Posts Tagged ‘European debt crisis’

QE3 A Boon to CMBS

Tuesday, November 13th, 2012

If history repeats itself, QE3 will be good for commercial mortgage-backed securities (CMBS). The Fed’s third round of quantitative easing – which is purchasing $40 billion of residential mortgage-backed securities (RMBS) each month from Fannie Mae and Freddie Mac – will free up money for the commercial real estate market and lure investors away from other vehicles in their hunt for maximum yield.  QE3 is expected to last at least until 2015.

“The primary difference between 2012 and 2010 is that commercial property prices in healthy markets are stronger than they were just two years ago.  At its peak, CMBS constituted 40 percent of all commercial real estate loans,” said John O’Callahan of CoStar.  O’Callahan notes that “Investment returns of 40 percent or more for riskier assets during QE1 were largely a result of a bounce-back from the lows caused by investor panic in late 2008 through early 2009.  The overall impact of QE becomes clearer upon examining QE2.  Prices of equities and high-yield bonds, including CMBS, gained a respectable 12 to 15 percent.”

Low interest rates mean that returns will narrow to as little as 150 basis points, forcing investors to look elsewhere for respectable yields.  Currently, B-piece CMBS investors are achieving 20 percent and higher yields.  By contrast, the Dow Jones Industrial Average’s yield has remained below three percent each of the last 20 years.

CMBS has “been a boon for us,” said Kenneth Cohen, head of CMBS at UBS Securities.  “You’ve seen a fairly good size increase in loan pipelines.  Our pipeline has increased probably 50 percent over the last six weeks.”  Borrowers also are cashing in on the favorable loan terms.  According to Fitch Ratings, loans in 2012 are averaging 95.7 percent of a stressed property’s estimated value; that’s up from 91.6 percent in 2011.

Despite the good news, industry experts don’t expect the resurgent CMBS market to resolve all financing woes.  For example, the encouraging loan terms are of minimal help to commercial real estate owners who are under water, nor will new issuance be adequate to refinance the $54 billion in CMBS loans coming due this year.  Additionally, some ratings firms warn that the credit quality of CMBS loans could increase risk for some investors.  In response, Moody’s Investor Services’ now requires that senior bonds have expensive credit protection.

Want to Feel Better About the Economy? Take a Look at the Rest of the World

Monday, September 10th, 2012

There is no doubt that America needs to get its economic mojo back: in the 2nd quarter its GDP grew at an annualized rate of 1.7 percent, according to revised figures published on August 29th.  That growth number is down from two percent in the 1st quarter and 4.1 percent in late 2011. But, anyone ready to ascribe that number to mismanagement or competition from emerging economies should consider the state of much of the developed world.

Europe remains the cautionary tale with GDP shrinking by 0.2 percent (an annualized decline of 0.7 percent) in the 2nd quarter. The Greeks are on the verge of quitting the common currency and Spain is looking for a bigger bailout.  According to the Economist, the research firm Markit is predicting a further fall in GDP in the 3rd quarter.

Finland’s economy shrank by 1.1% in the second quarter. The country had been one of the euro zone’s best performers, but the crisis is now starting to take its toll on exports, which account for 40% of Finnish GDP. In July the finance minister said Finland would “not hang itself to the euro at any cost”.

The Japanese economy is feeling the European gloom with exports to the European Union falling by a steep 25 percent in the year to July.  The only reason their economy grew by 3.5 percent over the last 12 months is because of all the reconstruction work after the tsunami and earthquake.

Even the high-flier BRIC countries (Brazil, Russia, India and China) are sputtering.  Brazil’s fall from grace has been particularly marked:  Brazil’s economy grew at an annualized pace of only 1.64 percent in the April-June period. It is forecasted to grow 1.9 percent this year, less than the 2.15 percent in the U.S. and 2.5 percent expected in Japan. One bright spot – Brazil scored the rare coup of winning the bid for the 2014 World Cup and the 2016 Summer Olympics, leading to $38.1 billion in foreign direct investment this year.

Flagging imports suggest that China’s slowdown will prove to be more severe than previously expected.  The country’s exporters are also having a hard time.  In August, new export orders for manufacturers were at their weakest since March 2009, according to Markit.

