Posts Tagged ‘banking system’

If I were a banker, I would dread Friday’s.  It is the day of the week that the federal regulators walk in and shut banks down.  This past Friday there were 4 more banks in Texas, California, Illinois, and Florida bringing the total bank closures for 2010 up to 20.  This is on the heals of 140 being closed in 2009, 25 in 2008, and 3 in 2007.

The troubling part of this whole process is that last year banks were able to push the problems aside as the Government allowed them in short to hide these bad loans on their books through an accounting adjustment.  In other words, all of those toxic bank killing loans are on the books and have not been dealt with. 

It gets better.  The FDIC gets to pick up the tab each week through the FDIC insurance fund.  Currently, the fund has $21 billion left.  They estimate $100 billion of losses will have to be covered over the next 3 years.  Oh, don’t worry – they have a credit line that can be tapped up to $500 billion dollars through the Treasury. 

Don’t forget, a massive foreclosure problem still lingers as we start a huge wave of adjustable rate mortgages re-setting over the next 3 years.  In 2009, we were in the calm of the storm as the first wave of adjustable rate mortgages which were sub-prime based were finishing up with their adjustments.  This next wave which represents Alt-A and Prime mortgages is much bigger.  In addition, the fun is just getting started in the commercial space where corporations are having to refinance debt on commercial properties and are having no luck because no one is lending money. 

John Mauldin writes this week in his www.frontlinethoughts.com newsletter “Bank loans are being written off at staggering rates. Over 700 banks (I think that is the figure I saw) are officially on watch by the FDIC, with more banks being closed each week.  There is at least $300-400 billion in losses on commercial real estate waiting to be written down. Housing foreclosures are rising and hundreds of billions have yet to be written off.”

He goes on to write that in January, “Foreclosures rang up at 4300 and Notice-of-Defaults at 5100 per day nationally.”

Think through with me what this could look like.  This last Friday’s 4 bank closures cost the FDIC approximately $1 billion.  That’s an average of $250 million per bank.  If we continue at this pace, we could be looking at 100 more bank closures this year.  That could be as much as $25 billion.  That would deplete all of the FDIC money and force the FDIC to borrow from the Treasury before year end. 

This can’t have a happy ending. 

This week the Sovereign Debt Problem will be front and center as Greece attempts to borrow money through a bond offering.  As I wrote last week, this could be a real problem in the event that Greece defaults.  Also this week we have the unemployment numbers that will be released.  It is a critical number each month.  Watch the risk!

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Have you heard of CIT Group?  CIT is a company that lends money to about 1 million small and medium size businesses and has about 40 billion dollars in debt. They are a pretty big player in the lending business, a company mired in debt, a company on the verge of collapse. 

In the event they fail, there could be some pretty significant repercussions throughout the financial system.  Of course, they are not on the same scale as the Lehman Brothers. However, with a financial system on shaky ground, who knows what would result in the collapse of a large lender.  So, a company in trouble should be no big deal.  After all, President Obama is in the bail-out business and hasn’t had a good bail-out in a while now. 

No, not this time.  Poor little CIT doesn’t meet the too big to fail test.  President Obama stated that it had set “high standards” for granting aid to companies and leaving private investors as the one alternative to avoid collapse.  Wait a minute, excuse me while I settle down from that good laugh I had while writing. 

Since when does this administration have standards?  They still think that GM is a good business model.  So will CIT go into bankruptcy if Big Brother doesn’t lend them a hand?  Of course not, because Big Brother is going to lend them a hand.  The secret is that they are going to do it behind closed doors.  Yes, this is what is happening to our taxpayer dollars.  Roughly 7 of their big bondholders are in talks to cough up 3 billion or so to place another band-aid on the festering wound. 

Where do you think that these bondholders get their money?  With the banking system pretty much nationalized, the money easily funnels from the Government through these banks to these troubled companies.  Obama can keep his “high standards” and no problems to deal with in the financial sector.  They have been running the same system with AIG since that major entity was nationalized.

Price Levels

Let’s take a look at price levels. Last week I warned that things were looking bleak for the market.  As soon as I wrote the warning and hit send, the market turned around and put in a big week.  So does that mean we are out of the woods in the near-term?  Well, last week was the one week out of the month that we have options expiration.  Options expiration can be a real dramatic week either positively or negatively.  It is misleading to see the results of options expiration as what is really occurring with the market.

The next significant price level we are looking at is 956.  The S&P 500 has entered into a price level “zone” (over 940) and now we will really see what this market is made of.  Any strength carrying the S&P 500 over 956 could indicate that we are heading towards 1000.

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Just like that the market in one single day went right up into the zone of the price levels that we have been talking about over the past few weeks.  The S&P 500 finished yesterday’s market at the price level of 822 (between the 800 and 825 price level).

No doubt about it…yesterday’s rally was extremely strong.  Yes, I will have to admit that yesterday’s enormous rally added more credence that we are in the midst of a significant bear market rally that could be with us for more than just a few days.  At the same time, there are a few caveats.  If that is the case, it is probably more than half of the way completed as far as percentages go.  With the exception of a powerful bear market rally in 1929, most major bear market rallies go up between 25% and 30%.  This bear market rally has gone up roughly 21% thus far.

The market took off on the news that the Obama administration has the solution to the banking crisis.  The problem is that all of the Government-based solutions are more illusions than solutions.  There are so many problems with this solution that will just create unintended consequences.  All of the bad debts that banks hold didn’t just all of the sudden disappear with the announcement of this plan.

In order for this plan to work, the banks will still have to realize these losses, which is something that they have avoided thus far.  The Bush administration tried this approach last fall.  They didn’t go through with it because they couldn’t figure out the details.  It appears that we are not much further down the road from that initial attempt to solve the banking crisis last fall.

The worst part of this program is that taxpayers will ultimately get stuck with the bill once these mortgage backed securities lose their value.  One other item of note is that there are roughly 2 trillion dollars of these bad or toxic investments that the banking system owns.  This program only covers 1 trillion dollars of those bad investments. 


It looks like to me that the Obama administration is nationalizing the banking system without calling it nationalization. 


So what are the price levels to watch now?  Anything over 840 to 850 is stock market positive, anything below 800 would be a concern, and anything below the S&P 500 price level of 741 would be very bearish. 


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Well, so far so good for the stock market (S&P 500).  The price decline stopped at a price level of 666 on Monday and is now at 729 (mid-morning Thursday).  Thus far today, the market is showing some follow through from the big day on Tuesday.    This is a pretty typical day following a day where the stock market went up over 6%.    The big key now will be the S&P 500 closing over the price level of 741. 

Although any positive news in the stock market is good news, there is a problem lurking in the background.  The credit markets are starting to deterioate again.  There is a key interest rate called the LIBOR rate.  Without getting to technical, the LIBOR rate is the rate banks charge when they lend money to one another.  A rising LIBOR rate is a real negative.  It basically suggests that  the risk level is rising causing banks to raise their lending rates.  This was at the heart of the problem last fall.  Thus, if this continues, it would be a real negative for the banking system and for the rest of the market.

So once again, we take this day by day.  The risk level is still extremely high.   



So the big

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