Five minutes to midnight for banks

The real estate-led banking crisis in the United States has a bit of a Las Vegas feel to it these days as industry analysts and business executives handicap when the next American bank will shut its door.

If you are a betting person, do not take action beyond a year.

In August, Greenwich Associates of Stamford, Conn., found that nearly 60 per cent of U.S. and European financial institutions polled believe another bank or finance company will collapse with the next six months.

Add in another 15 per cent who believe the next institutional flop could take up to a year to happen, and fully three-quarters of the globe's financial elite are casting a pretty gloomy eye over the near-term fortunes of this sector.

Spreading gloom

The sector's pessimism should come as little surprise.

For the past year, the global financial industry has suffered through a massive restructuring as banks and brokerage houses deal with the fallout from the collapse of the asset-based commercial paper market in North America.

As a result, the United States has experienced a number of high-profile bankruptcies already in 2008:

• August: First Priority Bank of Bradenton, Fla., was taken over by U.S. Federal Deposit Insurance Corp. (FDIC) after incurring "significant loan losses" in Florida's commercial real estate market.
• July: $32 billion US IndyMac Bank of Pasadena, Calif., closed its doors, a move that could cost the U.S. government $4 billion US to $8 billion US.
• March: J.P. Morgan Chase & Co. buys Bear Stearns Companies Inc. in a huge deal brokered by Washington.

Worse still, both the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) have been the subjects of widespread rumours of a possible bailout by Washington.

These two corporations are responsible for nearly 50 per cent of the $12 trillion US mortgage market.

In addition, news reports pegged Bear Stearns's saviour, J.P. Morgan, as seeking an injection of foreign capital in order to stave off a distressed buyout of its own.

And it is not only the big players that have problems.

Earlier this year, FDIC, the government agency that insures bank deposits, took over $19 million US Hume Bank, in Hume, Mo., because of insolvency worries.

The same agency slapped a "smarten up" order on tiny Towne Bank of Mesa, Ariz., to prevent the bank from engaging in questionable banking practices in an effort to shore up a depleted balance sheet.

Overall, FDIC has 90 banks on its problem list.

Up here, Canada's financial sector is in better shape despite large mortgage-backed write-offs among the chartered banks. The Canadian banking system is not as fragmented as its American counterpart and, thus, not as open to bankruptcy as U.S. financial institutions, according to industry experts.

More failures looming

But, south of the border, analysts expect more carnage as the bad loans and write-offs raze the financial statements of undercapitalized banks.

RBC Capital Markets expert Gerard Cassidy already predicted that as many as 300 banks will fall by the wayside within a few years.

But, if the American financial market is becoming more of a gamble, then Ladenburg Thalmann analyst Richard Bove is probably its chief oddsmaker.

In July, the much-quoted and influential banking analyst published a report in which he used two different yardsticks to pick which banks might be in the most trouble.

For his trouble, Bove was slapped with a defamation lawsuit from BankAtlantic Bancorp. The bank's shares dropped sharply after Bove's examination placed BankAtlantic in the "danger" category.

In fact, Bove was relatively optimistic about the sector's survival prospects in his report.

Indeed, after he asked the provocative question in the paper's title, he answered it with: "Not as many as you think."

By financial measure, Bove estimated that only seven of more than 100 institutions studied are in any danger of financial insolvency.

Even FDIC, which might be forced to raise insurance premiums to other banks to cover these bailouts, noted that 3,000 banks and financial thrifts stopped operations in the 1980s.

The U.S. banking system is nowhere near in such dire straits today, the agency said.