The good news is that the FDIC payments to those organizations and institutions buying failed banks during the present crisis are smaller than the regulatory officials anticipated. The FDIC has paid out $8.89 billion to “cover losses” at 165 banking institutions that have failed during the recent financial crisis. (See Wall Street Journal article: http://professional.wsj.com/article/SB10001424052748704396504576204752754667840.html?mod=ITP_moneyandinvesting_0&mg=reno-wsj.)
The reason for this good news, I believe, is the monetary policy followed by the Federal Reserve over the past three years, now captured in the quaint symbol QE2. Excess reserves pumped into the banking system by the Fed now total around $1.3 trillion.
I have argued for at least a year-and-a-half now, that the Federal Reserve is pumping all these reserves into the banking system to help the FDIC close banks in an orderly manner. The basic premise is that if the Fed can provide sufficient “liquidity” to the financial markets in order to maintain the value of financial assets it wil give the FDIC breathing room to close banks as rapidly as they can without causing major disruptions to the many other troubled banks in the system.
The Federal Reserve has argued that it has pumped all these reserves into the banking system to help stimulate the economy. The economic recovery has almost reached its two-year anniversary, although there is general dissatisfaction with the speed of the recovery, and looks likely to extend beyond this milestone.
However, the recovery seems to have taken place without the Fed’s help except for the argument that there have not been further disruptions to the recovery due to major cumulative banking failures. Certainly, one cannot argue that the Fed’s actions have provided banks with the incentives to increase their lending activity for they have not. Commercial banks are still sitting on the money.
This is exactly my point! The policy of the Federal Reserve has been to support the FDIC and allow the FDIC to close insolvent banks in an orderly manner.
Thus, the monetary policy followed by the Federal Reserve over the past three years has succeeded.
Added evidence that the policy of the Federal Reserve has been successful is that reported above: the FDIC payments to those acquiring banks have been “smaller than FDIC officials anticipated.” Without the market liquidity, results would have been much worse.
The Wall Street Journal even reports: “Some executives at U. S. banks that bought failed institutions using the FDIC lifeline agreed that losses on the troubled loans aren’t piling up as high or as fast as they previously anticipated.”
The bad news?
“FDIC officials expect to make an additional $21.5 billion in payments from 2011 to 2014. More than half of that total is predicted for this year, followed by an estimated $6 billion in loss-share reimbursements in 2012, according to the agency.”
According to my calculations, $21.5 billion is almost two-and-one-half times the $8.89 billion the FDIC has already paid out during this cycle of bank failures!
This would bring the total of FDIC payments up to more than $30 billion!
It also seems to mean that we have a lot of bank failures that still have to be resolved!
The banking system now has less than 8,000 banks in it. Over the past year or so, I have argued that this number will drop to less than 4,000 by 2015.
I see nothing inconsistent between my forecast about the number of banks that will be in the banking system and the estimates made by the FDIC, itself, concerning the amount of payments it will need to make to those that acquire banks to cover loan losses.
Bottom line: there are still a massive amount of bad loans that still reside on the balance sheets of commercial banks!
Consequently, there are still a lot of commercial banks that need to be closed!
And, what does this mean for the Fed and QE2? The Fed claimed on Tuesday that the economic recovery is picking up. However, QE2 will need to continue, as planned, through June. Also, the Fed will maintain its interest rate targets at current levels for “an extended period”. NO CHANGE IN MONETARY POLICY!
If I am correct the Fed will only change its monetary policy when it…and the FDIC…believe that problems connected with bank closings have receded sufficiently so that more normal operations can be resumed.
Since the Fed…and the FDIC…have never claimed that the excessively loose monetary policy over the past few years has been to assist the regulatory closing of commercial banks, any statements about changing policy will not be worded in a way that ties the policy with the closing of banks.
Maybe it has been just as well for us…that we have not really known how bad off the banking system has been. But, so much for openness and transparency.
Showing posts with label bank consolidation. Show all posts
Showing posts with label bank consolidation. Show all posts
Thursday, March 17, 2011
Monday, January 3, 2011
What to Watch For in Early 2011
There are four situations in the financial area that require special attention in, at least, the early part of 2011. These situations pertain to the European debt problem, both sovereign and corporate, the problems being experienced by state and municipal governments in the United States, the problems connected with the rolling over of commercial real estate loans, and the consolidation that is taking place in the United States banking system.
The European situation seems to be the first out-of-the-box for the new year. Although most of the attention on Europe has been focused on the sovereign debt problem, the potential for problems to arise in the corporate sector should not be overlooked.
