CNNMoney.com quotes Alan Levenson, chief economist with T. Rowe Price as stating that “The health of banks is a concern, but it’s not as big as it was at this time a year ago. The key is that the failed banks are being taken over and sold quickly”. This certainly is a strong factor and it certainly feels good knowing that the FDIC seems to have no difficulties finding strong, willing buyers to purchase even the most troubled banks. For sure, this is a sign of trust in the market by knowledgeable market makers that should help embolden our over all confidence… but after the latest collapse, do you really want to just throw all your trust behind such movers without just a little further inspection? They acted seemingly oblivious to the industry’s faults before… Couldn’t they be doing it again? Evidence suggest they may be…
If what Levenson says is true… that “the key is that the failed banks are being taken over and sold quickly”, then with just the briefest of inspections we should be taking pause over new rules government regulators proposed just last month, as they seemingly wish to throw a stick in the spinning wheel of capitalism and encumber private capital (private equity, hedge funds, pension funds, etc.) from buying out troubled banks; arguably leaving the “go to the government” option for rescue a struggling bank’s only recourse.
Speculations aside, statements submitted to the FDIC by a coalition of US state pension funds say the measures will have “a chilling effect on private capital participation in the acquisition of failed banks”. Lone Star, a private equity firm that has invested over $60 billion in distressed banks and financial institutions globally since the collapse, notes that the proposed rules display a “strong bias against, and suspicion of, ‘private’ capital” and even the Office of the Comptroller of the Currency (OCC), another banking regulator, has weighed in and raised issues over the proposal’s impact on the industry’s health. However, so far, the administration seems undeterred and the market… oblivious and undaunted.
But oblivious and undaunted seems to be the market preference… as even in lieu of such a newly government-created encumbrance and their willingness to let the private sector participate… a large fundamental industry weakness persists, but seemingly remains disregarded. Namely, the industry still suffers the $5 trillion in “toxic” residential and commercial loans that no one knows how to value… and it’s a fair bet that banks aren’t likely to start letting their money flow again until they do. As such, the fundamental cause of the initial collapse persists… and we continue to experience record high mortgage delinquencies and growing problems in the commercial real estate market that suggest more large write downs will be necessary over the next few quarters. This alone should make statements that the banks are “out of the woods” premature. Regional banks especially remain highly susceptible to such write downs and hold the potential to still threaten the future of the now market trusted larger banks.
In closing… I think it’s important to note that banks led the downturn we all suffer and respectively fell much, much further than the rest of the economy. The expectation was that the banking industry would lag behind the rest in a recovery, yet here the industry is in “point” position leading the climb out. This should be a nagging concern for all given that the fundamental “toxic” debt issue that started the fall to ruin still exists and that the market is once again building, seemingly without care or notice of the faults it still holds in it’s foundation.
By Neil R. Palmquist CM&AA, CEPA
August 25, 2009