About Ryan Caione

The Office of Thrift Supervision (OTS) announced on Wednesday that thrifts — consisting of some 830 savings and loan associations (S&Ls), savings banks, and cooperative banks — lost approximately $5.4 billion in the second quarter. It was one of the largest losses ever, second only to the $8.8 billion that thrifts lost in the fourth quarter of last year. The institutions lost a comparatively paltry $627 million in Q1.

On Tuesday, the FDIC released a report, entailing all banks and thrifts, revealing that Q2 deposits and earnings are down, and charged-off and noncurrent (more than 90 days past due) loans are at their highest levels in some 15 years. A total of 117 institutions are on its “Problem List.” The OTS said in its report that 17 of those are thrifts. (The main difference between thrifts and banks is that thrifts are mandated by law to have at least 65% of their loan portfolios invested in mortgages and consumer loans, making them more vulnerable to the vicissitudes of the housing and consumer markets.)

Of course, not all those banks and thrifts are ready to implode, and it’s still a far cry from the S&L crisis of the late eighties and early nineties, when more than 700 institutions failed. But last week, small Kansas-based Columbian Bank and Trust became the ninth bank this year to be closed by federal regulators. Of course, the most spectacular collapse so far in 2008 was that of one of the largest thrifts, IndyMac Bancorp, which was also one of the largest bank failures in US history.

Like the S&L Crisis, the current mess faced by thrifts has been fueled by risky real estate loans. In addition to the bottom-line losses they have endured, thrifts set aside $14 billion in the second quarter (more than 3.7% of average assets) to cover anticipated losses from bad mortgages and other loan-related investments.

The world of finance is rarely a happy-go-lucky place (unless you’re making money hand over fist), but the news coming out of the sector this past week has been downright gloomy.

Pundits, politicians, and professionals may not agree whether the US is in a recession or not, and while I’m no economist, here’s what’s been coming across the news wires.

Inflation reached a 17-year high in July. Home sales reached a ten-year low and home prices fell 7.6% in the second quarter compared to the same period last year. Foreclosure filings rose 55% in July. Bank seizures of properties in default have nearly tripled. Unemployment rates are up.

Things can’t get much worse, right? Apparently they can. Former Fed chairman Alan Greenspan, who said earlier that more bank failures are imminent, predicted that the housing markets will bottom out in 2009. Lenders Fannie Mae and Freddie Mac, mandated by federal charter to provide mortgage funding and to keep housing markets liquid, have been rumored to be teetering on the brink of collapse for months now. The pressing question is whether they will require a bailout from the US government. Oh, and those rising food and energy costs shouldered by consumers are causing credit card balances to balloon even more. Eventually all that household debt has to catch up to someone, sometime, no? (Bank of America and Capital One, I’m looking in your direction.)

The news is not all bad, though. Proving that every silver lining has a cloud, Merrill Lynch has lost so much money due to the mortgage crisis ($29 billion and counting) that they may not have to pay taxes in the UK for the next sixty years.

We all know that 2008 has been a tough year for banks. But forget the heavy real estate- and mortgage-related losses endured by the big boys; entire institutions are going under. Eight have failed so far this year, and four have been taken over by the FDIC in the last month alone. By comparison, only three banks failed in all of 2007, and none did in 2005 or 2006.

The latest was small Florida-based First Priority Bank, which fell into receivership on Friday. Superregional SunTrust Banks assumed control of First Priority’s six branches and some $200 million in customer deposits. The week before, California’s First Heritage Bank and First National Bank of Nevada were closed by the Office of the Comptroller of the Currency, and Mutual of Omaha took over the banks’ deposits. The most spectacular collapse this year, of course, was IndyMac Bancorp, which was seized by the FDIC on July 11 and filed for Chapter 7 bankruptcy on Friday. It is the third-largest bank failure in US history.

So what happens when the FDIC steps in? It usually does so on a Friday, so it can take care of business over the weekend, and gives no advance notice, as to not incite panic and a run on the bank. Customers with FDIC-insured deposits (up to $100,000) usually can access their accounts as normal (by check, ATM or debit card, or online), or at a branch when the bank reopens on the following Monday, either under FDIC supervision or by an acquiring bank.