Europe cannot put its debt problems behind it because its leaders are not really facing up to the real problem. The real problem relates to the fiscal integration of the countries within the European Union.
As I have stated many times over the past year, a region cannot have just one currency if capital flows within the region are not restricted and if the political entities within the union continue to conduct their fiscal policies independently of one another. The European Union cannot be successful over time if it tries to maintain all three of these objectives.
Simon Johnson in “The Baseline Scenario” states that “Most experienced watchers of the eurozone are expecting another serious crisis to break out in early 2011. This projected crisis is tied to the rollover funding needs of weaker eurozone governments…” A solution will not be reached until the leaders of the European Union really face the fundamental facts of their crisis.
But, the sovereign debt of Europe is not the only concern. Although the corporate sector has been relatively successful in staying out of the limelight, concern is rising over what might happen here in 2011 if there are spillover effects coming from the “sovereign” sector. Especially worrisome is the amount of speculative-grade bonds maturing in the future and the potential number of defaults connected with the roll-overs. (See “Gearing up for 2011,” http://www.ft.com/cms/s/3/4b13a710-1363-11e0-a367-00144feabdc0.html#axzz19ypGKK7a.)
The second uncomfortable situation that is looming over 2011 is the fiscal soundness of many states and municipalities in the United States. Almost daily, new information comes out about the condition of our state and municipal governments, the cutbacks in police, firemen, educators, and social workers, the un-funded pension funds, and the labor unrest that is stirring because of the changes being proposed.
Bankruptcy is an issue. In some states, the bankruptcy of a municipality is unrecognized. For example, the situation in Hamtramck, Michigan is extremely bad, yet, the state of Michigan will not let the city declare bankruptcy. (See http://www.freep.com/article/20101205/NEWS02/12050500/Hamtramck-can-t-declare-bankruptcy-state-says.) Harrisburg, Pennsylvania and a host of other municipalities are just plugging holes attempting to avoid the worst.
But, many states are not doing much better.
And, the unrest in these areas continues to grow. However, this unrest is not just associated with the citizens losing services, the unrest is connected with the workers and the unions that are losing jobs and benefits. More than 50% of the union workers in the United States are in state and local governments so the potential conflicts with budget needs can be substantial. But, the times may be changing: “In California, New York, Michigan, and New Jersey, states where public unions wield much power and the culture historically tends to be pro-labor, even longtime liberal political leaders have demanded concessions—wage freezes, benefit cuts and tougher work rules.” (See http://www.nytimes.com/2011/01/02/business/02showdown.html?_r=1&scp=1&sq=public%20workers%20facing%20outrate%20in%20budget%20crisis&st=cse.)
Commercial real estate is another potential disaster area. For twelve months or more, commercial real estate loans have been on the list of major looming problems, in Europe as well as the United States. Yet, a crisis never seems to occur. One reason is that “banks on both sides of the Atlantic have been ‘ever-greening’ loans—or essentially extending the maturities, and practicing forbearance to avoid recognizing losses.” (See Gillian Tett, “Commercial Property Loans Pose New Threat”, http://www.ft.com/cms/s/0/c23e885e-1422-11e0-a21b-00144feabdc0.html#axzz19yRTp3ed.)
“Banks and borrowers have been able to conduct such ever-greening because interest rates have been rock-bottom low. But if rates rise, this ever-greening will be harder to maintain.”
Tett concludes with something we all need to keep in mind: “while a sense of peace might have returned to parts of the financial system in the past two years, this has only been achieved by virtue of government aid—and rock-bottom interest rates.”
As I have said over and over again, Federal Reserve policy has been aimed at achieving “a sense of peace” so that banks and others could work out of their debt problems: so that the FDIC could close banks in as quiet an environment as possible. And, some participants believe that the reduction in the size of the banking system will still be in the 1,000s over the next four or five years.
The question remains: has deleveraging taken place by a significant enough amount so that we can declare the bank crisis over?
The first three situations described above indicate that the deleveraging still has a ways to go and that as this deleveraging takes place the banks, in both the United States and Europe, could face further stress. There is certainly concern “out there” that the problems in the banking sector are not over. See, for example “Banks Pushed Together in a Wave of Deals,” http://professional.wsj.com/article/SB10001424052748704774604576035732836200772.html?mod=ITP_moneyandinvesting_0&mg=reno-wsj, and “Bailed-Out Banks Slip Toward Failure,” http://professional.wsj.com/article/SB10001424052970203568004576044014219791114.html?mod=ITP_moneyandinvesting_0&mg=reno-wsj.
