has been the unsung hero of the national banking crisis.
The Most Attractive Option
Since March of last year when Bear Stearns was fitted for a shallow grave, Bair has been a constant voice of reason and concern. Early on, when California’s IndyMac bank failed, Bair urged the imposition of lending ratios that would permit homeowners to stay in their homes and help at-risk banks to keep their doors open.
Unfortunately, Bair’s counsel fell on deaf ears. Despite her essential role in protecting the integrity of the banking system, she was notably absent from critical decision-making during the past administration.
Wisely, along with Defense Secretary Robert Gates, President Obama opted to keep Bair on the job.
Despite Bair’s steady hand and sure aim, the rate of bank failures has not abated. Unlike their big brothers, most of the banks that already have gone under or soon will face their maker, do not have access to any of the TARP funds that made it possible for the mega-banks to survive.
Sadly, this means that the local banking landscape likely will be changed forever.
Gone will be the local banker who knew your name and understood the unique circumstances of your credit needs. In his place will be faceless numbers-crunchers whose only concern is serving the bottom line of their corporate masters and staying off the radar of the federal regulators.
With each passing day, my mattress is starting to look like my best banking option.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
