Interest Rate Roundup

Friday, June 20, 2008

All about oil and the financials -- and some thoughts on the "surprising" crisis in the banking industry

Sorry for the lack of posts the past couple of days. I had to travel to handle some family issues. But it looks like the big story on the last day I posted is still the big story today -- oil.

Yesterday, oil prices tanked by more than $5 after China raised the domestic price of refined products (gasoline, diesel, etc.). Why would that matter? The idea is that if more consumers have to pay the "real" price of energy (China, Malaysia, Venezuela, and other countries subsidize or cap the price of energy products for their citizens), energy use will fall and so will energy prices. Today, oil prices have come bouncing right back (+$3.50 or so as I write) amid reports that Israel is contemplating an attack on Iran's nuclear facilities. That kind of volatility really gets the market's blood pumping.

The other big news of the week? Many companies in the financial sector continues to plumb new depths. Almost every day, we hear about fresh losses, more capital raisings, and more regulatory trouble. The regional banks have been the latest firms to take their lumps, as covered in the New York Times yesterday. An excerpt:

"For the banks’ shareholders, the numbers tell a sad story: Wednesday’s decline brought the loss for the S.& P. bank index to 39.3 percent so far this year. Fifth Third’s odd name almost seems like a bad joke. Fifth Third has lost two-thirds of its value this year. Shares of two other banks based in Ohio, the National City Corporation, of Cleveland, and Huntington Bancshares, of Columbus, have suffered similar declines.

"Banks based in the Southeast are hurting, too. The Regions Financial Corporation, the biggest bank in Alabama, has lost half its value. Standard & Poor’s predicted this week that Regions would cut its dividend to conserve its capital in the face of rising losses on real estate loans. The share price of SunTrust Banks, which operates across the Southeast, has fallen almost 41 percent.

"Small and midsize lenders are in far less danger than they were during the 1980s and early 1990s, when about 1,600 federally insured institutions failed during a savings and loan crisis. But the breadth and depth of the current troubles have caught bank executives by surprise. Federal regulators are particularly concerned about the exposure of smaller banks to the commercial real estate market, which has softened in some parts of the country.

"But another worry is that raising money will become increasingly costly for banks that need capital. In a report issued this week, analysts at Goldman Sachs said banks might need as much as $65 billion on top of the $120 billion they have already raised."

I especially like the part about bank executives being caught by "surprise." How could so many of these guys NOT see this coming? How could they NOT realize the housing and mortgage markets were swept up in a gigantic bubble, one that would result in one of the worst downturns in decades ... and the biggest threat to the financial system since the S&L crisis? Plenty of observers, myself included, began warning about the dire risks of just such an outcome years ago, and turned up the "heat" on those warnings within the past 12 months.

Yet regulators and bankers continue to be surprised at virtually every step of the way. Remember it was only about a year ago that officials were giving speeches about how the problem was "contained" to subprime mortgages. I'll never forget this March 28, 2007 excerpt from Mr. Bernanke's testimony before Congress:

"Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency."

As for all those "bottom fishers/value destroyin ... er ... creating" funds that keep buying into every new bank/broker/insurance company sale of common and preferred shares, warrants, bonds, and so on? The Times sums it up this way:

"So far the vast majority of investors who bought into financial companies in the hope that the industry was out of the woods have lost, and lost big."


  • Good post, and the "contained" post as well. Bernanke link doesn't work.

    By Blogger shtove, at June 20, 2008 at 5:00 PM  

  • I think anyone who saw how easy cridet was in the last 8 years, knew banks would have problems--sooner or later. Now oil is going up in price. But gas is still cheap, I will tell you why @

    By Anonymous Anonymous, at June 22, 2008 at 12:52 PM  

  • Mike,

    I'm not at all surprised that the banking industry wouldn't/couldn't admit that there were bubbles. The bankers garnered huge bonuses as a result of perpetuating the bubbles. This truly high-lights the failure of the regulators and strongly argues for a return to a gold standard.

    The CPI inflation genie is out of the bottle. So is the asset deflation genie.

    By Anonymous Anonymous, at June 23, 2008 at 10:12 AM  

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