Monday, July 14, 2008

A Regional Bank Collapse: No Moral Hazard Here

The charts above show price changes for the S&P 500 Index (SPY) and seven major regional banks: Bank of America (BAC); Comerica (CMA); Fifth Third Bank (FITB); SunTrust Bank (STI); KeyCorp (KEY); Wachovia Bank (WB); and National City Bank (NCC). The top chart displays the percentage changes from Friday's close to the end of trading today, Monday. The bottom chart shows year-to-date percentage changes for the issues as of Monday's close.

To say that the regional banks are underperforming the broad, large cap market would be a massive understatement. As a group, as tracked by the regional bank ETF (KRE), they were down over 8% today alone. Bank of America was down 7% today; National City was down over 27%.

Year to date, the group sports 50+% losses, with National City now down over 80% on the year.

As I noted in today's Twitter comments, it's become clearer that Federal bailouts will be designed to protect the functioning of the financial system, not to bail out shareholders. We've heard a fair amount of anguished commentary regarding the "moral hazards" introduced by possible bailouts of investment banks and Government Sponsored Enterprises (GSEs, such as FNM, FRE). Well, take a good look at the charts above. That's what a crisis of confidence free of moral hazard looks like.

Will depositors respond calmly to the collapse in share values among their banks? After Sen. Schumer's disclosure of problems at IndyMac Bank, depositors chose to vote with their feet, leaving the bank and precipitating its seizure by regulators. An eye-opening statistic reported in today's Wall St. Journal indicates that, at the nation's banks, "the percentage of uninsured deposits has doubled since 1992, climbing to about 37% of the nation's $7.07 trillion in deposits at the end of the first quarter...". In the wake of continued bank weakness and the realization that funds thought secure may not fall within FDIC insurance limits after all, we may see depositors as well as shareholders flee from the financial hazards that accrue in the absence of moral ones.