2.12.10

2.12.10

          The bi-partisan Congressional Oversight Panel is expected to release a report that predicts that 2,988 small U.S. banks are about  to “get hit  by a tidal wave of commercial-real estate loan failures”. That is approximately 38% of the 8,000 banks in the U.S. Concerns about commercial loan losses being the next shoe to drop have been growing for a number of months. The panel used information provided by the Federal Reserve, the Comptroller of the Currency, and the Federal Deposit Insurance Corp (FDIC). The latter is the quasi-government agency that takes over failed banks, disperses their deposits and assets to healthier banks, and absorbs much of the losses from the banks’ bad loans.

          The potential problems for the economy are not just the losses for the financial institutions and their stock-holders, but banks could be forced to cut back even further on the already tight availability of commercial loans needed to sustain the economic recovery. These are banks that were not included in the “too-big-to fail” bailout, and were not subjected to the subsequent ‘Stress-Test’ that the 19 major banks went through (which resulted in them having to sell assets and issue more shares to the public to raise cash to strengthen their balance sheets). Commercial real estate debt in the U.S. totals $3.4 trillion, of which banks hold $1.5 trillion. Bond-holders of real-estate debt hold another $708 billion of the total.

          As the debt comes due this year and for the next several years, unfortunately most of the commercial properties are worth less than the debt owed on them, making it difficult, or impossible, to refinance, potentially leaving the banks holding the bag. The head of the panel said, “These banks were never stress-tested and their ability to withstand the coming storm has never been examined.”

          During the 2008 elections Wall Street provided candidates with $155 million in campaign funds, roughly $88 million to Democrats, and $67 million to Republicans. In the year following the elections Wall Street firms and executives have handed out $42 million to lawmakers. Most of it to the members of House and Senate banking committees, and House and Senate leaders. Wall Street is right up their with the largest and best financed lobbying efforts in Washington. This in the mid-year election year when their re-election looms larger than any other consideration. 

          We will be seeing another 4 day market next week, being closed on Monday for Presidents Day. The news from China that it was increasing bank reserve requirements again to slow its economy, came out Friday morning, after Asian markets were closed. Due to Asian holiday closings next week, many Asian markets will not be able to react for several days to a week. In addition to the U.S. market being closed on Monday for the President’s Day holiday, South Korea markets will also be closed on Monday. Hong Kong, Singapore, and Malaysia will be closed Monday and Tuesday. China, Taiwan and Vietnam markets will be closed all week, for Lunar New Year. In the U.S., next week will be an average week for potential market-moving economic reports, including new housing starts, the minutes of the last Fed meeting and the Producer Price Index. The market may pay more than normal attention to the reports for clues to the U.S. economy, given the worries of slowing economies in Europe (4th quarter GDP up only 0.1%) and China taking repeated steps to get its economic growth slowed. That should be enough fodder to create continued up and down volatility.