So, while the campaign rhetoric heats up, with each side blaming the other, it is important to see the bigger picture. A big part of our weak job numbers was that U.S. factory activity shrank for a third straight month in August — because of factors outside our control.  Weak demand from China (our 3rd largest market) hits our farmers, IT firms and chemical companies. When Europe contracts, that makes our manufacturing free fall because they buy 20 percent of our exports.  In the end, we need to place our woes in context and recognize that the recession is indeed world-wide.

Germany Catches Cold

Monday, June 25th, 2012

In a sign that no Eurozone nation is completely immune to the shocks of the European debt crisis, ratings agency Moody’s Investor Services has cut the credit ratings of six banks in Germany.  The largest bank to be downgraded is Commerzbank, Germany’s second-biggest lender, which was cut to A3 from A2.

“Today’s rating actions are driven by the increased risk of further shocks emanating from the euro area debt crisis,” Moody’s said. The downgrade shows that Moody’s thinks Germany could be hit if the Euro crisis becomes a catastrophe.  “It brings the crisis in Southern Europe and Ireland closer to home in Germany,” said BBC Berlin correspondent Stephen Evans.

The other affected banks DekaBank, DZ Bank, Landesbank Baden-Wuerttemberg, Landesbank Hessen-Thueringen and Norddeutsche Landesbank.  In addition to its rating cut, Commerzbank was placed on negative outlook, meaning Moody’s is considering an additional cut.  According to Moody’s that is because of the bank’s exposure to the Eurozone periphery and its concentration of loans to single sectors and borrowers.  Moody’s deferred a decision on the rating of Germany’s biggest bank, Deutsche Bank.

The downgrades are a result of Moody’s concern about the “increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks’ limited loss-absorption capacity”.  Moody’s believes that German banks are likely to find themselves under less pressure than many European peers as personal and corporate debt levels are more modest than elsewhere.  The agency noted that the downgrades are less harsh than it had originally said they could be.  “Moody’s recognizes the steps Germany banks have taken to address past asset quality challenges,” the ratings agency said.

The Group of Seven nations agreed to coordinate their response to Europe’s turmoil, which has tipped at least eight of the 17 Eurozone economies into recession and damped demand for foreign goods. Policy makers at the European Central Bank meeting today face increasing pressure to lower rates and introduce more liquidity support for banks.  Moody’s decision is “a bit harsh” given the strength of the German banking system and economy, said Sandy Mehta, chief executive officer of Value Investment Principals Ltd., a Hong Kong-based investment advisory company.  “But given the events in Europe, unless the authorities and the powers that be are more decisive and take firmer action, then you do have the risk that the economic problems will engulf Germany as well.”

The rating actions were driven by “the increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks’ limited loss-absorption capacity,” Moody’s said.  “We wanted to identify vulnerabilities from further potential shocks from the euro area debt crisis and how this would affect investor confidence in institutions across Europe,” said Moody’s Managing Director for banking, Carola Schuler.  Moody’s agency was especially apprehensive about a potential decline in the value of banks’ portfolios of international commercial real estate, global ship financing, as well as a backlog of structured credit products, she said. “German banks have limited capacity to absorb losses out of earnings and that raises the potential that capital could diminish in a stress scenario.”  Moody’s action was anticipated.

According to Forbes, “This latest downgrade could be used by European politicians to put pressure on Angela Merkel and other policymakers.  Germany is staunchly opposed to the idea of Eurobonds, which Spanish and Italian politicians believe is one of the ways out of this mess.  Moody’s downgrade is but another sign of the extent of financial interconnectedness in the European Union, which highlights the dangers of contagion.  While some have argued that Germany would be better off leaving the monetary union, its financial sector remains in close contact to the broader European economy, making it difficult for Merkel and the rest to give up.  According to Moody’s, German banks’ major headwind is the continuation of the European sovereign debt crisis.  These banks are sitting on assets that will see their quality erode as markets tank, an effect that will be exacerbated if the global economy begins to cool at a faster pace too.”