In terms of closing banks in an orderly fashion, another problem has existed: the FDIC has just not had the resources to act as quickly as needed to fully deal with those banks that are seriously facing financial difficulties. Thus, even in troubled banks, “ever-greening” is a methodology for keeping the doors open because this buys time and “who knows what might happen” if a bank can keep open. “There’s just not enough manpower and coordination to catch all these failing institutions at once.” For more on this see “Hard Call for FDIC: When to Shut Bank,” http://professional.wsj.com/article/SB10001424052970204685004576045912789516274.html.
I am not saying that it is a sure thing that we will face eruptions in these four areas in 2011. And, I am not saying that these four situations are the only ones to be looking at during the year. It is just that the problems that exist in these four areas have not been resolved and will have to be resolved at some time in the future for the economic recovery to really pick up steam. The interesting times are not over.
The European situation seems to be the first out-of-the-box for the new year. Although most of the attention on Europe has been focused on the sovereign debt problem, the potential for problems to arise in the corporate sector should not be overlooked.
Europe cannot put its debt problems behind it because its leaders are not really facing up to the real problem. The real problem relates to the fiscal integration of the countries within the European Union.
As I have stated many times over the past year, a region cannot have just one currency if capital flows within the region are not restricted and if the political entities within the union continue to conduct their fiscal policies independently of one another. The European Union cannot be successful over time if it tries to maintain all three of these objectives.
Simon Johnson in “The Baseline Scenario” states that “Most experienced watchers of the eurozone are expecting another serious crisis to break out in early 2011. This projected crisis is tied to the rollover funding needs of weaker eurozone governments…” A solution will not be reached until the leaders of the European Union really face the fundamental facts of their crisis.
But, the sovereign debt of Europe is not the only concern. Although the corporate sector has been relatively successful in staying out of the limelight, concern is rising over what might happen here in 2011 if there are spillover effects coming from the “sovereign” sector. Especially worrisome is the amount of speculative-grade bonds maturing in the future and the potential number of defaults connected with the roll-overs. (See “Gearing up for 2011,” http://www.ft.com/cms/s/3/4b13a710-1363-11e0-a367-00144feabdc0.html#axzz19ypGKK7a.)
The second uncomfortable situation that is looming over 2011 is the fiscal soundness of many states and municipalities in the United States. Almost daily, new information comes out about the condition of our state and municipal governments, the cutbacks in police, firemen, educators, and social workers, the un-funded pension funds, and the labor unrest that is stirring because of the changes being proposed.
Bankruptcy is an issue. In some states, the bankruptcy of a municipality is unrecognized. For example, the situation in Hamtramck, Michigan is extremely bad, yet, the state of Michigan will not let the city declare bankruptcy. (See http://www.freep.com/article/20101205/NEWS02/12050500/Hamtramck-can-t-declare-bankruptcy-state-says.) Harrisburg, Pennsylvania and a host of other municipalities are just plugging holes attempting to avoid the worst.
But, many states are not doing much better.
And, the unrest in these areas continues to grow. However, this unrest is not just associated with the citizens losing services, the unrest is connected with the workers and the unions that are losing jobs and benefits. More than 50% of the union workers in the United States are in state and local governments so the potential conflicts with budget needs can be substantial. But, the times may be changing: “In California, New York, Michigan, and New Jersey, states where public unions wield much power and the culture historically tends to be pro-labor, even longtime liberal political leaders have demanded concessions—wage freezes, benefit cuts and tougher work rules.” (See http://www.nytimes.com/2011/01/02/business/02showdown.html?_r=1&scp=1&sq=public%20workers%20facing%20outrate%20in%20budget%20crisis&st=cse.)
Commercial real estate is another potential disaster area. For twelve months or more, commercial real estate loans have been on the list of major looming problems, in Europe as well as the United States. Yet, a crisis never seems to occur. One reason is that “banks on both sides of the Atlantic have been ‘ever-greening’ loans—or essentially extending the maturities, and practicing forbearance to avoid recognizing losses.” (See Gillian Tett, “Commercial Property Loans Pose New Threat”, http://www.ft.com/cms/s/0/c23e885e-1422-11e0-a21b-00144feabdc0.html#axzz19yRTp3ed.)
“Banks and borrowers have been able to conduct such ever-greening because interest rates have been rock-bottom low. But if rates rise, this ever-greening will be harder to maintain.”
