The Corner

What’s Coming

And here’s the WSJ on Wachovia today:

Wachovia Corp. has entered into preliminary talks with a handful of possible buyers — the latest in a parade of banks to look for safety in the arms of a suitor amid concerns that the weak economy is pushing them deeper into peril.

The talks came as Washington Mutual Inc.’s late-Thursday failure rattled the shares of other troubled banks. Shares in Wachovia fell 27% on Friday as investors fretted about its massive mortgage portfolio.

Investors are growing concerned that a host of banks nationwide, both large and small, could come under fresh pressure to either raise more capital or else find someone willing to buy them. The trouble stems in part from the fact that a broad range of borrowers, not just mortgage holders, are now starting to default on their debt. For instance, about 2.4% of payments on credit cards are more than 90 days overdue, according to the Federal Deposit Insurance Corp., the highest level since 1991.


The 13 bank failures so far this year don’t come close to the savings-and-loan crisis of the late 1980s, when hundreds of shaky institutions failed, costing taxpayers about $130 billion. By other measures, though, some bank executives say the current turmoil is worse, since it is more geographically widespread and involves a broader mix of loans.


Alan Worrell, chief executive of Sterling Bank, a Montgomery, Ala.-based unit of Synovus Financial Corp., says the industry’s problems now are “far worse” because the real-estate market is so backlogged with unfinished homes and other construction projects that it will haunt lenders and borrowers for years.

After generating record profits during the housing boom, it has taken only a year for the banking industry’s profitability to evaporate. Second-quarter profit fell to just $5 billion from $36.8 billion a year earlier, its second-lowest level since 1991.

About 18% of federally insured lenders lost money in the second quarter. Dividends paid to bank-stock investors plunged by $35 billion in first six months of 2008.

Third-quarter results could show the industry’s first overall loss since the fourth quarter of 1990. One big reason: Banks need to set aside more money to cover loans that have gone sour, a move that cuts deeply into profitability.

Forced to conserve capital in order to cover ballooning losses, commercial banks are far more reluctant to lend money than they were just even a few months ago. Of 3,000 companies surveyed by RBC Capital Markets, 25% said it is harder to borrow money than 90 days ago.

There isn’t a clear way out of trouble. There aren’t many investors willing to take a bet on banks right now, particularly given WaMu’s example: In April, it received a $1.35 billion investment from the giant investment firm TPG — which lost the entire amount this week when WaMu failed.

Aside from J.P. Morgan’s purchase of WaMu, few weak banks have been snapped up by stronger ones, partly because would-be buyers have their own headaches.

Some banks are paying unusually high interest rates on deposits to replenish their capital levels. That strategy raises red flags with many bankers because it is often viewed as a sign of desperation.

It can also be a double-edged sword: Banks that don’t want to compete on rates can’t attract deposits that are critical to making loans. In any case, that strategy didn’t work for WaMu, which paid some of the highest rates in the country.

Saddled with a mountain of troubled adjustable-rate mortgages inherited through its 2006 takeover of Golden West Financial Corp., Wachovia has seen its financial condition weaken. The bank’s CEO, Robert Steel, has said the bank has ample capital, noting that it added $20 billion to its certificate-of-deposit balances last summer due in part to a high-interest-rate promotion that began in June.

“I spend a lot of time trying to lay out the fact that we believe we’re liquid,” he said earlier this month. “We believe we have the ability with our current financial position to respond to issues, and we also have some other levers to pull” to improve its financial position, he said.


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