Writing on the 247wallstreet.com website, Douglas A. McIntyre says that “Germany is assumed to be the home market of some of Europe’s most stable banks because of the relative stability of its economy.  Moody’s has undermined that view as it cut ratings of seven banks there, including Commerzbank, the second largest firm in the country.  The move was the result of worry over exposure to debt issued by some nations in the region that are now in financial trouble.  And the banks Moody’s singled out have less than adequate balance sheet to handle a major shock to the region’s credit system.”

Existing-House Sales Spike in April

Tuesday, May 29th, 2012

If you want to sell a product, price it correctly. That theory at long last appears to be working in the U.S. housing market.  The National Association of Realtors (NAR) reported that sales of existing homes rose 3.4 percent in April when compared with March.  One reason is that asking prices were remarkably affordable.  The interest rate on a 30-year fixed-rate mortgage was 3.79 percent, the lowest since record-keeping began in 1971, according to Freddie Mac.  The Realtors’ index of affordability hit a record high in the 1st quarter and factors in sales prices of existing homes, mortgage rates, and household income, which is gradually strengthening as the labor market improves.

The average sales price was 10.1 percent higher when compared with one year ago.  That has the potential to lure buyers who decide they can’t wait for even cheaper prices.  “Today’s data provide further evidence that the housing sector is turning the corner,” said economist Joseph Lavorgna of Deutsche Bank Securities.  The numbers could see more improvement in coming months.  Action Economics Chief Economist Michael Englund said that “The existing home sales data generally continue to underperform the recovery in the new home market and other indicators of real estate market activity.”  But, he added, “the trend is upward.”

Owner-occupied houses and condominiums dominated the market, a change from all-cash deals by investors snapping up distressed properties.  Employment gains and record-low mortgage rates may make houses affordable Americans, eliminating a source of weakness for the world’s largest economy just as risks from the European debt crisis rise.  “We are making incremental progress,” said Millan Mulraine, a senior U.S. strategist at TD Securities, Inc., who correctly forecast the sales pace.  “People are becoming more confident about job prospects and about taking on mortgages.  This is all positive for the economy.”

Even with this uptick, sales are well below the nearly six million per year that economists equate with healthy markets.  The mild winter encouraged some people to buy homes, which drove up sales in January and February, while making March weaker.

First-time buyers, a key segment critical to residential recovery, rose in April and accounted for 35 percent of sales, up from 32 percent in March.  “First-time homebuyers are slowly making their way back,” said Jennifer Lee, an economist at BMO Capital Markets.  “That is still below the 40-to-45 percent range during healthy times, but the highest in almost half a year.”  Homes at risk of foreclosure accounted for 28 percent of sales.  That’s approximately the same as was seen in March sales statistics, but down from 37 percent of sales in April 2011.

Wall Street analysts expressed caution about seeing the increase as a sign that home values are about to make a big comeback.  NAR’s price calculations may have been skewed by larger homes coming onto the market, analysts said.  According to NAR economist Lawrence Yun, seasonal factors might have played a role in the price increase because families tend to buy in the spring, which means bigger homes comprise a larger share of total sales.  “It does echo the message sent by most other related measures that have shown house prices stabilizing or firming,” said Daniel Silver, an economist at JPMorgan.  Home prices, according to the S&P/Case Shiller composite index, have fallen by approximately one-third since the middle of 2006.  “Although the data seem to imply that there is a relative good balance between buyers and sellers, it is unlikely that home prices can recover on a sustained basis until the number of distressed properties is more significantly reduced,” said Steven Wood, chief economist at Insight Economics.

The housing inventory climbed 9.5 percent to 2.54 million, representing a 6 ½-month supply.  CoreLogic estimates that the shadow inventory — homes that aren’t on multiple listing services that are either seriously delinquent, in foreclosure or real-estate-owned — totaled 1.6 million units as of January.