Tett concludes with something we all need to keep in mind: “while a sense of peace might have returned to parts of the financial system in the past two years, this has only been achieved by virtue of government aid—and rock-bottom interest rates.”
As I have said over and over again, Federal Reserve policy has been aimed at achieving “a sense of peace” so that banks and others could work out of their debt problems: so that the FDIC could close banks in as quiet an environment as possible. And, some participants believe that the reduction in the size of the banking system will still be in the 1,000s over the next four or five years.
The question remains: has deleveraging taken place by a significant enough amount so that we can declare the bank crisis over?
The first three situations described above indicate that the deleveraging still has a ways to go and that as this deleveraging takes place the banks, in both the United States and Europe, could face further stress. There is certainly concern “out there” that the problems in the banking sector are not over. See, for example “Banks Pushed Together in a Wave of Deals,” http://professional.wsj.com/article/SB10001424052748704774604576035732836200772.html?mod=ITP_moneyandinvesting_0&mg=reno-wsj, and “Bailed-Out Banks Slip Toward Failure,” http://professional.wsj.com/article/SB10001424052970203568004576044014219791114.html?mod=ITP_moneyandinvesting_0&mg=reno-wsj.
In terms of closing banks in an orderly fashion, another problem has existed: the FDIC has just not had the resources to act as quickly as needed to fully deal with those banks that are seriously facing financial difficulties. Thus, even in troubled banks, “ever-greening” is a methodology for keeping the doors open because this buys time and “who knows what might happen” if a bank can keep open. “There’s just not enough manpower and coordination to catch all these failing institutions at once.” For more on this see “Hard Call for FDIC: When to Shut Bank,” http://professional.wsj.com/article/SB10001424052970204685004576045912789516274.html.
I am not saying that it is a sure thing that we will face eruptions in these four areas in 2011. And, I am not saying that these four situations are the only ones to be looking at during the year. It is just that the problems that exist in these four areas have not been resolved and will have to be resolved at some time in the future for the economic recovery to really pick up steam. The interesting times are not over.
Friday, July 9, 2010
Market Volatiltiy is Not Bad: Its the Better Alternative
Last week the United States stock markets dropped dramatically…the Dow Jones Index fell significantly below 10,000. This week the same markets are up sharply…the Dow Jones closed yesterday at almost 10,140.
Most financial markets this year have been especially volatile. All measures of volatility have risen. Yet, the world goes on!
When the markets are down, gloom pervades the scene and fears of a double dip recession or a drop back into economic depression flood media outlets. When the markets are up, optimism about the economic recovery increases.
Yet, this volatility is the better alternative to a financial market collapse which has been avoided this year, up to this point.
Where does this leave us?
What I have tried to convey in my recent posts is that economic conditions, in general, are improving but that there are a lot of problems that have not been fully resolved at this point. In essence, things are getting better but we are not “out-of-the-woods” yet.
On what do I base this conclusion?
At this point in time I see a lot of people trying to work out the problems that exist. Where the problems are identified and “owned” the process of resolution goes forward. When people fail to accept the fact that problems exist and deny that anything needs to be done to correct them, the road gets bumpy and further market problems ensue.
A case in point is the European crisis that took place earlier this year. Denying that a problem existed in the financial position of several European governments only exacerbated the situation and led to substantial financial turmoil. A cloud still hangs over the European Union with respect to the bank stress tests that are now going on. It took a major effort to make these tests a reality, but now the whole process is cloaked in a secrecy that only creates more fear and concern. When will people learn that opaqueness does not breed confidence?
As I have written before, “quiet” is good. That is, financial markets do not like surprises or the fear of surprises. Problems may exist, but if it appears as if people recognize that problems exist, if people are working hard to identify the problems, and if people are applying resources to correct the problems, the world goes along.
In such an environment there will be bad news from time-to-time, just as there will be good news. The financial markets, however, do not like news that falls outside the bounds of what is expected. In this respect, market participants are on the alert for “surprises”, especially “bad” surprises, pieces of information that indicate that things are worse than they had expected.
At times like the present, financial markets are particularly sensitive to bits of news that might point to “bad” outcomes.
The problem with “bad” outcomes is that they may cause people to discard their previous expectations. The danger is that the destruction of expectations may be so severe that people stop trading until they are able to re-construct expectations that they are willing to trade on. A time period in which people stop trading is a “liquidity crisis” and is usually connected with the breakdown of market expectations due to a “surprise” that shakes the market.
Many believe that European leaders risked such a consequence in their response to the financial market disruptions that took place earlier this year.
