One of the dirtiest little secrets about the U.S. economy is that many banks are essentially bankrupt -- even as they still do business. The stress tests came and went, but banks that should be scheduled for triple-bypass surgery still walk around as if they're in robust health.
On July 31, 2009, the Wall Street Journal reported that the Federal Reserve and the Office of the Comptroller of the Currency have put more banks on a kind of double-secret probation in 2009 thus far than in all of 2008. The memorandums of understanding that the supervisory agencies sent out tell the heart-attack-prone banks to take strong actions, such as raising capital or replacing their management. According to the newspaper, if the rate of these memos keeps up at the same pace, nearly 600 banks will receive a memo as opposed to about 400 last year.
So, the question is, why have banks fallen so far off the pedestal of safety and soundness? Why are they more like the walking wounded, waiting for the heart attack that might kill them? Bob Prechter answers that question in his most recent Elliott Wave Theorist.
Want To Know Where To Put Your Money Now? Bob Prechter's latest Elliott Wave Theorist not only covers the markets, the economy, real estate, banks, and "peak oil," he also gets specific about where to put your money now.
Read more here.
Many Banks Today Are Little More than REITs
Why did bank stocks fall so far? Back when banks generally lent money to productive enterprises, they were more diversified lending institutions. They were also more conservative, requiring 30 percent down to buy a house, so if a mortgage holder defaulted, the bank had plenty of leeway to sell the property.
By concentrating on residential and commercial real-estate lending and dropping their down-payment standards on mortgages to zero, banks shunned production loans in order to acquire vaults full of deeds. In doing so, they became little more than real estate investment trusts (REITs).
It would be well to recall that in the 1973-1974 bear market and recession, the shares of many REITs suffered drops of up to 100 percent, as many of the companies declared bankruptcy. This history, not previous declines in bank stocks, is the proper model for anticipating what will happen ultimately to bank stocks and the companies they represent. Banks are not just REITs but REITs in trouble.
Want To Know Where To Put Your Money Now? Bob Prechter's latest Elliott Wave Theorist not only covers the markets, the economy, real estate, banks, and "peak oil," he also gets specific about where to put your money now. Read more here.