More bank bailouts ahead?

Something from 6-24-08 from Antony Currie at breakingviews.com: The Fed’s decision to take on $29B of Bear Stearns’ assets may soon look like chicken feed. If problems at US banks worsen, the government (taxpayers) is likely to be on the hook for sorting out much of the mess. It’s not that the collapse of any one, or even a few, of the thousands of mostly small and mid-sized retail and commercial banks across America would pose the same kind of threat to the financial system that the now-defunct investment bank did. And anyway, most have access to the Fed for emergency funding. The problem is that the other usual escape routes available to struggling Main Street banks are narrowing. It’s getting harder to tap either new or existing shareholders for new funds to replenish bank capital. (Look what just happened to IndyMac) That’s because virtually all the deals that have been struck in the last few months – whether common stock or convertible bonds – have performed poorly. Those who bought stakes in Citigroup, Merrill Lynch, Wachovia, Washington Mutual and Keycorp, for example, are all underwater. Investors have tired of trying to call a bottom on bank losses. That’s making them much less willing to take on more exposure.


Bankers reckon it would now be tough to complete the deals they squared away as recently as a couple of weeks ago. It’s a similar story across the Atlantic, where British lenders Bradford & Bingley and HBOS are both trying to get big rights issues away with their share prices sagging and investors already loaded up with paper sold by the likes of UBS and the Royal Bank of Scotland. The mere whiff of a capital shortage is now enough to send shareholders scampering for the exits. Citigroup’s stock, for example, fell more than 5% late last week after finance chief Gary Crittenden told investors the firm would probably take more write-downs on mortgage-related assets – hardly a surprise. At least Citigroup and other big banks have size and brand recognition in their favor, making them better placed to attract more cash than their smaller brethren. But access to capital isn’t the only issue for smaller banks. In the past, a troubled lender could always try to sell.


So far only residential mortgages have caused much pain beyond Wall Street. Other consumer loans like car and credit card debt are only beginning to suffer, as are commercial mortgages. Losses here could keep the credit crisis rolling for another year or more. What’s more, unlike investment banks, retail and commercial banks usually book loans and other assets at face value until actual defaults appear likely. But under purchase accounting rules introduced earlier this decade, a takeover target’s portfolio has to be marked to the current market value when it is acquired. That could crystallise substantial losses, a factor that is staying the hands of the few potential acquirers. Bankers say it’s the reason a rumored bid for National City failed to materialize. It’s no wonder bank M&A volume is already 80% down on last year, according to Goldman Sachs. There’s often only one option left for a capital-starved US bank that can’t attract a suitor – receivership under the auspices of the FDIC. While hardly ideal, that works fine as long as only a few banks stumble. But if the pressures of the credit crunch cause too many to fail, FDIC could be overwhelmed. True, the government could prop it up, but that simply passes on the risk to the taxpayer. Mike Bell's note: now you know why I read the WSJ and get news from other sources, the local rags don't report it like this.