So what we want is a period of relatively “quiet” economic activity so that the problems that exist within the economy can be worked out. There is no arguing against the fact that there are still a lot of problems areas in the world today. That is why there is so much volatility in the financial markets. With so many problems still in existence, there are still many, many possibilities that new “surprises” may be discovered. Market participants have a right to be jittery.
In my mind, additional governmental stimulus programs will not correct this situation. More spending stimulus from the government, if it has any effect, will only work to postpone the resolution of currently existing problems. These problems must be worked out or they will just carry over to the next period of financial distress.
In fact, I have argued that this is what has happened over the past fifty years or so as governments have tried to stimulate economic activity in order to avoid excessive amounts of unemployed labor. The result of this activity, however, has been excessive amounts of under-employed labor as well as unemployed labor. (See my post, “Jobs and Skills: The Current Mismatch,” http://seekingalpha.com/article/213163-jobs-and-skills-the-current-mismatch.)
Government efforts to achieve “quiet” results are apparent in the banking industry. Big banks do not seem to be the major problem: problems do seem to exist among the “less-than-big” banks. Both the Federal Reserve System and the Federal Deposit Insurance System are working to provide an environment in which these problems may be worked out in an orderly fashion.
First, the Federal Reserve has provided for a massive infusion of liquidity into the banking system by keeping its target interest rate near zero and allowing for about $1.0 trillion to remain on bank balance sheets as excess reserves. In additions, the FDIC has instituted a systematic process to close problem banks and to encourage a change in control of many other banks short of capital.
The result has been a steady handling of the problems in the banking system with no surprises. At least, no surprises up to this point in time. This is good…very good!
And, what do we see happening? People are seeing opportunities popping up in these “smaller” banks. (See my post from yesterday http://seekingalpha.com/article/213630-are-smaller-banks-a-good-investment, but also today from the Wall Street Journal, “Wilbur Ross’s N. J. Bank Play,” http://online.wsj.com/article/SB20001424052748703609004575355031598784308.html?mod=ITP_moneyandinvesting_2.)
Problems are also being worked out in the economy as a whole. However, this “work out” process takes time and since it took about 50 years for the United States to get into the position it now finds itself in, things are not going to right themselves overnight. Impatience, like further short run fiscal stimulus plans, will not correct the situation because they work “against” the healthy correction of the economy, they do not work “with” the natural flow of activity. There are ways the government can work “with” the correction, but these also require patience for they have to do with re-training, education, innovation and a changing structure of incentives.
Volatility comes with the territory we now occupy. Volatility comes with the release of bad news and good news on the economy, government finances, and company performances. The volatility comes because people are still trying to understand what is going on and whether or not expectations are going to be met. However, knowing that people accept the problems and are working to correct them creates an environment that is more conducive to trust than the failure to acknowledge the fact that problems might exist. Even in hard times, knowledge is better than ignorance…or foolishness.
Most financial markets this year have been especially volatile. All measures of volatility have risen. Yet, the world goes on!
When the markets are down, gloom pervades the scene and fears of a double dip recession or a drop back into economic depression flood media outlets. When the markets are up, optimism about the economic recovery increases.
Yet, this volatility is the better alternative to a financial market collapse which has been avoided this year, up to this point.
Where does this leave us?
What I have tried to convey in my recent posts is that economic conditions, in general, are improving but that there are a lot of problems that have not been fully resolved at this point. In essence, things are getting better but we are not “out-of-the-woods” yet.
On what do I base this conclusion?
At this point in time I see a lot of people trying to work out the problems that exist. Where the problems are identified and “owned” the process of resolution goes forward. When people fail to accept the fact that problems exist and deny that anything needs to be done to correct them, the road gets bumpy and further market problems ensue.
A case in point is the European crisis that took place earlier this year. Denying that a problem existed in the financial position of several European governments only exacerbated the situation and led to substantial financial turmoil. A cloud still hangs over the European Union with respect to the bank stress tests that are now going on. It took a major effort to make these tests a reality, but now the whole process is cloaked in a secrecy that only creates more fear and concern. When will people learn that opaqueness does not breed confidence?
As I have written before, “quiet” is good. That is, financial markets do not like surprises or the fear of surprises. Problems may exist, but if it appears as if people recognize that problems exist, if people are working hard to identify the problems, and if people are applying resources to correct the problems, the world goes along.
In such an environment there will be bad news from time-to-time, just as there will be good news. The financial markets, however, do not like news that falls outside the bounds of what is expected. In this respect, market participants are on the alert for “surprises”, especially “bad” surprises, pieces of information that indicate that things are worse than they had expected.
