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American banks not out of woods yet as loan losses remain
Anyone who thinks US banks are out of the woods, as the government shores up a financial system in turmoil, might want to think again.
- Reuters
- Published: 23:52 September 20, 2008
New York: Anyone who thinks US banks are out of the woods, as the government shores up a financial system in turmoil, might want to think again.
Sweeping plans announced on Friday to help cleanse many of the nation's banks and thrifts of bad loans and temporarily ban short sales of stock in hundreds of financial services companies should help support share prices.
But they don't mean loan losses will go away. Banks also can't return now to the loose lending practices that long goosed profits and share prices - and which culminated in a housing and credit crisis with no clear end in sight.
"We don't know for sure how this is going to come out," said Robert Millen, who helps oversee $3 billion at Jensen Investment Management in Portland, Oregon. "You wouldn't want to rush into the sector. If valuations get ahead of themselves, then you probably should trim."
Jensen invests in one bank, Wells Fargo & Co.
US Treasury Secretary Henry Paulson on Friday called for the government to spend hundreds of billions of dollars to help rescue financial companies from lethal mortgages and other toxic debt that have discombobulated markets and threatened to undermine the entire financial system.
A separate two-week ban on short-selling financial stocks, in which investors betting on a decline sell borrowed shares and repurchase them later, is intended to halt market distortions that to many seemed absurd.
Morgan Stanley shares, for example, last week fell as much as 59 per cent in the two days after the Wall Street investment bank posted quarterly results that easily topped forecasts.
Banks worldwide have suffered more than $500 billion of writedowns and loan losses since the global credit crisis began more than a year ago.
Before Friday, this had weighed heavily on the banking shares, with the broad Standard & Poor's Financials Index down more than 46 per cent from its record high in May 2007.
The crisis grew more acute this month, with government takeovers of mortgage companies Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers, Bank of America Corp's shotgun agreement to buy Merrill Lynch & Co, and a bailout of the insurer American International Group Inc. This came just six months after a government-backed rescue of Bear Stearns Cos.
Meanwhile, mortgage losses have battered Washington Mutual Inc, causing the largest US savings and loan association to put itself up for sale. And Wach-ovia Corp declared an entire $122 billion adjustable-rate mortgage portfolio "distressed".
Walking wounded
Bad risk management has resulted in many lenders among the "walking wounded", Bank of America chief executive Kenneth Lewis said on Friday. "More institutions will muddle through, attract new capital or merge to survive," he said. The economy may stay sluggish "well into next year," he said.
Not all observers, of course, are as gloomy.
"I think we're seeing the problem children being taken out," said Anton Schutz, whose Burnham Financial Services Fund has outperformed 96 per cent of its peers over three years, according to Morningstar Inc.
"Nobody wants these companies to fail; nobody wants a run on them," he said. "But Fannie Mae, Freddie Mac, AIG, Leh-man, Bear Stearns, Merrill Lynch, they've all been solved. It doesn't mean banks won't have continuing issues; it's just that the risk of a large institution failing is behind us."
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