The economy is getting better, but people are still losing their jobs, and banks are still going bankrupt. At least we are told it’s getting better. They need someway to keep the engines running on Wall Street.

Although BankUnited is a regional player, it’s still somewhat of a larger bank, with nearly 14 billion in assets, and a large number of outlets. When a bank this size goes belly up, it brings some major concerns to the market. What’s different here is that private investors have stepped in riding a white horse to save the bank, after the last minute. It will be interesting to see how the investors position themselves as possible takeover targets come up. The investor group will inject an additional $ 900 million into the bank; bring its tangible common equity to 8% of assets.  

Breakdown: BankUnited

·          Worth nearly $13bn by assets

·          Closed by federal regulators in the biggest US bank failure of 2009

Breakdown: Investor Group

·          Blackstone Group

·          The Carlyle Group

·          Centerbridge Partners

·          WLRoss & Co

“The auction, conducted by the Federal Deposit Insurance Corporation, was the second of a troubled US bank during the credit crisis. Earlier, a group including JC Flowers, hedge fund manager John Paulson and Dune Capital won the bidding for IndyMac’s assets.”

Breakdown: The Deal

·          Deal includes a loss-sharing agreement on $10.7bn of the bank’s $12.8bn in assets

·          Government will take 80% of the first $4bn in losses

·          95% of any remaining losses

·          Federal government receives warrants, share of any future upside

·          Investors will put $900m of equity into the bank

·          Bringing tangible common equity up to 8% of assets

·          Giving the bank the ability to make acquisitions

·          Will be run by John Kanas, former chief executive of North Fork

·          Winning group has talked to regulators for almost four months

“Regulators have worried that sales of troubled banks to private capital should not look overly generous. Those fear were fed when Chris Flowers, founder of private equity firm JC Flowers, said the investor group that bought IndyMac’s assets had all the upside for the failed California bank, while the government had all the downside. Calls to Mr Flowers were not returned.”

Read Article: Private equity consortium wins BankUnited auction

FDIC: FDIC Bank Closing Information for BankUnited, FSB

There is an All State Insurance commercial currently running on televisions in the United State that talks about how the company was created in the middle of the great depression, and how they have been around for the 7 or so recession since. The actor in the commercial says that when the fear subsides, and the economy starts up again a funny thing happens. Hope.

The question is, is this a false start. The general numbers are still down. New housing starts are down to there lowest leaves. 10 out of 19 banks needed to raise more capital. The two largest automakers in the world are declaring bankruptcy, and unemployment is reaching levels not since in generations.  

Are we just over optimistic, or have been become so use to contunited growth, that with out it, we can not survive. What scary is at want point does hipper inflations start? If we don’t increase the money supply, can we deal with all the bills we have pilled up?

Experts are saying that “stocks have moved up too quickly from their March lows, there is one undeniably healthy thing about this surge: Investors are not nearly as afraid about the economy as they were a few months ago.”

Breakdown: CBOE Volatility Index (VIX)

·          Market barometer Measuring expectations of risk and turmoil

·          Created in 1993

·          Changes to its methodology made in 2003

·          Commonly look at as a gauge of fear

·          Rule of thumb, the higher the level of the VIX, the more panicky the investors

·          Last Bull Market, 2002 to 2007 – range of between 10 and 20

“VIX closed below 30 for the first time in more than eight months”

VIX has not been this low since the investment bank Lehman Brothers went bankrupted. After which the VIX peaked near an all-time high of 90 in late October. Investors feard the demise of AIG and the possible nationalization of large banks like Citigroup and Bank of America.”

“As long as the VIX doesn’t get too low, then there is a good chance that this recent rally is actually the start of a new bull market and not merely a temporary blip in the bear market.” The VIX around 27 is still historically high and therefore not a sign of too much exuberance.

“If the VIX gets too low, it could be indicative that good news is already reflected in stock prices. Then you would have to begin to ask yourself what other news could drive stocks higher that investors haven’t already discounted.”

“A low VIX isn’t necessarily a positive,” Roberts said. “It could mean that people are getting comfortable and that might set us up to more shocks in the system. Investors might not be factoring bad news into the equation.”

Read Article: Who’s afraid of a big bad bear?

In banking size does matter, and when a big bank fails it has the potential of taking down the whole economy as many experts say the failure of Lehman Brothers did in 2008. But much of the American banking system is built on smaller, community banking institutions rather then the mammoths of Wall Street like Citibank and Bank of American. What happens if these 7,900 smaller banks fail? What happens to the communities they serve, and the families they employee.