At times like the present, financial markets are particularly sensitive to bits of news that might point to “bad” outcomes.
The problem with “bad” outcomes is that they may cause people to discard their previous expectations. The danger is that the destruction of expectations may be so severe that people stop trading until they are able to re-construct expectations that they are willing to trade on. A time period in which people stop trading is a “liquidity crisis” and is usually connected with the breakdown of market expectations due to a “surprise” that shakes the market.
Many believe that European leaders risked such a consequence in their response to the financial market disruptions that took place earlier this year.
So what we want is a period of relatively “quiet” economic activity so that the problems that exist within the economy can be worked out. There is no arguing against the fact that there are still a lot of problems areas in the world today. That is why there is so much volatility in the financial markets. With so many problems still in existence, there are still many, many possibilities that new “surprises” may be discovered. Market participants have a right to be jittery.
In my mind, additional governmental stimulus programs will not correct this situation. More spending stimulus from the government, if it has any effect, will only work to postpone the resolution of currently existing problems. These problems must be worked out or they will just carry over to the next period of financial distress.
In fact, I have argued that this is what has happened over the past fifty years or so as governments have tried to stimulate economic activity in order to avoid excessive amounts of unemployed labor. The result of this activity, however, has been excessive amounts of under-employed labor as well as unemployed labor. (See my post, “Jobs and Skills: The Current Mismatch,” http://seekingalpha.com/article/213163-jobs-and-skills-the-current-mismatch.)
Government efforts to achieve “quiet” results are apparent in the banking industry. Big banks do not seem to be the major problem: problems do seem to exist among the “less-than-big” banks. Both the Federal Reserve System and the Federal Deposit Insurance System are working to provide an environment in which these problems may be worked out in an orderly fashion.
First, the Federal Reserve has provided for a massive infusion of liquidity into the banking system by keeping its target interest rate near zero and allowing for about $1.0 trillion to remain on bank balance sheets as excess reserves. In additions, the FDIC has instituted a systematic process to close problem banks and to encourage a change in control of many other banks short of capital.
The result has been a steady handling of the problems in the banking system with no surprises. At least, no surprises up to this point in time. This is good…very good!
And, what do we see happening? People are seeing opportunities popping up in these “smaller” banks. (See my post from yesterday http://seekingalpha.com/article/213630-are-smaller-banks-a-good-investment, but also today from the Wall Street Journal, “Wilbur Ross’s N. J. Bank Play,” http://online.wsj.com/article/SB20001424052748703609004575355031598784308.html?mod=ITP_moneyandinvesting_2.)
Problems are also being worked out in the economy as a whole. However, this “work out” process takes time and since it took about 50 years for the United States to get into the position it now finds itself in, things are not going to right themselves overnight. Impatience, like further short run fiscal stimulus plans, will not correct the situation because they work “against” the healthy correction of the economy, they do not work “with” the natural flow of activity. There are ways the government can work “with” the correction, but these also require patience for they have to do with re-training, education, innovation and a changing structure of incentives.
Volatility comes with the territory we now occupy. Volatility comes with the release of bad news and good news on the economy, government finances, and company performances. The volatility comes because people are still trying to understand what is going on and whether or not expectations are going to be met. However, knowing that people accept the problems and are working to correct them creates an environment that is more conducive to trust than the failure to acknowledge the fact that problems might exist. Even in hard times, knowledge is better than ignorance…or foolishness.
Thursday, July 8, 2010
Are Smaller Banks a Good Investment?
The general picture I have been drawing of the banking industry is as follows: big banks are doing well; banks that are not big are not doing so well.
Who do I consider to be the big banks?
The big banks are the largest twenty-five domestically chartered banks in the United States and these banks hold two-thirds of the banking assets in the country. These banks, as a group, are doing very well.
The not-big banks are all the rest, some 8,000 domestically chartered banks that hold approximately one-third of the banking assets in the United States. These banks are not doing so well.
The evidence of the condition of these not-big banks is that the Federal Reserve is keeping its target rate of interest at 25 basis points or below and has pumped around $1.0 trillion in excess reserves into the banking system. The FDIC has approximately one out of every eight banks in the country on its problem bank list and is closing three to four banks, on average, every week. It is expected to continue at this pace for another 12 months or so.
Commercial banks are not making loans and this is true of the not-big banks as well as the big banks. In the not-big banks the problem seems to be dealing with the bad assets they have on their balance sheets rather than just an absence of potential borrowers.
