Wednesday, May 27, 2009

More Pain Ahead

It looks as if my assumption/prediction that no less than 78 U.S. banks will fail this year is going to be easily met. So far 36 banks in less 5 months have gone south including the big juicy Bank United of Florida whose failure will cost the FDIC an estimated 4.9 billion.

As if this was not bad enough the FDIC has increased the number of “Problem” banks from 252 to 305 up 21% while the FDIC insurance fund from 17.3 to 13 Billion in the same period, prompting an emergency levy on the banks to raise more money.

While the FDIC states the industry as a whole showed a first quarter profit compared with a Q4 loss last year, 22% of banks are still taking losses and 59% are showing lower income than last year, which would seem to show there is room for many more failures both this year and next.

From the article I saw last week but can’t find the link(sorry) it would seem that banks are sitting in the eye of the storm. While things seem to be calmer with lower losses than last year, in reality we are simply in the period where most of the subprime mortgages have already reset but the vast majority of the ARMs have yet to hit their reset date. Claims by the banks or markets that things are better are simply lies to pump share prices ahead of share offerings needed to recapitalize for the next wave of losses. Don’t be fooled, not only is there a huge wave of ARM resets in the next two years but there are additional home loses from unemployment to consider, failing commercial mortgages and increasing credit card defaults as well.

Just today JP Morgan stated they expect 9% credit card defaults this year, while defaults at WaMu could range between 19-24% and with profits from gouging and fees curtailed by recent laws many banks will continue to hang on or bleed out slowly only to be hammer into submission Q4 or next year as the ARM products begin to be reset.

Me despite my fear of the U.S. dollar going all to shit I’ve actually bought my first U.S. stock in 2 years with a small purchase of FAZ, a 3 times leveraged financial bear ETF. The Bank index has recovered too much in my opinion and I expect financials to take another beating some time soon. I wish someone would explain why all he announced dilution of U.S. bank shares is not hurting the share price more, this makes no sense what so ever!

Meanwhile the debt, foreclosures, bankruptcies continue to pile up. If you want to send your eyes spinning and your mind reeling have at look at this all inclusive debt clock

and they want you to believe things are getting better, yeah right!


Anonymous said...

Could this trigger the 2nd wave of the global economic crisis?

CSB said...

I don't know if these failures would be interlinked with the west enought to trigger the second wave but they will certainly work to sour the talk of inproved fundamentals but the system is so stretched and distored anything could be the trigger.

large bank failures anywhere in the world, especially if they have large derivative positions that will be triggered.

A major failure of U.S. treasury auctions

comex/LME default brought on by the demand to repatriate Gulf states and German gold

North Korea doing something stupid.

Or even just a general awakening by the general public that they are screwed.

More likely the trigger will be small incremental things rather than a big bang. My bet is the coming option arm resets over the next 2 years. In that time more hedge funds will crash, more banks will fail, the U.S. might apply capitol controls as the dollar weakens from monetization of the debt.

There is just too much going on, too many dangerous cracks in the dyke, its gotta break but which crack is the keystone is purely speculation because many of the possible triggers are based on timing, public perception and heard mentality.

CHR said...

I agree with CSB's evaluation. The ARM resets will be the 2nd wave, starting in the US which is the big pond from which the rest of the world ripples. Sounds like next year's "new and improved Bailout, version 2". They won't have admitted that they can't pay for the first bailout before firing up the presses, again.

An interesting article from one of my favourite writers ...