Sunday, July 13, 2008

Banking on Bailouts: How Many IndyMacs are Out There?

In what has been billed the third-largest bank failure on record, IndyMac Bank has been taken over by federal regulators. According to a weekend Wall St. Journal story, the bank's collapse will cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion. That would exhaust over 10% of the entire deposit insurance fund of the FDIC.

That eye-opening statistic led me to wonder how many more IndyMac banks might be lurking in the wings. We had some alert to the gravity of IndyMac's situation simply by following its stock price, as shares moved from over $10 early in the year to under $2 by May. Perhaps year-to-date stock performance might alert us to other candidates for seizure--and further challenges for the FDIC.

With the help of data from the excellent Barchart site, I tracked the year-to-date performance of every publicly traded bank and savings and loan institution. I particularly focused on two groups of companies: those that have enjoyed a rising stock market performance year-to-date and those that have severely underperformed the market. I measured this latter group in two ways: those that fall into the lowest 20% of year-to-date performers across all NYSE, NASDAQ, and ASE issues and those that fall into the lowest 10%. Mr. Market is alerting us to the possibility of an IndyMac-like demise for this latter group, the majority of which are down more than 60% on the year.

Interestingly, I found 33 banks and savings and loan institutions that are up year-to-date in their stock market performance. They are outperforming the broad stock market, and they are trouncing their sector peers. Many are yielding 3% or more and have enjoyed solid earnings growth. I took it upon myself to look up a few annual reports for these financial institutions. All appear to have conservative lending practices, with no subprime residential loans and no major problem loans to overextended real estate developers.

Many of these high performing banks are located in decidedly unsexy areas where there was no real estate boom. Two of the banks, for example, are located in my former hometowns of Syracuse and Ithaca, NY. More than ten of the banks were located in the Northeast; only one was in the West.

The bank and savings and loan stocks falling into the bottom 20% of all market performers were far more numerous: there were 113 in all. Of these, 45 are severe laggards, falling into the bottom 10% of market performers. Interestingly, about half of these are located in the West and Southeast regions of the country: two of the hotter real estate markets during the boom. And the large regional banks? Seven fall into the underperforming category; two in the lowest group. None are up on the year.

The housing crisis does not appear to be over and yet the market is already warning us of at least 45 banks in straits potentially similar to IndyMac. Many more of the group of 113 may join that list as the housing situation unfolds, particularly among smaller banks. Meanwhile, I notice on the Bankrate site that many of the banks offering the juiciest CD rates are those on my list of stock market basket cases. It's understandable that they want/need to raise capital, but if the banks cannot fund those juicy returns, it will only be a larger call on FDIC funds. That is a demand that the FDIC is ill-prepared to meet, given its historically low reserve ratio, raising the unpleasant prospect of bailing out the regulators.


procol said...

The writing has been on the wall for some time now. None of this is news. Far from it.

The real question is , what to do about it.

Safe places to park cash are few and far between , and the "safest" pays next to nothing.

So isn't parking funds in deaths doorstep FDIC insured banks the best "game theory" play?

You're going to get paid as long as you keep under 100k. Same depreciated, decimated greenback that treasuries will pay you at twice the rate.

What would you suggest for capital that you simply want to protect against the ravages of financial meltdown?

I'm having a hard time with that as I'm not a gold bug and I don't want unlimited downside.

markus said...

It all reminds me of this famous chinese curse: May you live in interesting times.

Brett, have you already read "When Markets Collide" by El-Erian? I am reading it right now and maybe he is right about us living in interesting times cause of a secular regime transformation concerning not only the financial markets but also the global economy as a whole and the way we are going to live in it.



Brandon Wilhite said...

It appears to me that Sen. Schumer (and a few other politicians I could name) should take some lessons from Bernanke et al on holding his tongue. Not that he's responsible, but he sure didn't help.


bzbtrader said...

Thanks for this very timely post and resource links. With many of these banks on death watch, finding a safe haven for cash with even a marginal yield has become a real challenge. CDs under 100K are one option as are MM accounts with the bigger brokerages (like Schwab)who are not investment banks, have no subprime exposure and have SIPC protection up to $500K.

GS751 said...

In the long run fundamentals are gonna play out. Who is holding the bad loans and who were just guying taking a cut.

Chris said...

Consider parking cash in Swiss, Canadian, Euro government bonds.