Banks Could Face Dire Consequences Without Liquidity Help
By Daniel at 30 September, 2008, 8:58 am
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
NEW YORK (Dow Jones)–Steep losses Monday in bank stocks reflect the dire straits
the banking industry may face if politicians reach no agreement on the financial
rescue package.
“All of us are just numb,” said Frank J. Barkocy, the director of research at
Mendon Capital Advisors Corp. Asked if he fears more big banks might not pull
through the crisis, he said, “I just don’t know,” adding that the commercial
paper market might freeze until some compromise appears.
He and other observers firmly believe that a way for the U.S. government to help
will be found - because it needs to be found.
Much of the focus on banks has been on their capital strength. But the tension
for banks is now focusing on their short-term liquidity - that is, their ability
to fund their daily operations. The rescue plan could have helped unfreeze the
markets for short-term capital. Without a plan, say some worried observers, the
short-term funding crisis for some banks could become acute, leading to more
forced takeovers.
Dimitri B. Papadimitriou, the president of the Jerome Levy Economics Institute of
Bard College in Annadale-on-Hudson, N.Y., said if no action is taken “there will
be a couple of sizable banks besides Wachovia that become headline news.” Most
likely, he said, the FDIC will sell assets in similar transactions - undertaken
while a bank is alive but at the end of its rope - rather than outright failure.
Bank failures along the line of Lehman Brothers Holdings Inc. (LEH) “would be
catastrophic,” he said.
Papadimitriou said Sunday night, as the draft for the Troubled Asset Relief
Program, or TARP, circulated, that he believed it would pass because it was a
compromise. On Monday, he said: “If this bill does not pass, something else will
pass because I think it is impossible to let the chips fall as they may.”
Dire conditions for commercial paper and credit default swap markets are shocking
bankers, who only days ago believed their strong capital and deposit base would
help them through the crisis.
But the Federal Deposit Insurance Corp. revealed last week that Washington Mutual
Inc. (WM) lost almost $20 billion of deposits within weeks and was forced in a
deal to sell its banking operations to JPMorgan Chase & Co. (JPM). Also, Wachovia
Corp. (WB) reached a frantic deal over the weekend to sell its banking business
to Citigroup Inc. (C).
Now observers have the dark feeling that they can no longer tell which banks are
invulnerable to having their funding lifelines cut.
“The Wachovia deal is just so dramatic,” said Gerard Cassidy, an analyst with RBC
Capital Markets Corp. “Wachovia was not a company that from any ratio or balance
sheet perspective was going to go under,” he said. That the FDIC still pulled the
plug and facilitated the deal with Citi shows that regulators watch like hawks
over deposits.
TARP’s failure, or the failure of any type of federal assistance, would lead to a
long bleed of banks and more assisted sales, Cassidy said.
The federal government might need to consider emergency liquidity enhancement to
stem the worst consequences, several observers said.
For the banks hit hardest by the evaporation of investor confidence, Cassidy said
it may no longer be enough to assert they have a strong capital base because the
crisis is now about liquidity. Banks can only calm the market if they disclose
their liquidity position.
Sovereign Bancorp Inc. (SOV) did just that. When called by Dow Jones Newswires
for comment on its falling stock price - shares closed at $2.33, down 72% - a
spokeswoman for the Philadelphia company said: “Sovereign has unused liquidity
from the Federal Home Loan Bank of Pittsburgh of $6.2 billion, another $4 billion
from the Federal Reserve” as well as another $1.8 billion from other sources.
“We are not aware of anything specific to Sovereign’s business that would cause
the volatility in our stock price. Sovereign is fundamentally sound,” the
spokeswoman said.
Sovereign and National City Corp. (NCC) were among the hardest hit Monday. Shares
of National City closed down 63% to $1.36. The index of banks in the Standard &
Poor’s 500 fell more than 13%.
A spokeswoman for National City said TARP would have provided the Cleveland bank
with “additional options” to rid itself of undesirable assets, but that the bank
was “not reliant on it.”
“We have sufficient capital and liquidity” to survive even the difficult
short-term funding conditions, she said. “We have carefully planned for the
conditions that exist today.”
Wells Fargo & Co. (WFC), on the other, was among the banks that felt Monday’s
apocalyptic mood the least. The San Francisco bank had reportedly put in a bid
for Wachovia, but Mendon Capital’s Barkocy said he was not unhappy that it ended
up empty-handed. It rose in a falling market and even its 11% decline to $33.25
wasn’t as bad as other banks.
Barkocy, and David Hendler of CreditSights Inc., said that Wachovia could have
been a strain on Well Fargo’s capital, and it might have backed off to stick with
its conservative strategy. Well Fargo’s executives have repeatedly said they are
not eager to do a big bank deal.
However, while Well Fargo employees, clients and customers woke to an unchanged
bank, the banking landscape has changed dramatically. Wells Fargo will now have
to compete with a stronger Citigroup in its market, and a stronger JPMorgan
Chase.
Still, Barkocy said the bank could likely weather the competition and the market
storm. It’s deposit probably make it less dependent for short-term market
funding, he said. Wells Fargo does not even need TARP, he and other observers
said. In fact, it might be one of those who may not participate if the bill were
to pass.
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
No comments yet.