bank run blog

Cleaning house before their outright nationalization, Fannie Mae announced a shakeup in senior management this afternoon after the markets closed. The Financial Times reports :

“Fannie Mae, the US government-sponsored mortgage financier, yesterday unveiled a management restructuring that put new executives in charge of its plan to improve capital management and cut credit losses.

‘As we move through the bottom of this cycle, maintaining capital, managing credit and driving revenues are priorities and we have to organise staff accordingly,’ Daniel Mudd, Fannie Mae chief executive, said.

Fannie said Stephen Swad, its chief financial officer, had chosen to leave the company after little more than a year to pursue work in the private equity field, while Enrico Dallavecchia, chief risk officer, was leaving to pursue other finance and risk management opportunities.”

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The coverage by the Associated Press included a rare quote from a bearish analyst, who puts the losses at the GSEs at $1 trillion or more :

“Other analysts, however, continue to express a gloomier outlook. Peter Schiff, president of Euro Pacific Capital in Darien, Conn., a longtime bearish investor, predicts that the companies’ losses could eventually hit $1 trillion or more as housing prices fall far further than most analysts expect.

‘The end result is probably going to be that they go bankrupt and the government nationalizes the function,’ Schiff said. ‘There’s no way they can survive.’

Concern also has been growing that a government rescue of Fannie and Freddie could be costly for scores of investment, banking and insurance companies that hold billions of dollars in their preferred shares. The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.”

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In a quarterly report described by Chairman Sheila Bair as “pretty dismal”, the Federal Deposit Insurance Corporation revealed that earnings for US banks dropped 86 percent year over year. The FDIC raised the number of banks on its watch list to 117. The Associated Press reports :

“The number of troubled U.S. banks leaped to the highest level in about five years and bank profits plunged by 86 percent in the second quarter, as slumps in the housing and credit markets continued.

Federal Deposit Insurance Corp. data released Tuesday show 117 banks and thrifts were considered to be in trouble in the second quarter, up from 90 in the prior quarter and the biggest tally since mid-2003.

The FDIC also said that federally-insured banks and savings institutions earned $5 billion in the April-June period, down from $36.8 billion a year earlier. The roughly 8,500 banks and thrifts also set aside a record $50.2 billion to cover losses from soured mortgages and other loans in the second quarter.”

According to CNN, bad loans and failed investments have forced banks to set aside more and more capital to cover losses :

“Facing additional deterioration in the housing market and further weakness in the broader economy, FDIC-insured banks set aside $50.2 billion during the quarter, more than four times the quarterly total of $11.4 billion from a year ago.

At the same time, nonperforming assets and net charge-offs, or loans banks don’t think are collectable, continued to rise, totaling $26.4 billion in the second quarter, almost three times the $8.9 billion during the second quarter of 2007.”

Associated Press : FDIC: troubled banks highest in 5 years; bank profits dropped by 86 percent in second quarter

CNN Money : Problem bank list keeps growing

In what some analysts are already calling a “stealth bailout”, it looks as though the Fed and the Treasury have secretly and improperly intervened on behalf of beleaguered Lehman Brothers Holdings. This morning the Wall Street Journal is reporting :

“In an apparent attempt to prevent a repeat of the cascading rumors that helped sink Bear Stearns Cos., the Federal Reserve last month quietly called one major bank to see if it had pulled a credit line from Lehman Brothers Holdings Inc., people familiar with the matter said.

Responding to a July rumor that Credit Suisse Group planned to pull a line of credit to Lehman, Federal Reserve officials called to see if it was in fact true, according to these people. Credit Suisse told Fed officials there was no truth to the rumor and it had no intention of pulling the line of credit, the people said.”

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Reuters notes that the contact with the Swiss bank came at roughly the same time as SEC subpoenas were issued in July :

“Fed officials contacted Credit Suisse last month, but it is unclear whether the move occurred before or after the U.S. Securities and Exchange Commission subpoenaed dozens of hedge funds and financial firms about four Lehman-related rumors, the paper said.”

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With its government “backstop” secure, Freddie Mac this morning announced huge losses for the second quarter. Analysts believe that the magnitude of the problems at the GSEs mean that the next several quarters will look worse, not better. The Associated Press is reporting :

“Freddie Mac on Wednesday posted a second-quarter loss that was more than three-times larger than Wall Street expected as a huge number of borrowers with good credit fell behind on their exotic and risky mortgages.

The losses were concentrated in a handful of state — California, Florida, Nevada, and Arizona — where home prices shot up the most and are now falling precipitously.

The dismal financial results come just weeks after the government threw a financial lifeline to Freddie and its sister company Fannie Mae to ward off fears the pair could collapse and take down the U.S. mortgage market. Together, the two hold or guarantee nearly half of outstanding U.S. mortgage debt.