Yet, within this environment, we hear and read about people, funds, or groups buying up the smaller banks and attempting to consolidate them into viable and vibrant regional banks…and possibly more. The New York Times on July 8ran an article on just this type of activity: “Financier Invests in a New Jersey Bank”, http://www.nytimes.com/2010/07/08/business/08bank.html?_r=1&ref=todayspaper.
Does this make sense?
My answer to this is “Yes, it does make a lot of sense!”
The New York Times article is about Wilbur L. Ross, Jr. who is expected to announce the purchase of a stake in the New Jersey banking company Sun Bancorp, an organization that has around $3.5 billion in assets.
Mr. Ross, according to the article, has predicted that “hundreds of the nation’s troubled banks will fail” and that there will be a substantial consolidation of the banking industry over the next few years. In earlier posts, I have also argued that the banking system, now at 8,000 banks, will consolidate, dropping to a total of no more than 5,000 banks in the next five years, maybe even a lot fewer.
Ross, who has already acquired banks in Florida and Michigan, stated that this acquisition could be the first of many he acquires in New Jersey.
“The next 18 banks in size (in New Jersey) after this one (Sun), together, have around $5 billion in deposits, and there’s another 100-some-odd banks that, in total have $40 billion in deposits.” Ross argues that “That’s just way too many banks for one state to have.”
The financial industry is changing. The largest twenty-five commercial banks in the country are going to be one thing. I believe that these banks will move from about two-thirds of the banking assets in the country to about three-fourths. They will be an entirely different animal of their own making. I have written many posts on what these banks might become in the Information Age.
The other one-fourth of the banking assets in the country will be in banks that are larger than the average not-big banks that now exist, but will be more “client-first” banks, banks that are more relationship based like the outstanding banks we knew in the past.
Certainly, these banks will change because they, too, are a part of the Information Age. However, they will not be the diversified financial giants inhabiting the territory of the largest twenty five big banks. But, this change to incorporate the technology of the Information Age will alter these smaller banks in a fundament, yet different way. More on these changes in future posts.
Aside: It is interesting that a new biography is just currently hitting the book stores, one that deals with an “old fashioned” banker who emphasized, successfully, doing business in the traditional way. See “High Financier” The Lives and Time of Siegmund Warburg” by Niall Ferguson. Yes, this is the Niall Ferguson that wrote “The Ascent of Money.”
I believe that there exists a tremendous opportunity in the restructuring that is currently taking place in the banking industry. Of course, one must not rush into these “deals” hastily for there are many problems that still exist within the industry. Remember, that is a major reason that the Federal Reserve is keeping interest rates so low. Also, there is the change in financial regulations that are currently being written in Washington, D. C.
Still, there is a major restructuring taking place in the banking industry and when such a restructuring takes place in an industry, opportunities abound. This is a chance to get in on the ground level with the “new” relations-based commercial banking platform. It is a chance to be a part of the new “Information Age” banking organization. And, to me, this restructuring is going to take place through the consolidation of existing banks so as to achieve the appropriate scale and geographic distribution of offices.
The consolidation of banks will not be achieved over night because of the time and energy it takes to put organizations together. Furthermore, many of the consolidating banks will have problems, these banking assets must be “turned around” as well as combined and this will take time and energy. But, it can be done.
Furthermore, these banks need to be “conservatively” run. That is, in my mind, the new banking rules and regulations will not be an impediment to success. I have been a part of three “turnarounds” myself, two as a CEO and one as a CFO, and have raised millions in capital. I always wanted these banks to have policies and procedures that were stricter than those imposed by the bank regulators because I did not want regulators to have a say in the decisions of the bank. Even within this “conservative” requirement, the banks were “turned around” and achieved attractive returns. This can also be achieved within the current environment.
Smaller banks can be a good investment and an organization intent upon building a 21st century, client-based commercial bank through the consolidation of these smaller banks, I believe, can be quite successful. This is certainly an area to keep an eye on.
Disclosure: I am now a board member of a startup organization, e3bank, attempting to build a 21st century, client-based bank. More information can be found on this bank at http://www.e3bank.com/.
Who do I consider to be the big banks?
The big banks are the largest twenty-five domestically chartered banks in the United States and these banks hold two-thirds of the banking assets in the country. These banks, as a group, are doing very well.
The not-big banks are all the rest, some 8,000 domestically chartered banks that hold approximately one-third of the banking assets in the United States. These banks are not doing so well.
