Maybe more about this at some point in the future. Consider it a RawShock Test, and feel free to describe what you see in comments.
Kids, don’t try this at home.
The highlight is “Help Us Build a New Citi”:
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Ken Houghton, having realized there is still a Commercial Paper market, looks at one implication of it.
One of the things that gets ignored in all the fussing about government debt is how small it is by comparison to corporate debt.
The shortest-term debt, Commercial Paper, can be very interesting. With a maturity that is by definition nine months (270 days) or less—and often for financial institutions overnight, for others rolled over weekly—Commercial Paper can be the lifeblood of an institution.
For Financial Institutions, it’s even more extreme. The prime example is Drexel Burnham Lambert, which failed in large part due to its CP being downgraded, leaving it to turn to the Fed as its Lender of Last Resort. Wikipedia tells the story, using James B. Stewart’s Den of Thieves as its source:
Unfortunately for Drexel, one of first hostile deals came back to haunt it at this point. Unocal’s investment bank at the time of Pickens’ raid on it was the establishment firm of Dillon, Read—and its former chairman, Nicholas F. Brady, was now Secretary of the Treasury. Brady had never forgiven Drexel for its role in the Unocal deal, and would not even consider signing off on a bailout. Accordingly, he, the SEC, the NYSE and the Fed strongly advised Joseph to file for bankruptcy. Later the next day, Drexel officially filed for Chapter 11 bankruptcy protection.
Financial Institutions live and die by their CP sales. Or at least they did before the Greenspan Put. Here’s a chart of Domestic Financial CP Outstanding and Excessive Reserves over the past twelvemonth:
It certainly appears that the banks are using their “excess reserves” to make up for an inability to issue Commercial Paper in the amounts they did before. Perhaps the Fed Governors who are talking up recovery (h/t David Wessel’s Twitter feed) should wait until the debt markets strengthen a bit as well.
Dr. Black starts digging into the question why so many Georgia-based banks fail. The picture painted isn’t pretty:
The review also contains a photo of a planned 238 townhouse project that the bank financed for $5.6 million in 2007 even as the real estate market was softening. By September 2008 about three quarters of the loan had been disbursed. The photo taken in 2009 shows an empty lot with no construction on it. The FDIC now appraises the property’s value at $1 million.
By my current count, 25 of the 129 bank failures of 2008—seven more than Illinois and ten more than California. (Only Florida is also in double-digits, with 11 failures, three of which came yesterday.)
AB Commenter Nancy Ortiz was all over this possibility back at the end of June:
I wonder if the GA phenomenon isn’t some sort of scam. If I have some money to invest, why can’t I open a bank, solicit customers, provide basic services with high fees, sell stock, etc. Then I can use the resulting cash to give loans to people, getting high interest on various real estate or commercial ventures. Or, in GA, I might want to bribe state politicians by means of loans on overvalued assets. I could make loans like that to the governor, for example, in exchange for tax advantages, specific favorable legislative measures (income tax exemptions on other enterprises I own, for example) water rights, state contracts, you name it. I could make a lot of money that way, and the FDIC would pick up the individual depositers losses, or not, if I have sold them uninsured CD’s. Another small bank bites the dust, and I go on an extended cruise to….um, Argentina. It’s cold down there at this time of year, but later, I hear the weather’s quite nice.
while Guest followed with a possible point of salience:
Georgia has too many banks — one bank for every 28,000 residents. Georgia also had a big surge of commercial lending for risky real estate deals. This seems more like the savings and loan crisis of the 1980s than the sub-prime crisis.
I admire the optimism of Guest (and the Atlanta Journal-Constitution).
Also noted for the record, in the interest of full disclosure: the Business Week piece cited by Dr. Black was written by my neighbor and former editor, Peter Carbonara.
There have been 13 bank closings posted (as of right now, about 6:50pm) in the state of Illinois since last March. That alone is significant—but, even more interesting, six of them occurred today. This exceeds the previous record for a state, Georgia’s five last week.
Three (in Elizabeth, Oregon, and Danville) are in the NW part of the state. The other three are located near Chicago (Worth, in Cook County), Urbana (Clinton), and Springfield (Winchester).
Only two of those cities (Worth and Danville) are in the Top 200 cities by size in the state, so it’s difficult not to suspect that their location had a lot to do with the closing of at least four of the banks.