Breakdown: Capital Needs

·          Small/Medium-sized banks must raise $24bn to meet the capital standards

·          10 of the largest 19 US financial institutions need additional capital

·          Identifying a $74.6bn combined shortfall

“Since this month’s release of the tests for the 19 largest banks, regulators and investors have increased their focus on the next tier of lenders, amid concerns some of them might struggle to survive if the economy worsens.”

Breakdown: Stress Test Results

·          200 banks below the 19 largest financial would result in capital shortfalls for 38% of the institutions

·          Leading to a deficit of around $16.2bn in common equity

·          Applying similar criteria to the remaining 7,700 banks in the US would result in a further $7.8bn capital deficit

·          The banks have to repay a combined $27bn in aid

“US Treasury does not intend to extend the stress tests beyond the 19 top institutions. Analysts say that the public release of the government’s test methodology and capital adequacy philosophy means that the tests’ standards will become a model for the rest of the US banking system.”

Read Article: Smaller US banks need additional $24bn

What do you do when you when don’t make enough money to cover your monthly expenses. You use your credit card. You also us it for that nice 46 inch TV, but we’re not judging. Well as most people are aware, American has had a 20+ year love affair with there credit cards.

Every bank issues them. You can get anything from your favorite sports team, to a picture of your pet dog on them. And for a long time even dead people where getting pre-approved applications for cards. But as the 2008/09 crises has hit the banking sectors the hardest, the providers of credit cards are preparing for the largest defaults they have seen in decades.

“Experts predict that millions of Americans will not be able to pay off their debts, leaving a gaping hole at ailing banks still trying to recover from the housing bust.”

Breakdown: Stress-Test Results

·          19 biggest banks could expect $82.4 billion in credit card losses, by end of 2010

·          Federal regulators call a “worst case” economic situation

·          Regulators published losses only on credit cards held on bank balance sheets.

·          $82.4 billion figure did not reflect another element in their analysis:

·          billions of dollars tied to credit card are held off their balance sheets

·          A portion of losses will be absorbed by outside investors

Breakdown: Unemployment Breaches 10%

·          Many economists predict it to get worst

·          Rate of uncollectible balances at some banks could far exceed that level

·          American Express and Capital One Financial, Expect 20% of balances to go bad this year

·          Bank of America, Citigroup and JPMorgan Chase, about 23% are expected to sour

Breakdown: Vastly Understate

·          Regulators’ loss rate was applied to their entire credit card business

·          Card losses could reach $141.5 billion by 2010

·          It could top $186 billion for the entire credit card industry

“(T)he peak unemployment level that regulators used to drive their loss estimates is roughly what current rates are on track to reach. That suggests that if the unemployment rate gets much worse, credit card losses could be worse than what regulators projected.”

Breakdown: Job Losses

·          Unemployment rate reached 8.9% as the economy shed 539,000 jobs.

“The unemployment rate and the rate of credit card charge-offs, or uncollectible balances, have been aligned because consumers who lose their jobs are more likely to miss payments.”

Breakdown: Write-offs

·          Banks wrote off an average of 5.5% of their credit card balances in 2008

·          Average unemployment rate was 5.8%.

·          End of the year, rate of credit-card write-offs was 6.3%

“Experts predict that the rate of credit-card losses could eventually surpass the jobless rate because of the compounding effects of the housing crisis and lackluster consumer confidence. Shortly after the technology bubble burst in 2001, credit card loss rates peaked at 7.9 percent.”

Breakdown: Prior Recessions

Unlikely to be able to extract equity from their homes

Or draw down retirement accounts to help pay off their debts

“After writing off about $45 billion in bad debts during 2008, credit card lenders are bracing for the worst year in the industry’s history. Not only are losses spiraling, but also lawmakers are on the verge of passing a set of tough new consumer protections that could have a devastating effect on profits. This week, the Senate is expected to take up the Credit Cardholders Bill of Rights after the measure passed in the House with a strong bipartisan vote of 357 to 70.”

Breakdown: Average American

Household have with nearly $8,400 of credit card and other revolving debt.

Read Article: Banks Brace for Credit Card Write-Offs

For most people on Main Street, looking at Wall Street today, its almost trying to figure out what side is tails on a double side coin. Who the hell knows what’s going on? On one hand the government is saying that there are banks out there that are in good standing. But other banks need around $75 billion dollars of additional capital to survive a worsening economy. That money is expect to come either throw private channels or by converting already barrowed government aid into common equity. But people that’s still $75 billion dollars.

Wall Street was up today on news that job loss are slowing down, but we have almost 14 million people out of work, with most analysts expecting additional 2 million loses this year, and 20 million totals before its all said and done.

How can this be good for the economy? Whybanksfail does not see anything improving until we start to add jobs. Not lose them.  

