by Calculated Risk on 1/18/2009 12:57:00 PM

From the Chris Serres at the StarTribune: Loans threaten Minnesota community banks (hat tip dryfly)

Dozens of Minnesota banks have entered the new year on shaky footing, hobbled with millions of dollars of commercial real estate loans going sour at an alarming pace. ... "Any bank that has a sizable book of commercial real estate loans could have serious problems in 2009," predicted Jamie Peters, a bank analyst at Morningstar in Chicago.
...
As of the third quarter of last year, 5.7 percent of commercial real estate loans in Minnesota were more than 30 days past due, up from 3.1 percent a year ago.
...
Officials with the Minnesota Department of Commerce, which regulates 429 state-chartered banks and credit unions in Minnesota, acknowledged the problem and said they are concerned. The department's watch list of banks it considers in "less than satisfactory" condition has nearly doubled over the past 18 months to 50, from 26 in June 2007.

As I've noted several times, most regional banks avoided the residential real estate market (because they couldn't compete) and instead focused on CRE and C&D (construction & development) lending. This exposed many regional banks to excessive CRE loan concentrations, and now that CRE will implode in 2009, many of these banks will be in serious jeopardy.

Along these lines, here are some comments from Fed Vice Chairman Donald L. Kohn from April, 2008:

Setting aside the 100 largest banks, the share of commercial real estate loans in bank loan portfolios nearly doubled over the past 10 years and is approaching 50 percent. The portfolio share at these banks of residential mortgage and other consumer loans, which are more readily securitized, fell by 20 percentage points over the same period.
...
Concentration risk is another familiar risk that is appearing in a new form. Banks have always had to worry about lending too much to one borrower, one industry, or one geographic region. But as smaller banks hold more of their balance sheet in types of loans that are difficult to securitize, concentration risks can develop. Concentrations of commercial real estate exposures are currently quite high at some smaller banks. This has the potential to make the banking sector much more sensitive to a downturn in the commercial real estate market.

Here come the regional bank failures ...

by Calculated Risk on 1/17/2009 08:14:00 PM

From The Times: Treasury’s £100bn lifeline

THE Treasury will tomorrow drastically revise the terms of last October’s bank bailout and say it will guarantee at least £100 billion of new lending.
...
Three key proposals are being finalised. The government will offer guarantees on new consumer loans, outline plans to ringfence “toxic” assets on bank balance sheets and propose to refinance the preference shares that were used to rescue Royal Bank of Scotland and HBOS.

The taxpayer’s stake in Royal Bank of Scotland could jump from 57.9% to about 70% as part of the deal.
...
Tomorrow’s announcements will centre on measures to get the banks through the crisis and to boost lending. The existing Bank of England Special Liquidity Scheme (SLS), which has provided the banks with £200 billion of liquidity over the past nine months, will expire on January 30. But officials say there will be a “son of SLS”, to replace it and ensure liquidity does not dry up.
...
There has been intense speculation that the government plans to set up a “bad bank” to take so-called toxic assets off the banks’ books and put them in a new taxpayer-owned entity, to be sold on when economic conditions improve.

Officials, however, played this down. “There will be no announcement of a bad bank next week,” one well-placed Whitehall official said.

It sounds like the details will be released on Monday, and will include more capital for banks and a Government guarantee for new lending ... but no "bad bank".

by Calculated Risk on 1/17/2009 04:34:00 PM

Atrios notes:

... suddenly our great newspapers are discovering the "stereotypes" they helped to perpetuate weren't, you know, true. Subprime loans were never the problem, just an early warning signal ...

Oh well, better late than never.

* Note: "We're all subprime now!" was Tanta's response to the false subprime meme.

From the WaPo: The Growing Foreclosure Crisis

One oft-repeated assertion no longer holds true. Those in trouble are not, primarily, lower-income borrowers. The foreclosure crisis has become a wave, afflicting neighborhoods of every stripe -- but particularly communities created by the boom itself.

... interviews and a Washington Post analysis of available data show that the foreclosure crisis knows no class or income boundaries. Many borrowers ensnared in the evolving mortgage mess do not fit neatly into the stereotypes that surfaced by early 2007 when delinquency rates shot up. They don't have subprime loans, the lending industry's jargon for the higher-rate mortgages made to borrowers with shaky credit or without enough cash for a down payment.

The wave of subprime delinquencies appears to have crested. But in October, for the first time, the number of prime mortgages in delinquency exceeded the subprime loans in danger of default, according to The Post's analysis.

And please excuse me, but I found this paragraph amusing:

In 2005 and 2006, more than half the homes sold in Southern California were in Riverside and neighboring San Bernardino County, pumping thousands of new jobs into the regional economy, said John Husing, an independent economist. "Real estate became what gold was to the gold mining towns," he said. "Everyone's job was tied to the mine, whether they realized it or not."

And here is what I wrote in 2006, in response to an optimistic forecast for the Inland Empire from Mr. Husing: Housing: Inverted Reasoning?

As the housing bubble unwinds, housing related employment will fall; and fall dramatically in areas like the Inland Empire. The more an area is dependent on housing, the larger the negative impact on the local economy will be.

So I think some pundits have it backwards: Instead of a strong local economy keeping housing afloat, I think the bursting housing bubble will significantly impact housing dependent local economies.

Hoocoodanode? This cartoon is worth repeating ...

