home prices continue to decline and loan defaults mount, federal
regulators are bracing for dozens of American banks to fail over the
But after a large mortgage lender in California collapsed late Friday, Wall Street analysts began posing two crucial questions: Just how many banks might falter? And, more urgently, which one could be next?
nation’s banks are in far less danger than they were in the late 1980s
and early 1990s, when more than 1,000 federally insured institutions
went under during the savings-and-loan crisis. The debacle, the
greatest collapse of American financial institutions since the Depression, prompted a government bailout that cost taxpayers about $125 billion.
But the troubles are growing so rapidly at
some small and midsize banks that as many as 150 out of the 7,500 banks
nationwide could fail over the next 12 to 18 months, analysts say.
Other lenders are likely to shut branches or seek mergers.
is drawing up lists, trying to figure out who the next bank is, No. 1,
and No. 2, how many of them are there,” said Richard X. Bove, the
banking analyst with Ladenburg Thalmann, who released a list of troubled banks over the weekend. “And No. 3, from the standpoint of Washington, how badly is it going to affect the economy?”
investors are on edge after federal regulators seized the California
lender, IndyMac Bank, one of the nation’s largest savings and loans,
last week. With $32 billion in assets, IndyMac, a spinoff of the Countrywide Financial Corporation, was the biggest American lender to fail in more than two decades.
Now, as the Bush administration grapples with the crisis at the nation’s two largest mortgage finance companies, Fannie Mae and Freddie Mac, a rush of earnings reports
in the coming days and weeks from some of the nation’s largest
financial companies are likely to provide more gloomy reminders about
the sorry state of the industry.
The future of Fannie Mae and Freddie Mac is vital to the banks, savings and loans and credit unions,
which own $1.3 trillion of securities issued or guaranteed by the two
mortgage companies. If the mortgage giants ever defaulted on those
obligations, banks might be forced to raise billions of dollars in
The large institutions set to report results this week, including Citigroup and Merrill Lynch, are in no danger of failing, but some are expected to report more multibillion-dollar write-offs.
time may be running out for some small and midsize lenders. They vary
in size and location, but their common woe is the collapsed real estate market
and souring mortgage loans. Most of these banks are far smaller than
the industry giants that have drawn so much scrutiny from regulators
Still, only six lenders have failed so far this year, including IndyMac. In 1994, the Federal Deposit Insurance Corporation
listed 575 banks that it considered to be troubled. As of this spring,
the agency was worried about just 90 banks. That number may go up in
August, when the government releases an updated list.
“Failed banks are a lagging indicator, not a
leading indicator,” said William Isaac, who was chairman of the
F.D.I.C. in the early 1980s and is now the chairman of the Secura
Group, a finance consulting firm in Virginia. “So you will see more troubled, more failed banks this year.”
And yet IndyMac, one of the nation’s largest mortgage lenders,
was not on the government’s troubled bank list this spring — an
indication that other troubled banks may be below the radar.
F.D.I.C. has $53 billion set aside to reimburse consumers for deposits
lost at failed banks. IndyMac will eat up $4 billion to $8 billion of
that fund, the agency estimates, and that could force it to raise more
money from the banks that it insures.
The agency does not
disclose which banks it thinks are troubled. But analysts are
circulating their own lists, and short sellers — investors who bet
against stocks — are piling on. In recent weeks, the share prices of
some regional banks, like the BankUnited Financial Corporation, in Florida, and the Downey Financial Corporation, in California,
have stumbled hard amid concern about their financial health. A
BankUnited spokeswoman said the lender had largely avoided risky subprime loans.
his “Who Is Next?” report over the weekend, Mr. Bove listed the
fraction of loans at banks that are nonperforming, meaning, for
example, that the assets have been foreclosed on or that payments are
90 days past due. He came up with what he called a danger zone, which
was a percentage above 5 percent. Seven banks fell in this category.
An important issue for the regional and community banks will be whether they have managed to sell their riskiest loans to Wall Street firms.
the government may have fewer failures than in the past because private
investment funds might buy some troubled lenders. Regulators are
considering rule changes that would allow private equity firms to buy larger shares of banks, and several prominent investors, like Wilbur Ross, have raised funds to leap in.
Eric Dash contributed reporting.