CNBC’s Diana Olick is unimpressed with the price spike.  “The median price of an existing home that sold in April of this year was $177,400, an increase of just over 10 percent from a year ago.  That is the biggest price jump since January of 2006.  The difference between now and then, though, is the 2006 price jump was real, this latest spike is not.  As we reported here on the Realty Check last month, a lack of distressed supply, that is foreclosures and short sales, is pushing overall home sales lower.  That’s because the majority of the sales action for the past few years has been on the low end of the market.  Now, as banks try to modify more delinquent loans to comply with the recent $25 billion mortgage servicing settlement, and as investors rush in to buy distressed properties and take advantage of the hot rental market, the distressed market is drying up.  The share of home sales in the $0 — 250,000 price range made up over 73 percent of all sales in February; that has already dropped to 67 percent in April.  If you look at sales by price category, you see the most startling evidence of this shift in what’s selling on the low end out west.  Sales of homes $0 — 100,000 dropped over 26 percent out west in April, but rose 21 percent in the $250 — 500,000 price range.”

2012 Stock Market Off to a Promising Start

Monday, February 6th, 2012

As the stock market moved between negative and positive territory on the last day of January, 2012, the Dow Jones Industrial Average was nevertheless poised to close with their biggest January gain in 15 years – despite closing down a few points for the day.  In fact, it could be the best January for Standard & Poor’s (S&P) and Dow since 1997 and since 2001 for the Nasdaq.

“Everyone is cautiously waiting for the close today to see if we can put this on the board,” said Frank Davis, director of trading at LEK Securities.  “It would be a pretty darn good foothold to start the year.”  Stocks initially rose after European Union leaders agreed to strengthen their financial firewall.  Additionally, most members have agreed to sign a new fiscal compact.  Even so, 2012’s first summit ended without new solutions to resolve Greece’s debt crisis.  “There’s positive news coming out of Europe, but it’s still very tenuous with Greece,” said Jeffrey Phillips, chief investment officer of Rehmann Financial.  “Every time we see something positive there, we seem to see it reverse in four or five days.”

The S&P 500 rose 4.3 percent in January, which is its best performance since the 6.1 percent gain that occurred in January of 1997.  One year ago, the market added a respectable 2.3 percent in January.  Following a trying 2011, investors had such low expectations that it’s easy for the year’s earliest reports to come in better than expected, said Jerry Harris, chief investment strategist at the brokerage firm Sterne Agee.  “I don’t see anything really glamorous or tremendous about the economy or earnings,” Harris said.  “But I think they’re very acceptable, and things are grinding along.”

“Longer-term investors should not be fooled by what appear to be attractive valuations for financials,” said Brian Belski, Oppenheimer & Co.’s chief investment strategist.  Any investor should look three to five years into the future and invest less money in these stocks than their S&P 500 weight would suggest because they account for roughly 14 percent of the index’s value.  The financial index was recently valued at 12.4 times earnings, which is about twice as high as it was two years ago.  “Most of these companies operate in a ‘whole new world’ of increased scrutiny and regulation,” Belski wrote, noting that more restrictive capital requirements, imposed as part of that shift, will hurt profitability.

The European debt crisis is a major culprit in the market’s volatility. Confidence that American markets can remain relatively unaffected by Europe’s difficulties has fueled gains in 2012.  Money managers, some of whom missed the upward move, seem to be willing to buy on day-to-day declines.  “The action that we’ve seen today is very similar to what we’ve seen throughout most of the year so far,” said Ryan Larson, head of equity trading at RBC Global Asset Management.  “We see the resilience showing in U.S. markets and I think that’s a theme that we’ve seen throughout 2012.  The U.S. appears to be slowly, slowly in the early stages of a decoupling from the Eurozone,” he said.

Chris Cordaro, chief investment officer at RegentAtlantic Capital, a wealth management firm, believes equities will finish sharply higher this year as Europe’s problems are resolved and investors buy into stock valuations that were beaten down through much of last year.  “We could definitely end the year much higher on equities,” he said.  “We have been favoring equities in our portfolio. We have just increased our exposure to emerging markets.”

More bad news came January 31 when the Conference Board’s consumer confidence index fell to 61.1, missing the forecast 68.  December’s level had experienced a slight upwards tick to 64.8 from 64.5.  “The US consumer has still seen a very firm turnaround since October, this also is likely to reflect the increase in gasoline prices since the start of the year,” wrote David Semmens, U.S. economist with Standard Chartered.  “While the U.S. consumer is feeling better, the turnaround is still likely to be volatile.”