The evidence of the condition of these not-big banks is that the Federal Reserve is keeping its target rate of interest at 25 basis points or below and has pumped around $1.0 trillion in excess reserves into the banking system. The FDIC has approximately one out of every eight banks in the country on its problem bank list and is closing three to four banks, on average, every week. It is expected to continue at this pace for another 12 months or so.
Commercial banks are not making loans and this is true of the not-big banks as well as the big banks. In the not-big banks the problem seems to be dealing with the bad assets they have on their balance sheets rather than just an absence of potential borrowers.
Yet, within this environment, we hear and read about people, funds, or groups buying up the smaller banks and attempting to consolidate them into viable and vibrant regional banks…and possibly more. The New York Times on July 8ran an article on just this type of activity: “Financier Invests in a New Jersey Bank”, http://www.nytimes.com/2010/07/08/business/08bank.html?_r=1&ref=todayspaper.
Does this make sense?
My answer to this is “Yes, it does make a lot of sense!”
The New York Times article is about Wilbur L. Ross, Jr. who is expected to announce the purchase of a stake in the New Jersey banking company Sun Bancorp, an organization that has around $3.5 billion in assets.
Mr. Ross, according to the article, has predicted that “hundreds of the nation’s troubled banks will fail” and that there will be a substantial consolidation of the banking industry over the next few years. In earlier posts, I have also argued that the banking system, now at 8,000 banks, will consolidate, dropping to a total of no more than 5,000 banks in the next five years, maybe even a lot fewer.
Ross, who has already acquired banks in Florida and Michigan, stated that this acquisition could be the first of many he acquires in New Jersey.
“The next 18 banks in size (in New Jersey) after this one (Sun), together, have around $5 billion in deposits, and there’s another 100-some-odd banks that, in total have $40 billion in deposits.” Ross argues that “That’s just way too many banks for one state to have.”
The financial industry is changing. The largest twenty-five commercial banks in the country are going to be one thing. I believe that these banks will move from about two-thirds of the banking assets in the country to about three-fourths. They will be an entirely different animal of their own making. I have written many posts on what these banks might become in the Information Age.
The other one-fourth of the banking assets in the country will be in banks that are larger than the average not-big banks that now exist, but will be more “client-first” banks, banks that are more relationship based like the outstanding banks we knew in the past.
Certainly, these banks will change because they, too, are a part of the Information Age. However, they will not be the diversified financial giants inhabiting the territory of the largest twenty five big banks. But, this change to incorporate the technology of the Information Age will alter these smaller banks in a fundament, yet different way. More on these changes in future posts.
Aside: It is interesting that a new biography is just currently hitting the book stores, one that deals with an “old fashioned” banker who emphasized, successfully, doing business in the traditional way. See “High Financier” The Lives and Time of Siegmund Warburg” by Niall Ferguson. Yes, this is the Niall Ferguson that wrote “The Ascent of Money.”
I believe that there exists a tremendous opportunity in the restructuring that is currently taking place in the banking industry. Of course, one must not rush into these “deals” hastily for there are many problems that still exist within the industry. Remember, that is a major reason that the Federal Reserve is keeping interest rates so low. Also, there is the change in financial regulations that are currently being written in Washington, D. C.
Still, there is a major restructuring taking place in the banking industry and when such a restructuring takes place in an industry, opportunities abound. This is a chance to get in on the ground level with the “new” relations-based commercial banking platform. It is a chance to be a part of the new “Information Age” banking organization. And, to me, this restructuring is going to take place through the consolidation of existing banks so as to achieve the appropriate scale and geographic distribution of offices.
The consolidation of banks will not be achieved over night because of the time and energy it takes to put organizations together. Furthermore, many of the consolidating banks will have problems, these banking assets must be “turned around” as well as combined and this will take time and energy. But, it can be done.
Furthermore, these banks need to be “conservatively” run. That is, in my mind, the new banking rules and regulations will not be an impediment to success. I have been a part of three “turnarounds” myself, two as a CEO and one as a CFO, and have raised millions in capital. I always wanted these banks to have policies and procedures that were stricter than those imposed by the bank regulators because I did not want regulators to have a say in the decisions of the bank. Even within this “conservative” requirement, the banks were “turned around” and achieved attractive returns. This can also be achieved within the current environment.
Smaller banks can be a good investment and an organization intent upon building a 21st century, client-based commercial bank through the consolidation of these smaller banks, I believe, can be quite successful. This is certainly an area to keep an eye on.
Disclosure: I am now a board member of a startup organization, e3bank, attempting to build a 21st century, client-based bank. More information can be found on this bank at http://www.e3bank.com/.
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