Barron's(11/30) DC Current: More Nasty Bank Surprises
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Sat Nov 28 00:09:53 2009 EST
(From BARRON'S)
By Jim McTague
There's growing evidence that the case for buying financial stocks is larded
with "bulloney." Recent indications are that bank regulators from the Treasury
to the Federal Reserve to the Federal Deposit Insurance Corporation and on to
the state level remain in the dark about the quality of bank-loan portfolios --
especially at small to midsize institutions. An estimated 21 publicly traded
banks that have received TARP injections are on the ropes, according to
published reports. The number likely will grow, leading to some nasty surprises
for investors.
Because of the political antipathy toward Wall Street, the consensus is that
any Congressional financial regulatory reform bill will be punitive in the
extreme and consequently inhibit the growth and profitability of the sector for
years to come. This hardly is a buy signal.
The latest and perhaps most startling evidence of endemic regulatory weakness
is the failure this month of two banks and the bankruptcy of CIT, all
recipients of TARP funds from Treasury after they were deemed earlier in the
year by "expert" regulators to be safe and sound. CIT received $2.3 billion in
taxpayers-financed TARP funds; UCBH Holdings, parent of San Francisco's United
Commerce Bank, received $299 million; and Pacific Coast National Bank, a San
Clemente, Calif., lender, received $4.1 million. All were publicly traded.
The aforementioned 21 wobbly publicly traded companies that have received
TARP money had zero or negative net income. They've suspended dividend payments
to the Treasury. Regulators vetted all of these institutions, using the
"CAMELS" rating system. CAMELS stands for "Capital, Asset quality, Management,
Earnings, Liquidity, and Sensitivity (which measures interest-rate risk,
exchange-rate risk, and other market risk). Each bank's CAMELS score is secret.
Banks with the lowest scores were excluded from TARP. Those with the highest
scores were fast-tracked. Banks with average CAMELS scores received the most
extensive vetting. They were recommended by their primary regulators for review
by a panel of experts from the FDIC, the Fed and the Office of the Comptroller
of the Currency. The panel then forwarded the case file on to the Treasury.
Some of the TARP awards seem outlandish. Linus Wilson, an assistant professor
of finance at the University of Louisiana, points out that CIT Group's
preferred stock was yielding an astronomical 20% before it received a TARP
investment intended for healthy banks. The regulators demanded dividends on the
TARP money of just 5%. Wilson says that regulators should have been able to
determine in five minutes that this return was far too low to compensate
taxpayers for the risk.
No surprise then that regulators recently determined that $5.1 billion in
TARP funds are not in healthy banks but rather in banks that have failed or,
may soon fail.
As for legislation, be assured it will toughen oversight, increase capital
requirements and enhance consumer protection. Profits will shrink. The universe
of financial institutions will contract. Here's hoping that you are better than
regulators at picking winners from losers. |
