The financial industry continued to teeter yesterday despite the government’s rescue plan for Fannie Mae and Freddie Mac.
This time it was regional banks that got hit hardest. Washington Mutual and National City both issued remarkable statements saying they had enough cash to remain solvent and weren’t experiencing runs on the bank. This on a day when depositors lined up to get their money back from IndyMac Bancorp, which on Friday became the biggest American bank failure in nearly a quarter century after a Depression-style run on the bank. Yesterday, WaMu plunged 35 percent and Nat City dropped 14 percent.
Bloomberg reports that yesterday’s 10 percent fall in bank stocks was the worst in the twenty years of a bank-stock index, something The Wall Street Journal misses in its C1 story.
The New York Times leads page one with a story that says “confidence in the banking sector spiraled downward” yesterday, perhaps because these banks are too small to be bailed out. It quotes the chairwoman of the Federal Deposit Insurance Corporation trying to calm nerves:
“People should not assume that just because the stock price has been going down, that we’re going to close their bank,” Ms. Bair said. “In addition to our credit problems, I don’t want to have to start worrying about bank runs.”
The Times says its likely to be another bleak week, with bank earnings season in full swing. M&T Bank said Monday its earnings fell by a quarter and its stock tumbled 16 percent.
How bad will it get?
Regulators and investors are bracing for a small number of banks to fail over the next 12 to 18 months. Analysts predict that 50 to 150 banks might stumble. In the first quarter this year, the F.D.I.C. listed 90 banks as troubled, which is far lower than the levels during the savings and loan crisis of the 1980s. Still, Ms. Bair said that number would increase. IndyMac, for example, was not on that first quarter list at the F.D.I.C. but was still seized by regulators.
The education of Henry Paulson
The Journal says that Treasury Secretary Henry Paulson led the rescue plan for Fannie and Freddie this weekend to stave off “imminent crisis.” As part of a page one tick-tock on the bailout plan, it reports that he’d had breakfast on Friday with Federal Reserve Chairman Ben Bernanke and had barely talked about such a plan.
Fannie and Freddie shares whipsawed throughout the day, ending up down 5 percent and 8 percent respectively. The closely watched auction of Freddie debt went off without a hitch.
The Journal calls it the latest example of the transformation of Paulson from Republican free-marketer to government interventionist. Merrill Lynch even compared the U.S. government to Sweden’s.
The Times on page one says Wall Streeters and overseas central bankers warned the U.S. that
any more turmoil threatened to reduce the value of trillions of dollars of the companies’ debt and other obligations, which are held by thousands of domestic and foreign banks, pension funds, mutual funds and other investors…
That, in turn, could have lasting effects on economies here and abroad already struggling from slumping housing markets, spiking energy prices and sharp declines in consumer confidence. The debt securities of Fannie and Freddie are nearly as ubiquitous as the debt issued by the United States government. In the minds of most investors, they are also almost as safe.
Sweden, good; Japan, bad
The Journal takes a look on C1 at the history of bank bailouts around the world and says it’s better to just get it over with rather than dragging them out.
This history shows it is almost always a painful process, typically costly to taxpayers and best done quickly.
Example to emulate: Sweden, whose quick bailout cost 4 percent of GDP. Example not to emulate: Japan, which let its zombie banks stagger along for a decade, crushing its economy.
Insurers’ losses tighten housing market further
The Journal on page one reports that it’s getting even harder to get a house. This time it’s because mortgage insurers are “dramatically tightening their standards” due to big losses they’re taking from defaulting homeowners. Some are closing their doors or ending their lending.
The paper quotes a Chicago bank official as saying that 70 percent of its previous borrowers wouldn’t be able to buy now because of the tighter standards.
Nowadays, insurers are frequently requiring at least a 10% down payment, compared with previous standards that might have included a 3% to 5% down payment. Prices also are rising. Next month, for example, MGIC plans to charge an annualized premium of up to 0.75% of the loan balance for fixed-rate, 30-year mortgages with a 10% down payment, up from 0.67% this month. The company doesn’t plan to change course anytime soon. “Housing cycles don’t correct quickly,” says MGIC’s Mr. Zimmerman.
Tell that to Barron’s.
Another two bite the dust at Tribune
The Times on C2 and the Journal on B1 report that the Los Angeles Times publisher David Hiller was forced out yesterday, and Chicago Tribune editor Ann Marie Lipinski quit, further roiling Tribune Company.
It’s just desserts for Hiller, who forced out two editors because they resisted his plans to slash newsroom jobs. Lipinski sounded like Marcus Brauchli in her reason for leaving:
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.In her note, she wrote that “professionally, this position is not the fit it once was.” She added that the new management “should have their own editor, compatible with their style and goals.”
