Next Stop: Bank Failures

Hello everybody! Enjoying your summers? Well, I intend to put a stop to that right now.

Over the coming months, we expect banking institutions to continue to face deteriorating loan quality. House prices are still declining sharply in many localities and losses related to residential real estate--including loans to builders and developers--are bound to increase further. In addition, weak economic conditions could well extend problems to other segments of lending portfolios including consumer installment or credit card loans, as well as corporate loan portfolios. Moreover, banking organizations must be prepared for the possibility that liquidity conditions become tighter if uncertainties in the capital markets fail to subside or if credit conditions deteriorate significantly. Accordingly, we anticipate that the number of banks with less than satisfactory supervisory ratings will continue to increase from the relatively low levels that have existed in recent years and we are monitoring developments at all supervised institutions closely.

That's Fed vice-chairman Donald Kohn. Loosely translated, he's saying that the continuing implosion of every loan in America will soon endanger American banks.

Now, in Boston and other Northeastern cities, you mostly hear about the big national banks, who are no doubt suffering (*cough* Citigroup) but whose total failure would probably not be permitted by risk-averse regulators. In much of the country, though, banking is primarily local. Out here in Denver -- from which I might provide a real update sometime soon, if I can ever get off Interstate 225 -- there's a preponderance of local banks and credit unions, with names like "Bank of Denver" and "Rocky Mountain Savings Bank" and "Western Bank of Colorado" and "DenverWestBankMountainBankWestBankBank" and whatever the hell else. Now, if the economy continues on its current path (and bear in mind that mortgage loans were only the first to collapse; there are indicators that auto loans are next, not to mention appliances and of course consumer credit), can small institutions like this really be expected to survive? How much can the FDIC handle? Anyone? Bueller?

Above: All the hot trends start in England

Filed under: banking • Denver • economics • impending disaster • the real issues

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Meanwhile the economy continues to implode

For the love of god, everybody, who cares about Clinton and Obama anymore -- THIS IS THE REAL NEWS:

In the 12 months ended in February, the Case-Shiller home price index, which measures the value of single-family homes in 10 major metropolitan regions, fell 13.6 percent, the biggest decline since records began in 1987. A broader 20-city index dropped 12.7 percent.

The slump in home prices was more severe than the worst point of the recession of the 1990s, the last time values fell so far, so quickly.

[...]The fall in home prices has also cut into Americans’ home equity and forced many to grapple with mortgages now worth more than the house itself. The problems have contributed to a deepening gloom, which was reinforced on Tuesday by a grim confidence survey released by the Conference Board.

The private report, which surveys up to 5,000 American households, dropped to its lowest point since March 2003, at the start of the invasion of Iraq. Americans feel worse about the economy’s prospects than any time since the mid-1970s, and many are bracing for job losses...

WHY ARE WE STILL TALKING ABOUT JEREMIAH WRIGHT WHILE THIS IS HAPPENING GAAAAAAAHHHHH

(via Working Life)

Next stop: Rationing at Wal-Mart (seriously)

NEW YORK (MarketWatch) -- Wal-Mart Stores Inc. said its Sam's Club wholesale club chain is limiting the sale of some rice to four bags per member visit because of what it described as "supply and demand trends." ...Wal-Mart said at this point, it's not limiting purchases of flour or oil.

Read that again: "At this point."

And food prices continue to rise.

(via Ambinder)

Sympathy from the bottom of my heart

A message, from me, to those Harvard sellouts students who'd landed I-banking internships and jobs at the prestigious Bear Stearns, just to see their ambitions cruelly dashed. Ahem:

"HA HA HA HA HA HA HA HA HA HA HA! HA HA HA HA HA! AHH, HA HA HA. HA."

UPDATE: From the Crimson article:

[J.P. Morgan spokesman Brian] Marchiony tried to assure prospective applicants that future recruitment would not be affected by the recent downturn in the market... Marchiony added that the troubles with Bear and the takeover by J.P. Morgan was a “unique situation."

"Unique situation." And if you believe that I've got a bridge to sell you. This whole system is on the verge of collapse and there's only so much the Fed can do...

Well, that doesn't look good--

--no matter how you spin it.

The L.A. Times writeup (registration required), which is unusually lucid and comprehensive, notes that two of the hardest-hit counties are Riverside and San Bernardino, low-priced areas that attract first-time buyers -- which logically would be hit hardest in the event of an economic downturn. Yet those two counties also experienced job growth by over 44,000 in the last year. More broadly, no traditional economic indicator syncs up with this spike in foreclosures, and unlike previous increases in California (which, especially in the 90s, were tied to defense-plant closures) this one has come on suddenly and without a corresponding increase in default notices. (There has been a spike in default notices, which normally presage foreclosures, but not large enough to mirror this enormous upturn.) So we're looking at a situation where, without provocation or any indication, people are suddenly losing their homes in massive numbers.

The Times makes a number of suggestions as to why this is happening -- changes in lending standards, particularly, lead to mortgages and loans that become suddenly difficult to pay -- but I think this one is the most telling:

As recently as a year ago, most homeowners who had slipped behind in their payments found a way to get current again. Nearly 9 out of 10 defaulting borrowers got out of trouble by selling their house or refinancing, according to DataQuick.

Fewer than 6 out of 10 are able to do so now. "People have stretched their finances to the breaking point," said DataQuick analyst John Karevoll.

We've all heard about the massive increases in household debt lately -- looks like those chickens might be coming home to roost. Brace yourselves for spikes like these across the country as more families begin to fold under the pressure. It is not going to be a fun year.

(h/t: Kevin Drum)