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Friday, August 21, 2009

As if it couldn't get any worse: Banks still in trouble? Insolvent you ask?

*Guaranty Bank of Texas is expected to be seized Friday at dusk by regulators. Guess what's been in their wallet?
The tip off was the rise in Credit Default Swap spreads over the past 2 weeks. Couple that with today's news in FT regarding an alarming increase in corporate defaults down the pike and a recipe for another disaster on the heels of public complacency lay soon ahead. Healthcare reform will be the least of our problems.
The really scary part of this is that the stock market has gone up >38% from their lows of March 9. We have only been dealing with the few regions in this country that have been hardest hit, that we know of. Wait until the rest of the country follows suit. Not to mention the municipal bond market. A house of cards? More like the Mexican Train Gang who all lost their jobs on the railroad. 1932 all over again? See what happens when you continue to bail out bad boy risk takers at first hedge funds (LTCM) and now banks of all kinds? NO MORE MORAL HAZARD. Hah! As if there ever was one.

In New Phase of Crisis, Securities Sink Banks
U.S. banks have been dying at the fastest rate since 1992, mainly because of bad loans they made. Now the banking crisis is entering a new stage, as lenders succumb to large amounts of toxic loans and securities they bought from other banks.

Federal officials on Thursday were poised to seize Guaranty Financial Group Inc., in what would be the 10th-largest bank failure in U.S. history, and broker a sale of the Texas bank to Banco Bilbao Vizcaya Argentaria SA of Spain. Guaranty's woes were caused by its investment portfolio, stuffed with deteriorating securities created from pools of mortgages originated by some of the nation's worst lenders.

Texas-based Guaranty Financial Group was crippled by investing in securities issued by other lenders. Guaranty owns roughly $3.5 billion of securities backed by adjustable-rate mortgages, with two-thirds of the loans in foreclosure-wracked California, Florida and Arizona, according to the company's latest report. Delinquency rates on the holdings have soared as high as 40%, forcing write-downs last month that consumed all of the bank's capital.

Guaranty is one of thousands of banks that invested in such securities, which were often highly rated but ultimately hinged on the health of the mortgage industry and financial institutions. "Under most scenarios, they were good and prudent investments -- as long as we didn't have a housing or banking crisis," says John Stein, president and chief operating officer at FSI Group LLC, a Cincinnati company that invests in financial institutions.

The specter of a systemic collapse in the U.S. banking system has faded, largely because the government has shored up the industry with $250 billion in taxpayer-funded capital since last fall, most of it going to big banks. But more than 20% of all banks reported a net loss in the first quarter, the latest period for which the Federal Deposit Insurance Corp. has figures, and problems are now building in small and medium institutions. Mortgage-delinquency rates and losses on credit cards are at all-time highs. The accumulating bad assets and need for capital mean few banks are lending aggressively, creating a drag on the economic recovery.

Many analysts and bankers are increasingly worried that the boomerang effect that killed Guaranty will cripple many small and regional banks already weakened by losses on home mortgages, credit cards, commercial real-estate and other assets imperiled by the recession. more here at

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