The US financial crunch has taken another downward lurch with the news of three more small regional banks being seized, closed or sold at the weekend, and signs of growing instability in the supposedly safe US credit union sector.
The news of the failures of the trio of banks and moves to seize two what corporate credit unions comes ahead of the expected release tonight of more details of the Obama Administration’s bank bailout and re-regulation policies. Both moves have to work otherwise the Obama Presidency will be close to being stuffed and the US and global financial system will once again tremble.
Regulators are battling to stabilise the US credit union system which was rocked on the weekend by the takeover of two major corporate credit unions (they act as central credit unions for smaller company and community-based credit unions) which had suffered large losses on mortgage backed securities. The takeover of the two central credit unions was surprising, while they had been ailing, news reports said one expected the move on Friday night to take them into Federal control, much in the way mortgage giants Fannie Mae and Freddie Mac were seized by the Government The three banks that failed were small: the biggest had around $US670 million in assets, but it means 20 US banks have now failed, compared with 25 for all of 2008. But the placing of the two corporate credit unions, and their $US57 billion in assets, into conservatorship, because of the need to “stabilize the corporate credit union system” was the major story. The National Credit Union Administration Board (NCUA) seized the corporate credit unions in California and Kansas. Corporate credit unions are chartered to act as a type of clearinghouse for the credit unions that serve consumers. The two seized had assets in excess of half the total value of assets held in corporate credit unions. The Administration is a US Government agency that regulates America’s credit union system. Corporate credit unions provide services such as lending and payment clearance services to retail credit unions. The Administration, or NCUA, took control of US Central with $US34 billion in assets, as well as Western Corporate (WesCorp) Federal Credit Union of California, another corporate credit union with $US23 billion in assets. U.S. Central Federal Credit Union provides settlement services used by more than 90% of all U.S. credit unions, which are member-owned lending institutions. If it was to fail, it would cripple credit unions across the US, setting off another financial crisis. Reuters reported that the seizures came as a surprise because of the strains in the nonprofit banking sector “that recently had been touted as a source of new lending even as many for-profit banks limit lending and receive billions of dollars of taxpayer-funded capital injections.” US Central’s losses were not disclosed, but Reuters reported that it had “a significant amount of risk … assets that are currently not marketable,” according to a credit union administration executive. Reuters says the level of credit losses in the US credit union system had been estimated earlier in the year at between $US10 billion and $US16 billion. In January, the NCUA injected $US1 billion into US Central after the corporate credit union suffered dramatic declines in the value of mortgage-backed securities it had bought. These are said to be of high quality, but because they involve home mortgages, there’s no real market and their value continues to fall. The NCUA moved in January to guarantee $US80 billion that US credit unions have on deposit in the corporate network, a move that was seen as a bailout America’s credit union network. Now the situation has worsened dramatically. So the much leaked details of the financial stability plan can’t come too soon.
Meanwhile watch for the moans and groans from the US banking system and associated fellow travellers as the Obama Administration releases its new bank rules and details of how it is going to take toxic assets out of bank balance sheets.
It will help because we know American banks know very little about banking and profit and loss accounts. The sheer persistence and size of toxic assets is testament to the cupidity of American banking executives and boards; now from the main banking regulator about the financial performance of US banks in the fourth quarter, is further evidence of their incompetence.
Revised figures from The Federal Deposit Insurance Corporation show the US banking sector lost a lot more than originally reported in the terrible last quarter of 2008, a lot more.
Figures released on Friday put the losses at an upwardly revised $US32.1 billion in the fourth quarter last year, not $US26.2 billion as previously advised late in February in the FDIC’s quarterly report.
The FDIC said it revised the figures from last month after “significant amendments” were made by banks. The quarter marked the first time since 1990 the federally insured banks and thrifts (Savings and Loans, such as Washington Mutual which became America’s biggest ever bank collapse last year) lost money collectively.
The higher losses left the US banking sector with a profit for all of 2008 of just $US10.2 billion ($A14.9 billion), revised down from an initial estimate of $US16.1 billion (or $A23.5 billion). The Big Four Australian banks earned roughly the same level of profits last year as the entire US banking system did, so it’s no wonder the American banks are described as ‘zombies; in many cases with too little capital; weak earnings and huge and growing bad loans and debts.
“A few very large losses were reported during the quarter — four institutions accounted for half of the total industry loss — but earnings problems were widespread,” the FDIC said.
“One out of every three institutions reported a net loss in the fourth quarter. Only 36 per cent of institutions reported year-over-year increases in quarterly earnings.”
Most of the revisions came from write-downs of bad assets, but do not affect banks’ ability to lend because these are not counted in capital requirements.
But despite non-cash nature of many of the asset write-downs, actual trading losses were substantial and more than doubled the fall in the industry’s total equity capital in the fourth quarter by $US10.1 billion from the originally estimated $US3.7 billion.