“Most market participants will raise their glasses to usher out what has proved to be a decent January for performance, data and sentiment,” said Jim Reid, a global strategist at Deutsche Bank AG.

Santa Brings More Than 200,000 New Jobs in December

Monday, January 16th, 2012

The United States added more than 200,000 jobs in December of 2011, building on a strengthening employment market that dominated the second half of the year.  This brought the unemployment rate down to 8.5 percent from the revised 8.7 percent, which had been predicted in November.  The primary growth was in transportation — primarily courier services that hired for the holidays — healthcare and manufacturing, according to the U.S. Bureau of Labor Statistics.

“It would have been even better without the drag from Europe,” said John Canally, economic strategist at LPL Financial, a stock brokerage firm. “The Europe situation created uncertainty, and uncertainty was used as a reason not to hire until now.”  The year ended even more strongly than economists had predicted.  They had forecast that employers would add a net 150,000 jobs in December, according to a survey by Factset. They also had predicted that the unemployment rate would tick up to 8.7 percent from November’s 8.6 percent; this is the lowest rate since March 2009.

In the end, November’s unemployment rate was revised up in this report, to 8.7 percent.  The better-than-expected monthly gain of 219,000 private-sector jobs means American businesses have replaced more than three million of the 4.2 million private-sector jobs that were lost the past 13 months. The private-sector jobs gained since employment bottomed in February of 2010 marks the strongest recovery since the 1990-1992 recession, when U.S. businesses added 4.2 million jobs in the same amount of time.

The new job numbers highlight the fact that the U.S. economy is on its way to recovery even as strains in Europe persist,” said David Watt, senior currency strategist at RBC Capital in Toronto. The fact that the labor market is gaining traction should be good news to the Obama administration, whose economic policies are relentlessly attacked by the political opposition.

This string of better-than-anticipated economic indicators has highlighted the stark contrast between the recovery in the world’s biggest economy and Europe, which faces bad times for months or even years.  Even with the good news, the American economy needs an even faster pace of job growth over a sustained period to make a noticeable dent in the pool of the 23.7 million people who remain out of work or underemployed in the wake of the 2007-09 recession.

December marked the 15th consecutive month that employment numbers have risen. Marcus Bullus, trading director at MB Capital, said: “That’s one hell of a number. Such an impressive fall in both the number of jobless Americans and the unemployment rate will cheer everyone bar Republican spin doctors.  The Obama administration could be forgiven for showboating over this convincing evidence that America’s economy is pulling away from Europe’s.  From a market perspective, strong US data like this will add to optimism, but nobody doubts the considerable downward pressure the Eurozone will continue to place on the global marketplace during 2012.”

Automatic Data Processing’s (ADP) numbers for December are even more impressive, saying the government added 325,000 jobs in December.  ADP’s figures do not always match the government’s, and economists warned that seasonal factors could have boosted the figures. Even so, all the major measures of the job market appear to be on the upswing.

Lasting payroll gains are needed to chip away at joblessness and support household spending, which accounts for approximately 70 percent of the world’s largest economy. The labor market figures come on the heels of recent data showing increased manufacturing and a rebound in consumer sentiment that show the U.S. is barely impacted by Europe’s debt crisis.  “You got the trifecta — more people working, wages up and the average work week up,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc., who accurately forecast the December payroll gains.  “You can’t really argue that that isn’t a sign of significant improvement in the job market.”

Yearly benchmark revisions showed the unemployment rate averaged 8.9 percent in 2011, down from 9.6 percent and 9.3 percent in the previous two years. It still ranks as the worst three-year period since 1939 to 1941.

Writing in the Wall Street Journal, Phil Izzo says the increase is “for real.” According to Izzo, “While the unemployment rate has been falling in part due to people leaving the labor force, a large portion of this month’s number appears to come from people finding jobs.

“The unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The actively looking for work’ definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force.