Again, the same as the Georgia question, why Illinois? And, most especially, given the past two weeks, why are there multiple state closings now?
With today’s (well, yesterday’s) five closings, the total of failings of U.S. banks since March of last year to 69.
Of those, slightly more than 20% (14) are from the state of Georgia. Excepting the much larger California, there have been more failings in Georgia than in any two other states combined.
Also as a matter of record, the 69 failings since last March constitute more than 70% of the 97 failings since October of 2000. So, in round numbers, 15% of the time accounts for 70% of the failings.
Bubbles beget bubbles. Anyone find anything more to it than that?
Did no one in Georgia pay attention in the 1980s?
It’s not just reputations that are on the line. Board members, also known as directors, could be held personally liable for a bank’s demise.
Experts are expecting a wave of lawsuits against directors to be filed in Georgia over the next year or two as regulators and shareholders seek someone to blame — and someone to pay — for the state’s bank failures.
Eleven Georgia banks have failed in the past eight months, the most in the country, and experts say many more troubled institutions are in danger of being shut down.
But recovery, of course, is just around the corner.
Ken Houghton finds someone who is more pessimistic than I am.
Seven institutions — JPMorgan Chase & Co., Citigroup, Wells Fargo & Co., Goldman Sachs Group, GMAC LLC, SunTrust Banks, Inc., and Fifth Third Bancorp — are at risk of failure and may have to cut back lending dramatically to stay alive.
Rusty disagrees with me on Fifth Third, which he sees on a daily basis a lot more than I ever did.
I still expect JPMC and Goldman Sachs to survive, and am still trying to figure out why they are on this list while Bank of America and Morgan Stanley “are borderline, meaning they could be at risk of failure with worsening economic or financial conditions and will also have to cut back on lending.”
But the whole thing is worth reading, so long as you don’t have any sharp objects nearby, or are paid in Swiss Francs.
The first encouraging sign in a long time from the Fed and the Treasury is in the link above. After it became common knowledge that the “stress tests” were only going to be window dressing, the question on everyone’s mind became only “How much more is it going to cost the American taxpayer to keep subsidizing the guys who got us into this?” (Brad DeLong’s mileage varies, though I note that Mark Thoma may be coming around, after his initial assumption that his money would be Used for Good and the System would be Fixed—a venial sin at the most.)
The fact that Geithner/Summers and P
Bandit/ Lewis are “haggling over the price” means there is still some reality reaching over the seawall that is the Obama Treasury Department.
Speculation below the fold
Or maybe this is the reality going deeper. Wells Fargo, which got Suckered by Charlotte with WalkAllOverYa? Or a Major Regional, say, SunTrust?
The last time I raised the spectre of SunTrust, Sammy questioned me and someone named Jessica suggested (in no uncertain terms: “SunTrust is one of the leading banks in the industry and is in NO NEED of bail out money. The FDIC Corp has trusted in SunTrust enough to reach out and ask for some help bailing out the smaller banks that are on the FDIC Watch List.”) that I must be mistaken.
At the time (29 Oct 2008), SunTrust had received $3.5 Billion, “more than BoNY/Mellon. More than BB&T or Fifth Third or Zions Bancorp.” They took another $1.4 Billion at year-end, so they’re up to $4.9 Billion, more that $1 Billion more than Capital One, which is one of the banks that is always spoken of as being endangered.
It doesn’t appear to have helped. SunTrust has been downgraded twice by S&P this year.
As for that help they’ve been giving the FDIC? Dr. Black notes that an 11th bank in Georgia has gone under since March of last year. No other state—not even California—is in double-digits yet.
So I won’t be surprised if SunTrust needs “additional capital.”
Another possible contender from the regionals? PNC Financial Services, which came out of nowhere to borrow $7.6 Billion at the end of last year. And, unlike SunTrust, there haven’t been any bank failures in the Greater Pittsburgh area (which surprises me more than it probably does Rusty).*
Going back to what Hank Paulson said, “these things are never over until you have a couple of institutions go that surprise everyone.” No bank on the Endangered Species list so far has been a Surprise in that sense; the delay of the “stress test” announcement until next Thursday, May 7th, may well mean that we will see one of those surprises getting capital.
It doesn’t make it good, right, or sensible, but it does at least hint at the possibility that things might, eventually, start getting better.
*In fact, today’s in upstate New Jersey is the first on the East Coast since at least January of 2008.