Click on cartoon for larger image in new window. Cartoon from Eric G. Lewis www.EricGLewis.com (site coming soon)

by Calculated Risk on 1/17/2009 01:16:00 PM

From the WSJ: U.S. Plots New Phase in Banking Bailout

Officials at the Treasury, Federal Reserve and Federal Deposit Insurance Corp., in consultation with the incoming Obama administration, are discussing a plan to create a government bank that would buy up the bad investments and loans that are behind the huge losses that U.S. banks continue to report, say government officials. Also under consideration is an additional and giant government guarantee of banks' assets against further losses.

The discussions, which are intensifying, show how the rapid deterioration of bank assets is outpacing the government's rescue efforts. Banks are now struggling not only with the real-estate investments that sparked the crisis, but also with the car loans, credit-card debt and other consumer debt that have taken a hit with the faltering economy.

The Times is reporting an announcement could come this week:

An announcement could be made within days of Barack Obama taking office as President on Tuesday.

Also the WSJ article has a table of credit losses based on estimates from Goldman Sachs: $1.1 trillion from residential mortgages, $390 billion from corporate loans and bonds, $234 billion from commercial real estate, $226 billion from credit cards, and $133 billion from auto loans.

The $1.1 trillion for residential is in line with my estimates from Dec 2007, and the additional estimate also seem reasonable (close to $2.1 trillion total in U.S. credit losses). These losses will be shared among banks and investors worldwide, so probably less than half of the losses will be for U.S. banks. However U.S. banks will also suffer losses on overseas loans.

by Calculated Risk on 1/17/2009 01:28:00 AM

From the Telegraph: £200bn to save banks from bad debt

In an attempt to restore confidence within the financial sector, the Treasury will tell the banks of its plan on Saturday. It aims to announce details of the rescue package publicly early next week.

The bad bank plan has climbed the political agenda in the past couple of weeks as the Government has become aware of the extent of the lenders' bad debts.

Sources said that a bad bank would have to take on about £200 billion of toxic assets. That would take the Government's total commitment to solving the banking crisis to almost £1 trillion in taxpayers' money that has either been spent or pledged.

That equates to about £33,000 per taxpayer. The total sum is equivalent to more than two-thirds of Britain's annual GDP of £1.4 trillion.

That is equivalent to a total U.S. bailout of almost $10 trillion (about 2/3 of GDP).

by Calculated Risk on 1/16/2009 10:33:00 PM

This is a followup to the subprime piece from a year ago ...

(Part 1: 8 min 42 sec)

(Part 2: 8 min 42 sec)

by Calculated Risk on 1/16/2009 09:24:00 PM

From the FDIC: Umpqua Bank Acquires the Insured Deposits of Bank of Clark County, Vancouver, WA

Bank of Clark County, Vancouver, Washington, was closed today by the Washington Department of Financial Institutions, and the Federal Deposit Insurance Corporation (FDIC) was named receiver.
...
As of January 13, 2009, Bank of Clark County had total assets of $446.5 million and total deposits of $366.5 million. At the time of closing, there were approximately $39.3 million in uninsured deposits held in approximately 138 accounts that potentially exceeded the insurance limits.
...
In addition to assuming the failed bank's insured deposits, Umpqua Bank will purchase $30.4 million of assets comprised of cash, cash equivalents, marketable securities and loans secured by deposits. The FDIC will retain the remaining assets for later disposition.

The transaction is the least costly resolution option, and the FDIC estimates the cost to its Deposit Insurance Fund will be between $120 and $145 million.

A Bank Failure Friday Twofer ...

by Calculated Risk on 1/16/2009 07:37:00 PM

From the FDIC: Republic Bank of Chicago Acquires All the Deposits of National Bank of Commerce, Berkeley, IL (hat tip Soylent Green Is People)

National Bank of Commerce, Berkeley, Illinois, was closed today by the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Republic Bank of Chicago, Oak Brook, Illinois, to assume all of the deposits of National Bank of Commerce.
...
As of January 7, 2009, National Commerce Bank had total assets of $430.9 million and total deposits of $402.1 million. In addition to assuming all of the failed bank's deposits, Republic Bank agreed to purchase approximately $366.6 million in assets at a discount of $44.9 million. The FDIC will retain the remaining assets for later disposition.
...
The FDIC estimates that the cost to the Deposit Insurance Fund will be $97.1 million.

Now it feels like a Friday.

by Calculated Risk on 1/16/2009 05:33:00 PM

WSJ: Circuit City to Liquidate, Meaning 30,000 Job Losses

Bloomberg: GE Capital May Cut as Many as 11,000 Jobs This Year

WSJ: Pfizer to Cut Up to 2,400 Jobs

WSJ: Google Plans 100 Layoffs of Recruiters

AP: AMD to cut 1,100 workers, 9 pct of staff

Reuters: Hertz to cut more than 4,000 jobs

Bloomberg: WellPoint Cuts 1,500 Jobs, Blames ‘State of Economy’

AP: Blue Cross Blue Shield to cut up to 1,000 jobs

Tampa Bay Business Journal: Report: Layoffs looming at Clear Channel

I'm sure I missed a few ...

by Calculated Risk on 1/16/2009 04:24:00 PM

From the LA Times: California controller to suspend tax refunds, welfare checks (hat tips Thomas and Circle the Drain)

State Controller John Chiang announced today that his office would suspend tax refunds, welfare checks, student grants and other payments owed to Californians starting Feb. 1 ... The payments to be frozen include nearly $2 billion in tax refunds; $300 million in cash grants for needy families and the aged, blind and disabled; and $13 million in grants for college students.