Breakdown: April Numbers

·          Bureau of Labor Statistics

·          Economy lost 539,000 jobs

·          Unemployment rate at 8.9 %

·          Pace of job losses starting to level-off

·          13.7 million American unemployed

“The economy, while still bleeding hundreds of thousands of jobs, is starting to lose them at a slower pace, offering the latest hint that the recession is bottoming out.”

Breakdown: Last four months

·          Jobs vanished at a rate of more than 650,000 every month

·          741,000 jobs lost in January

“But some 17 months into one of the worst downturns since the Depression, many businesses have already cut their own costs to line up with lower revenue. And economists said employers were likely to cut fewer and fewer jobs over the rest of the year as tax cuts and stimulus spending wash through the economy.”

Breakdown:

·          Economy has now shed 5.7 million jobs since the recession began in December 2007

·          Most of those coming in the last five months

·          March was revised upward Friday to 699,000, from 663,000

“Many economists expect businesses to cut an additional two million jobs before the economy begins growing again and the unemployment rate begins to ebb, probably sometime in 2010.”

What effect can 20 million unemployed or underemployed workers have on a fragile economy? The unemployment rate is already as high as the Obama administration believed it would be at the end of the year, and it is all but certain to climb even higher.”

Breakdown:

·          27% of unemployed people have been out of work for more than six months

·          Number of people who can find jobs in five weeks or less is dwindling

Read Article: U.S. Jobless Rate Hits 8.9%, but Pace of Losses Eases

US Government Federal Regulators are preparing to release the results of the much talked about Stress-Test, which are designed to give the country an understanding of were the nations banks stand, and what they might look like if the ongoing crisis continues or worsens.

Regulators have pushing banks to use common shares to bolster their “tangible common equity,” a measure of capital. Regulators are placing greater emphasis on the resources that a bank has at its disposal than the more traditional measure of “Tier 1” capital.

Bank of American

Regulators told BOfA that it needs $33.9 billion in capital to withstand any worsening

“If the bank is unable to raise the capital cushion by selling assets or stock, it would have to rely on the government, which has provided $45 billion in capital through the Troubled Asset Relief Program.”

Breakdown: Game Plan

·          Could convert non-voting preferred shares into common stock

·          Making government one of the bank’s largest shareholders

Executives at the bank believe the requirements should be less and have sparred with the government over the amount

Bank of America says they have plenty of options to raise the capital on its own before it would have to convert any of the taxpayer money into common stock.

“The government’s determination that Bank of America doesn’t need as much capital as it has already received from taxpayers is an indication that even some of the most troubled banks may not need more government money than has been allocated to them.”

Citigroup

Has allowed the Government to convert investment into common stock

Arrangement worked out between the Treasury and Citigroup earlier this year

Treasury received mandatory convertible preferred shares (Preferred Shares)

Those shares can  be converted to voting shares at the will of the government

Citigroup is expected to need to raise capital as insurance against any further downturn in the economy.

The government told the bank it would need $50 billion to $55 billion in capital, a requirement that would force it to raise $5 billion to $10 billion in new capital

Read Article: Bank of America Needs $33.9 Billion Cushion, U.S. Says

As the size of the nation’s debt grows to levels never seen before, Wall Street is starting to sound the alarms, saying that we need to keep the debt growth in check, or suffer a longer recession. Private firm will not be able to compete with the government in spending, washing away their ability to create wealth. We are also putting greater obligations on future generations to replay today’s debt.

As Tax revenues were continue to decrease, 14% in the first half of the fiscal year, the government will be forced to look for other ways to fund operations, and keep the country open for business. The question is how much can the United State afford to barrow before it collapses under its own weight.

Breakdown: Unprecedented Spending

·          Bank bailouts

·          Detroit rescues

·          Health care overhaul

·          Stimulus plans

Breakdown: Yield

·          10-year Treasury notes rose to its highest level since November, to 3.17%

·          Investors are demanding larger returns

·          Low by historical standards – Averaged about 5.7% in the late 1990s

As the economy stays in recession, for the first six months of the current fiscal year, federal deficit is running at $956.8 billion or about one seventh the gross domestic product (GDP). These levels have not been seen since World War II.

The debt which is held by the public is expected to go from 41% of GDP in 2008 to 51% in 2009, and will peak at 54% in 2011 at which point it is expected to declining the following years.“For all of 2009, the administration probably needs to borrow about $2 trillion.”

“Congressionally mandated debt ceiling of $12.1 trillion will most likely be breached in the second half of this year.”

Breakdown: Interest Payments

·          Interest payments to more than quadruple in the next decade

·          $806 billion by 2019 from $172 billion next year

Read Article: Worries Rise on the Size of U.S. Debt