“The key to the drop in the broader unemployment rate was due to a 371,000 drop in the number of people employed part time but who would prefer full-time work, that comes on top of big drops in that category over the past two months. That number could reflect people having their hours increased or part-time workers moving on to full time work,” Izzo concluded.

Economic Indicators Showing Signs of Life

Wednesday, January 11th, 2012

Leading economic indicators (LEI) rose 0.9 percent in October, a sign that the U.S. economy is likely to see accelerated growth and not slip into a feared double-dip recession.  According to The Conference Board, its index of leading economic indicators rose significantly faster than the revised 0.1 percent rise in September and the 0.3 percent increase in August.  After growing at an anemic pace of just 0.9 percent in the first six months of 2011, the economy grew 2.5 percent in the July – September quarter.  Some analysts are looking for even stronger growth in the 4th quarter.

Economists said the October gain and other positive reports recently should ease fears that the nation is in danger of slipping into a double-dip recession.  According to Conference Board economist Ken Goldstein, the latest leading indicators report was pointing “to continued growth this winter, possibly even gaining a little momentum by spring.”

The leading economic indicators is a subjective gauge of 10 indicators designed to signal business cycle highs and lows.  Among the 10 indicators, nine made positive contributions in October, led by building permits, the interest-rate spread, and average weekly manufacturing hours.  The sole negative contribution came from faster supplier deliveries.

Increases in consumer spending, manufacturing and homebuilding — along with fewer job losses — highlight an economy that is weathering the turbulence in financial markets caused by the European debt crisis.  Even so, a nine percent unemployment rate and political gridlock over deficit-cutting are hurting confidence, which may hamper a further pickup in the pace of growth.  “The economy looks to be getting better despite the continued drumbeat of negativity in financial markets,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc., who accurately forecast the gain.  “That speaks to U.S. resiliency.  If we can put some of these fiscal issues behind us, even for a short period of time, we might be able to come back.”

Another positive sign can be found in the University of Michigan’s six-month index of consumer expectations which rose to 56.2 in November, a five-month high, compared with 51.8 in October.  A word of caution — the measure remains below the 80.5 average of the previous expansion that ended in December 2007.

October’s results suggest strong ongoing economic activity, said Millan Mulraine, TD Securities’ economics strategist.  “On the whole, this report underscores the positive tone of the recent flow of economic reports pointing to a meaningful pick-up in overall economic activity during the quarter,” Mulraine said.  “And while the economy remains vulnerable to missteps in Europe and Washington, there is every indication that the recovery is slowly moving into the clear, building on the momentum from the last quarter.”

According to Ataman Ozyildirim, an economist at The Conference Board, “The October rebound of the LEI — largely due to the sharp pick-up in housing permits — suggests that the risk of an economic downturn has receded. Improving consumer expectations, stock markets, and labor market indicators also contributed to this month’s gain in the LEI as did the continuing positive contributions from the interest rate spread.  The Coincident Economic Index also rose somewhat, led by higher industrial production and employment.”

Banks Getting Healthier

Tuesday, December 13th, 2011

Bank earnings rose to their highest level in more than four years, while the number of troubled banks declined for the second consecutive quarter.  The Federal Deposit Insurance Corporation (FDIC) said the banking industry earned $35.3 billion in the 3rd quarter, an increase from the $23.8 billion reported in the same timeframe last year.  More than 60 percent of banks reported improved earnings.  According to the FDIC, there currently are 844 banks on its confidential “problem”, or roughly 11.5 percent of all federally insured banks.  That was down from 865 between April and June, and was first quarter in five years to show a decline.

“After three years of shrinking loan portfolios, any loan growth is positive news for the industry and the economy,” said Martin Gruenberg, FDIC’s acting chairman.  Lending has not yet reached healthy levels.  So far in 2011, 90 banks have failed.  That’s a significant improvement over the 157 banks that were shuttered last year — the most for one year since the darkest days of the 1992 savings and loan crisis — and the 140 in 2009.

The FDIC’s so-called problem bank list consists of the institutions considered most likely to fail, though few actually are shuttered.  Only 26 of the nation’s 7,436 banks failed in the 3rd quarter, 15 fewer than the same period of 2010.  “The trend has been improving, but the current number of failures and problem institutions remains high by historical standards,” Gruenberg said.