Freddie lost $821 million, or $1.63 a share, for the quarter that ended June 30, compared with a profit of $729 million, or 96 cents a share, in the year-ago period.”

Reuters reports that Freddie is cutting its dividend by more than 80 percent :

“Freddie Mac said it was setting aside twice as much money for bad loans and made plans to slash its dividend by at least 80 percent. Its shares fell 16 percent, while bigger rival Fannie Mae declined 12 percent.”

The news about the GSEs put a chill on the entire financial sector :

“Among banks, shares of Bank of America Corp fell 2.8 percent to $32.65. Freddie Mac, which also announced plans to slash its dividend, doubled its reserves for losses on delinquent loans and home foreclosures.”

Associated Press : Freddie Mac swings to 2Q loss

Reuters : Financials hit Wall Street after Freddie loss

The Bush Administration gave details recently on how it intends to raise the billions needed to finance huge spending deficits. The government has to borrow $171 billion for the second fiscal quarter, the amount is the second highest ever borrowed by the US government in a quarter.

The Bush administration predicts that the federal budget deficit for fiscal 2008, which ends on September 30, will be around $389 billion. The figure is up from last years deficit of $161.5 billion. The budget deficit is projected to rise to an all time high of $482 billion in the 2009 budget year.

USA Today reports that the administration plans to raise the funds by, “Raising $17 billion by selling a new 10-year note Aug. 6 and $10 billion by selling a new 30-year bond Aug. 7.”

The Bush administration blamed the deficit on the soft economy and the money that it spent sending “stimulus” checks to American taxpayers earlier this year. USA Today reminds readers;

“That deficit estimate could go even higher. It does not include the expected full cost of funding the wars in Iraq and Afghanistan or costs associated with the housing rescue measure Congress passed last week and President Bush signed into law Wednesday.”

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USA Today - Government announces plans to borrow billions

In a move with ironic undertones, the Treasury has turned to Wall Street investment bank Morgan Stanley for advice on how to deal with the technical insolvency of the GSEs. The Washington Post reports :

“The Treasury said on Tuesday it hired Morgan Stanley to advise it on whether housing finance giants Fannie Mae and Freddie Mac are adequately capitalized as the government tries to determine how it would use its new powers to support the two companies.

The Treasury said it has no immediate plans to provide support to Fannie Mae and Freddie Mac, the two largest U.S. providers of housing finance that together guarantee more than $5 trillion of mortgage assets, but wants to understand how it would use its new powers if needed.”

Morgan is one of the 19 financial institutions, along with Fannie Mae and Freddie Mac, that are protected under the temporary SEC emergency order against short selling. The same institutions are exempt from the order, meaning they could all short each other if they wanted to. The order was recently extended. The Post continues :

“The Treasury said Morgan Stanley won a competitive bid process to conduct a “sensitivity analysis” of the companies’ financial profiles and provide an assessment of appropriate capital structures for the two firms.

The Treasury acknowledged that the move by Treasury Secretary Henry Paulson, a former chief of Goldman Sachs, to hire a Wall Street firm for advice on stabilizing markets is an unusual occurrence.”

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Bloomberg reports that Paulson is stressing that he isn’t about to exercise his new authority at this time :

“’We have no plans to utilize the temporary authorities,” the Treasury said in a statement released in Washington. ‘This action should be interpreted as a prudent preparedness measure, and nothing more.’”

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Bad news is good news for Wachovia, as the fourth largest US bank tries to deftly skirt insolvency. CNN Money reports on Friday’s rally in Wachovia’s share price :

“Shares of Wachovia Corp. jumped Friday, one day after the ailing bank announced the planned departure of its chief risk officer.

Shares gained $1.57, or 9.1 percent, to $18.84 in afternoon trading. Shares are down 55 percent this year.

Wachovia said late Thursday that it will begin an immediate search for a replacement for Chief Risk Officer Donald Truslow, who plans to retire.

Truslow’s departure comes one week after the troubled bank announced the exit of its chief financial officer, and analysts suspect there are more executive changes to come under the new regime of Chief Executive Robert Steel.”

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Bloomberg put a slightly different spin on its coverage of the same story, divulging the poorly kept secret that Goldman Sachs might be positioning itself to “buy” Wachovia in a Fed- engineered shotgun marriage :

“Wachovia Corp. jumped to a seven-week high on renewed speculation that Goldman Sachs Group Inc. may bid for the fourth-largest U.S. bank.”

Bloomberg was able to find at least one analyst who would go on the record about the rumors driving the market :

‘The speculation is Goldman is buying Wachovia,’ said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $6 billion in San Antonio. ‘That’s why the stock is ripping.’”

