Banking Crisis Entering a New Stage?

Mike Larson takes a closer look at the banking crisis. In this issue of Money and Markets, Mr. Larson examines the ongoing credit crisis and the widespread impact it is having on the entire banking sector.

Jupiter, FL (PRWEB) February 29 2008 - The U.S. financial industry is facing unprecedented challenges. Unlike past crises, which tended to be isolated in one or two parts of the credit market, this one is different.

Major credit problems are popping up in everything from residential mortgages to commercial mortgages to leveraged buyout loans to credit cards to auto loans.

This is having a widespread impact on the entire banking sector. For proof, look no further than the Federal Deposit Insurance Corp.'s latest Quarterly Banking Profile. This report, which comes out every three months, always has a treasure trove of information on the banking industry.

The meat of the report shows an even worse outlook:

• In the fourth quarter, aggregate profits at the 8,533 institutions the FDIC tracks slipped to $5.8 billion. That was a drop of more than 83% from a year earlier, and the lowest absolute level of net income since the fourth quarter of 1991.

• Return on assets plunged to 0.18% in the quarter, driven by problems at a few of the nation's largest institutions. That was down from 1.2% a year earlier and the worst performance since 1990.

• Provisions for loan losses soared to $31.3 billion in the fourth quarter, the highest level in any quarter and more than triple what was seen during the same period of 2006.

• Net charge-offs surged to $16.2 billion from $8.5 billion a year earlier.

Interest rate gyrations in the late 1970s and early 80s greatly eroded the capital of the entire S&L industry. Lenders made long-term, fixed-rate loans and funded them with short-term borrowings.

When short-term rates rose, their funding costs increased, but they couldn't do anything about those long-term loans. They were stuck holding old mortgages that didn't yield as much as new mortgages and the value of those old mortgages plunged.

Legislation then allowed the S&Ls to aggressively expand into new markets, like commercial real estate, in the mid-1980s. The intent was to help the financial firms "earn their way out" of the interest rate problems.

But tax law changes and regional economic downturns struck later in the decade, dealing a death blow to the industry. Failures surged, and we as a country ultimately had to spend around $150 billion cleaning up the mess.

Banks were much better capitalized heading into this crisis than they were back in the S&L days. Yet the lending problems they face are also more widespread. The decline in home prices is unprecedented in modern history too, and that's driving mortgage delinquencies and losses into uncharted territory.

The number of "problem institutions" flagged by the FDIC continues to rise. It climbed to 76 in the fourth quarter of 2007 from 65 a quarter earlier and just 50 at the end of 2006. Problem banks are those with "financial, operational, or managerial weaknesses that threaten their continued financial viability," in the words of the FDIC.

Regulators can see the writing on the wall. The Wall Street Journal ran a story this week headlined "FDIC to Add Staff as Bank Failures Loom." It said:

"The Federal Deposit Insurance Corp. is taking steps to brace for an increase in failed financial institutions as the nation's housing and credit markets continue to worsen.

"The FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

"FDIC spokesman Andrew Gray said the agency was looking to bulk up 'for preparedness purposes.' The division now has 223 employees, mostly based in Dallas.

"The agency, which insures accounts at more than 8,000 financial institutions, is also seeking to hire an outside firm that would help manage mortgages and other assets at insolvent banks, according to a newspaper advertisement."

"Bottom line: When it comes to the financial sector, I'll repeat what I've been telling you for months: Bargain hunting in the housing and financial stocks still looks like a high-risk to me. There is no evidence I can see that a definitive "bottom" for housing is in. The magnitude of the credit challenges facing the financial industry is enormous. And the potential for outright bank failures to roil market confidence in the coming months is high," states Larson.

To read this issue online, please visit:

http://www.moneyandmarkets.com/Issues.aspx?NewsletterEntryId=1486

About Mike Larson and Money and Markets

Mike Larson joined the company in 2001, and has more than 10 years of experience researching and writing about personal finance, investing, and the housing and mortgage industry. In 2003, Mr. Larson was named associate editor of the company's monthly Safe Money Report. In this role, he is responsible for writing and editing as well as analyzing trading opportunities for clients. Mr. Larson is also a regular contributor to the company's daily e-letter, Money and Markets.

Before joining Weiss Research, Mr. Larson was a personal finance reporter for Bankrate.com, where he wrote extensively on mortgage lending, banking, residential real estate, and Federal Reserve Board policy. His responsibilities included analyzing economic data and interest rate trends for a weekly column and developing rate forecasts for a regular index feature. Previously, Mr. Larson held positions at Bloomberg News and the Boston Herald.

Recognized as an interest rate and mortgage market expert, Mr. Larson's views have been quoted in the Washington Post, Chicago Tribune, Dow Jones Newswires, Reuters, Sun-Sentinel and the Palm Beach Post. He has also appeared as an investment expert to discuss the housing market on CNBC, CNN, and Bloomberg Television. His writing has been acknowledged by both the National Association of Real Estate Editors and the Massachusetts Press Association.

Among the first analysts to call the housing slide, Mr. Larson's new policy paper, "How Federal Regulators, Lenders and Wall Street Created America's Housing Crisis: Nine Proposals for a Long-Term Recovery" has received broad media coverage following its July 2007 submission to the Federal Reserve and FDIC. Mr. Larson holds B.A. and B.S. degrees from Boston University.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.

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