Banks whose assets exceed $10 billion drove of the earnings growth. They account for just 1.4 percent of all banks but accounted for about $29.8 billion of the industry’s earnings in the 3rd quarter.  Those are the biggest banks, such as Bank of America, Citigroup, JPMorgan Chase and Wells Fargo.  The majority of these banks have recovered with help from federal bailout money and record-low borrowing rates.

Writing on MarketWatch, Ronald D. Orol says that “It is unclear whether the reduction in troubled banks on the list is a result of institutional failures or improvements.  In the 3rd quarter there were 26 bank failures and 21 banks dropped off the problem bank list.  In the 2nd quarter there were 22 bank failures and 23 banks came off the problem bank list.  It is possible that a bank fails so fast that it is never on the problem list.  FDIC-insured institutions posted net income of $35.3 billion in the 3rd quarter, an increase of $11.5 billion, or 48 percent, compared to a year earlier.  The profits were at the highest level since the 2nd quarter of 2007, the FDIC said.  However, Martin Gruenberg said that even though the industry is generally profitable, the recovery is ‘by no means’ complete.  He noted that a central concern for the agency is whether banks can generate income from a greater demand for loans, something that is still lacking.  He said that the industry has seen income gains generated from improvements in credit quality and the ability to reduce loss provisions but that to really generate income and revenue, funding for loans is going to have to expand and that ‘depends on the overall economy.’  The key issue is going to be whether there can be a pick up in economic activity and generate demand for loans.  Ongoing distress in real-estate markets and slow growth in jobs and incomes still pose a threat to bank credit quality.”

The majority of banks that have struggled or failed have been small or regional institutions.  They rely a lot on commercial property and development loans, sectors that have lost a lot of money.  As companies closed during the recession, they vacated shopping malls and office buildings financed by those loans.  Nevertheless, large banks are less profitable than they were before the financial crisis hit in the fall of 2008, leading to some sizable layoffs.  Some credit rating agencies have been warning that the European debt crisis could hit the largest American banks.  Financial companies’ stocks have been especially beat up in the stock market’s volatility in recent months.

“We continue to see income growth that reflects improving asset quality and lower loss provisions,” Gruenberg said.  “U.S. banks have come a long way from the depths of the financial crisis.  Bank balance sheets are strong in a number of ways, and the industry is generally profitable, but the recovery is by no means complete.”  The banking industry also saw a 0.5 percent rise in net operating revenue compared with 2010, thanks in part to a $3.2 billion — or 5.8 percent — increase in non-interest income, the first year-over-year increase in nearly two years.  “Absent these unrealized gains, net operating revenue would have posted a year-over-year decline for a third consecutive quarter,” Gruenberg concluded.

Bernanke Sets Sights on the Growing Deficit

Wednesday, June 23rd, 2010

Ben Bernanke has the deficit jitters.  Federal Reserve Chairman Ben Bernanke is warning that – even as the nation struggles to recover from the worst recession in 75 years – Congress must deal with an “unsustainable” level of debt.  “Our nation’s fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession,” Bernanke said in testimony before the House Budget Committee.

Although Bernanke admits that the deficit was a necessary evil designed to bring the nation out of a deep recession, it has to be addressed in the long term because of the European debt crisis.  The budget deficit gap will narrow as the economy improves and stimulus programs are phased out.  The Fed chairman still sees several drags on the economy.  First and foremost is the jobless rate, which stands at 9.7 percent nationally, as well as the housing market that is plagued by foreclosures and short sales – of which 4.5 million are expected this year.  The good news is that the Fed’s recently updated Beige Book found that consumer and business spending are up slightly.  There is limited growth in the manufacturing, non-financial services and transportation sectors.

The housing market is expected to remain flat, thanks to the expiration of government-funded subsidies.  According to the Mortgage Bankers Association, the number of people applying for mortgages has fallen to its lowest level in 13 years.  Tourism also is down, partly because of the Gulf of Mexico oil spill.  Inflation also is low, making it probable that the Fed will keep the benchmark U.S. interest rate close to zero.