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The FDIC’s Bank Failure Information page notified the public that the First Priority Bank, Bradenton, FL was closed today by the Florida Office of Financial Regulation and the Federal Deposit Insurance Corporation was named Receiver. First Priority is the eighth bank to fail so far this year.

First Priority Bank had $259 million in assets and $227 million in deposits and its failure will cost the federal fund that insures deposits an estimated $72 million, according to government regulators. SunTrust Banks has agreed to assume the insured deposits of First Priority. Depositors of the failed bank will automatically become depositors of SunTrust. First Priority’s six branches will reopen Monday as branches of SunTrust Bank.

The FDIC said, “Customers can access their money over the weekend by check, teller machine or debit card.”

Reuters notes;

It is the first bank to fail in Florida since Guaranty National Bank of Tallahassee failed in March 2004, according to the FDIC, which blamed the failure on exposure to the real estate market, predominantly in the construction lending area.

The FDIC reports that while $214 million in deposits will be protected by government insurance, “there were approximately $13 million in uninsured deposits held in approximately 840 accounts that potentially exceeded the insurance limits.”

As in the previous seven bank failures this year, the FDIC reminded depositors, “No advance notice is given to the public when a financial institution is closed” by the government.

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FDIC Failed Bank Information : First Priority Bank, Bradenton, FL
Reuters : Small Florida bank is 8th U.S. failure this year

The Federal Reserve has announced an array of additional emergency actions to address concerns about widespread insolvency in large US financial firms. The extraordinary nature of the Fed’s intervention indicates the gravity of the situation, even as the stock market rallies and some traders profit from the extreme volatility of the fianancials. The Times reports this morning :

“The US Federal Reserve unveiled a barrage of measures yesterday to lend stressed financial institutions more funds, and for longer periods, as it stepped up its drive to limit the fallout from America’s housing slump and the global credit crunch.

In a signal of concern over the still-fragile state of world financial markets, highlighted only two days ago by the IMF, the Fed expanded its emergency lending scheme for Wall Street investment banks for the fourth time in five months.”

The Fed will also work with the European Central Bank, in an attempt to alleviate pressures that the US economic collapse is putting on EU nations :

“With revived market strains also evident in Europe, the European Central Bank (ECB) and the Swiss National Bank announced joint action with the Fed. They are to auction dollar loans to European institutions for 84-day terms, in addition to 28-day loans already available. To facilitate that, the Fed said it would extend a dollar swap line with the ECB and the Swiss bank.”

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The Financial Times considers the larger implications of yesterday’s announcement for monetary policy, in an article headlined Big step for Fed after resisting calls for longer-term funds. The extension of the liquidity measures represents something of an about-face for Fed chairman Ben Bernanke :

“Yesterday’s further barrage of liquidity support measures from the Federal Reserve broadens its tools to include options on liquidity and extends the maximum term of its regular operations from one month to three.

This is a significant step for the US central bank, which had resisted calls to provide longer-term funds.

But in recent weeks there has been growing evidence that money market strains were increasing at longer durations. Officials may have seen benefit in providing additional reassurance on access to longer-term funds at a time of extraordinary volatility in bank stocks.”

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As expected, the SEC extended its emergency order protecting an elite group of 19 financial institutions from naked shorting, acting at the 11th hour after the markets closed yesterday. According to the Wall Street Journal :

“The Securities and Exchange Commission voted to extend the temporary rules it put in place to restrict short-selling of a handful of financial stocks.

The SEC commissioners didn’t take additional steps opposed by Wall Street to expand the number of stocks affected by the rules or make them permanent.

The temporary rules were set to expire Tuesday, and the SEC extended the order on the 19 stocks until Aug. 12. It won’t be extended beyond then.”

The Journal acknowledges that there is considerable consternation among larger banks that have been excluded from the emergency protection order, and that a major lobbying effort is underway to pressure the SEC to expand the protections and make them permanent :

“By extending the order in duration alone, the SEC has rejected calls from banking associations and at least one lawmaker to extend the protections to include shares of large and regional banks, whose stocks have also been battered.

Mr. Cox has indicated that the SEC may propose rules ‘very soon’ to extend the restrictions to all stocks that trade in the U.S. In its announcement of the extension, which came shortly after 9 p.m., the SEC said that following the Aug. 12 expiration, the agency ‘will proceed immediately to consideration of rulemaking which would become effective after public notice and comment’ and would focus on the ‘broader market.’”

Wall Street Journal : SEC Extends Short-Selling Rules

CNN Money : SEC Extends Emergency Short-Sale Order Thru August 12