We surely have not seen the last of the bank failures. Indeed, the man who some think shoulders some of the blame for the current mess says there are more to come. The FDIC maintains a watch list of around 90 banks that it deems “troubled”. It doesn’t share its list with the public, for obvious reasons, though some analysts have their own opinions about which banks may be included. Most are small institutions, similar in scale to First Priority.

Of course, with everyone so skittish, naming names can get one in trouble too. Ladenburg Thalmann financial services analyst Richard X. “Dick” Bove was sued by BankAtlantic for suggesting that the bank and its parent company BFC Financial could be next to go under.

The drumbeat of bad news continues for Wachovia, the fourth largest bank in the US. New CEO Bob Steel, the former undersecretary of the US Treasury who joined the company two weeks ago, certainly has his work cut out for him. The company announced Tuesday that it posted losses of nearly $9 billion in the second quarter of 2008, wrote off some $6 billion in assets, set aside more than $5.5 billion to cover future losses, is cutting dividends by 90%, and is eliminating approximately 10,000 jobs, including the layoffs of more than 6,300 employees.

At the crux of Wachovia’s troubles are so-called Pick-A-Pay mortgages, which allow borrowers to choose one of four monthly payment options. The bulk of these loans, most of them acquired when Wachovia bought Golden West Financial in 2006, are secured by homes in the hard-hit Florida and California real estate markets. The default rate of Wachovia’s $122 billion worth of Pick-A-Pay loans is hovering around 6%, and the company says that figure could balloon to 12% by 2009. (The national average for all mortgage defaults is currently around 1%.)

Wachovia has already raised more than $8 billion in capital from investors in 2008 alone, but may also be compelled to divest some of its operations in order to bring in more money. The most obvious candidate to be sold, according to some analysts, is the company’s Wachovia Securities subsidiary. It is perhaps Wachovia’s most successful business, though it has seen its assets under management dwindle by some 10% since its acquisition of A.G. Edwards last year. What’s more, Wachovia Securities’ St. Louis headquarters were raided last week by Missouri state regulators seeking information on the unit’s sales, pricing, and marketing of auction-rate securities after the market for the arcane financial instruments collapsed in February. [UPDATE: Please see the comment from Wachovia spokesperson Teresa Doughery regarding the state's actions.]

For its part, Wachovia is determined to weather the storm. Still, JPMorgan Chase is mentioned as a possible buyer of Wachovia Securities, if not all of Wachovia.

According to a report issued this week by Dow Jones, private equity firms raised more than $130 billion in the first half of the year, only 3% less than the same time last year, when the private equity boom was waning. Warburg Pincus closed the largest private equity fund so far in 2008, worth some $15 billion, while GS Capital Partners raised a record $20 billion for its latest mezzanine fund. Venture capital funds have also seen an uptick in their inflows, led by firms like Kleiner Perkins Caufield & Byers and Lightspeed Venture Partners. Real estate-focused private equity investors are enjoying record fundraising as well.

At the same time, with the credit market dried up, the biggest of the private equity firms, such as Carlyle Group and Madison Dearborn Partners, have had difficulties raising funds for leveraged buyouts and, for the most part, have been sitting on their hands (unless they’re ganging up to buy The Weather Channel). There were no venture capital-led IPOs during the second quarter. Even Warren Buffet’s Berkshire Hathaway, which revealed in its latest annual report that it has up to $20 billion burning a hole in its vault, has only made one major deal on its own (its acquisition of Marmon Group) in the last year-and-a-half or so.

So where is all the private equity and venture capital moolah going? Smaller private equity firms such as Kohlberg & Co. (which announced its acquisition of PPG Auto Glass this week) and Stone Point Capital (investors in 51% of Fiserv Insurance) are still relatively active. With the stock market in bear territory there are bargains to be had, but the same environment makes PE and VC investors wary of commitment. They have amassed their war chest. It’s only a matter of time before they start deploying it.