'Financial Services' Archive
We all know that 2008 has been a tough year for banks. But forget the heavy real estate- and mortgage-related losses endured by the big boys; entire institutions are going under. Eight have failed so far this year, and four have been taken over by the FDIC in the last month alone. By comparison, only three banks failed in all of 2007, and none did in 2005 or 2006.
The latest was small Florida-based First Priority Bank, which fell into receivership on Friday. Superregional SunTrust Banks assumed control of First Priority’s six branches and some $200 million in customer deposits. The week before, California’s First Heritage Bank and First National Bank of Nevada were closed by the Office of the Comptroller of the Currency, and Mutual of Omaha took over the banks’ deposits. The most spectacular collapse this year, of course, was IndyMac Bancorp, which was seized by the FDIC on July 11 and filed for Chapter 7 bankruptcy on Friday. It is the third-largest bank failure in US history.
So what happens when the FDIC steps in? It usually does so on a Friday, so it can take care of business over the weekend, and gives no advance notice, as to not incite panic and a run on the bank. Customers with FDIC-insured deposits (up to $100,000) usually can access their accounts as normal (by check, ATM or debit card, or online), or at a branch when the bank reopens on the following Monday, either under FDIC supervision or by an acquiring bank.
We surely have not seen the last of the bank failures. Indeed, the man who some think shoulders some of the blame for the current mess says there are more to come. The FDIC maintains a watch list of around 90 banks that it deems “troubled”. It doesn’t share its list with the public, for obvious reasons, though some analysts have their own opinions about which banks may be included. Most are small institutions, similar in scale to First Priority.
Of course, with everyone so skittish, naming names can get one in trouble too. Ladenburg Thalmann financial services analyst Richard X. “Dick” Bove was sued by BankAtlantic for suggesting that the bank and its parent company BFC Financial could be next to go under.
The auto industry suffered another setback recently when several finance companies, some tied to automakers, others among the biggest names in lending, said they would get out of the lease financing business.
It turns out that lenders were having trouble selling previously leased vehicles when their leases were up. High gas prices and a generally weak economy were fingered as the culprits. So what had once been a fairly lucrative business was hit by the malaise Americans are feeling due to higher gas prices, higher grocery bills, and other pains in the wallet.
Chrysler started the run of bad news when it said that its financial unit would get out of the leasing business entirely. In response, JPMorgan Chase subsidiary Chase Auto Finance basically said, “Hey, don’t look at us.” The company announced it would not take on any new leasing business from Chrysler dealers.
Wells Fargo Auto Finance also exited the business, citing low volume in its quarterly earning press release. Ford Motor Credit tried a different approach — it raised the prices on its leases, presumably to discourage prospective customers and encourage them to buy instead.
The bad news kept on coming, as GMAC Financial Services attributed a nearly $2.5 billion loss for the second quarter in large part to its auto leasing operations.
Leasing won’t go away forever, but customers who love the idea of driving a new car every few years might have to wait til the market comes back. Either that, or get some of that spray stuff.
Banks are desperate to move CDOs, those dangerous collateralized debt obligations that are backed by subprime mortgages, off their books. The problem is, who is brave, or stupid, enough to buy them?
In Merrill Lynch ’s case, that would be Lone Star Funds. But Lone Star was far from stupid — they agreed to the deal because Merrill Lynch funded most of the transaction. Lone Star Funds is buying the CDOs for $6.7 billion, and Merrill is financing the purchase up to $5 billion. It’s better than being on the hook for the estimated $11 billion that Merrill Lynch says the investments are still worth — a dubious estimate at best, since for all intents and purposes, the CDOs are worthless. Merrill Lynch is basically paying Lone Star to take them off its hands and its books. It originally valued the package at $30 billion (it’s hard to tell if that’s what it paid for the investments, since none of these figures are crystal clear).
What is Lone Star going to do with this hot potato? The company is no stranger to distressed assets. Those are its bread and butter. Maybe it’s hoping that the government’s bailout of Freddie and Fannie and the homeowner relief plan will stabilize the underlying mortgages and it won’t be left holding the bag. Most likely they will be collecting on the underlying debt. (Hey, it might just be a few pennies on the dollar, but after a while, it adds up.)
In the meantime Merrill Lynch still hasn’t extricated itself from these investments, it’s just moved them from one column to another. It’s a good move and a necessary one, but as the company is finding out, that’s one sticky hot potato.
The drumbeat of bad news continues for Wachovia, the fourth largest bank in the US. New CEO Bob Steel, the former undersecretary of the US Treasury who joined the company two weeks ago, certainly has his work cut out for him. The company announced Tuesday that it posted losses of nearly $9 billion in the second quarter of 2008, wrote off some $6 billion in assets, set aside more than $5.5 billion to cover future losses, is cutting dividends by 90%, and is eliminating approximately 10,000 jobs, including the layoffs of more than 6,300 employees.
At the crux of Wachovia’s troubles are so-called Pick-A-Pay mortgages, which allow borrowers to choose one of four monthly payment options. The bulk of these loans, most of them acquired when Wachovia bought Golden West Financial in 2006, are secured by homes in the hard-hit Florida and California real estate markets. The default rate of Wachovia’s $122 billion worth of Pick-A-Pay loans is hovering around 6%, and the company says that figure could balloon to 12% by 2009. (The national average for all mortgage defaults is currently around 1%.)
Wachovia has already raised more than $8 billion in capital from investors in 2008 alone, but may also be compelled to divest some of its operations in order to bring in more money. The most obvious candidate to be sold, according to some analysts, is the company’s Wachovia Securities subsidiary. It is perhaps Wachovia’s most successful business, though it has seen its assets under management dwindle by some 10% since its acquisition of A.G. Edwards last year. What’s more, Wachovia Securities’ St. Louis headquarters were raided last week by Missouri state regulators seeking information on the unit’s sales, pricing, and marketing of auction-rate securities after the market for the arcane financial instruments collapsed in February. [UPDATE: Please see the comment from Wachovia spokesperson Teresa Doughery regarding the state's actions.]
For its part, Wachovia is determined to weather the storm. Still, JPMorgan Chase is mentioned as a possible buyer of Wachovia Securities, if not all of Wachovia.
We have this idea that the US economy is based on the free market system. The SEC’s new rule against naked short selling for certain companies and entities sure puts paid to that belief.
In short sales, an investor borrows shares of a company, sells them, and hopes the stock price later drops before he has to pay back the shares. It’s a classic instance of selling high, buying low.
In naked short selling, the investor doesn’t borrow the stock first. Less risk, so more reward — if the stock does fall as expected.
The rule has already raised a chorus of complaints from financial services firms that aren’t on the safe list. It also is probably not the right way to restore stability to the market. Granted, the horse is already out of that barn, but the best way the SEC and the Fed could have stabilized the market was to have put the brakes on the bubble in the first place. But oh no — we have a free market, right? No market interference here.
Gretchen Morgenson of The New York Times has a trenchant article on just this topic. She writes:
HERE is a question: Might not the routs, which inevitably follow the manias, be less painful if things were not allowed to get wild and crazy on the upside? Might not the American people be better off with regulators who curb market enthusiasm — whether in the form of errant lending or voracious, ill-considered deal making — when it reaches manic levels, to protect against the free fall, and the bailouts, that ensue?
Since the Fed has no problem with regulating some of the markets some of the time with rules that only apply to certain companies and certain investors, why not drop the pretense of the free market completely and create different regulations that are designed to do exactly what Morgenson suggests — regulate on the upside too?
If that is unpalatable, then when a Bear Stearns, a Lehman, or a Freddie and a Fannie look like they are failing, let the free market take its course.