Tidal waves continue to hurtle through the banking industry
Manoeuvring a vessel with accuracy and precision through stormy waters is a fundamental skill, which most financial seaman acquire over time. But in the face of an all-out financial tsunami, those skills are of little use. This impending financial monster wave continues on a crash-course across America, leaving bank debris in its wake.
Bank insiders are reluctant to tell the public that the financial sector is still under tremendous pressure, with credit quality and toxic assets continuing to plague banks for the next 18 months to three years. Literally hundreds of banks will cease to exist over the next two years.
Commercial Real Estate will lead the next downturn - during the remainder of 2009 and the first half of 2010. Banks have tightened their credit criteria and hiked up fees to scandalous levels in an attempt to make back their losses and at the expense of the loyal customer. It appears the situation will get worse before it gets better.
Five institutions insured by the Federal Deposit Insurance Corp. (FDIC); two in Georgia and California respectively and one in Minnesota were closed Friday, bringing the total of bank failures for 2009 to 45. It is anticipated that over 100 banks will fail in 2009 alone.
Community Bank of West Georgia and Neighborhood Community Bank were both closed by the Georgia Department of Banking and Finance, which appointed the FDIC as receiver. Neighborhood Community Bank’s deposits will be assumed by West Point, Georgia-based CharterBank, which entered into a purchase and assumption agreement with the FDIC.
In California, Irvine-based MetroPacific Bank and LA’s Mirae Bank were closed by the California Department of Financial Institutions. The FDIC, again acting as receiver, entered into purchase and assumption agreements with SunWest Bank to assume MetroPacific’s deposits (minus those from brokers) and with Wilshire State Bank to assume all of Mirae Bank’s deposits.
The government's plan to enable banks to dump troubled assets is facing problems of its own. The Public-Private Investment Program (PPIP), like many of the government programs, have fallen short in their execution. So what will the Treasury do? Announce a new and improved PIPP to keep enthusiam running high? The Markets rallied in March when Treasury Secretary Timothy Geithner announced that plan and will likely rally again only to falter due to poor execution.
Monday, June 29, 2009
Tuesday, June 16, 2009
ECONOMIC RECOVERY– “Not according to Bank insiders”
Economists and politicians chatter about green-shoots and pundits come out waving the flag – predicting the worst is over. Then the bottom falls out – we hit the depression. Sound familiar? History is not only a great healer – but a fantastic teacher. Let’s take a little trip down memory lane. Its 1929, Wall Street crashes. But the DOW rallies solidly over six months in 1930, reclaiming nearly half of its losses.
Not so long ago, Japan’s economic “Lost Decade”- between 1990 and 2000 was seen as one of the most turbulent ever for the archipelago (in a sense, the country is still waiting to fully recover). Nevertheless in that first year, pundits squealed that the worst was over as the Nikkei peaked at 38,900. At one point the biggest rally came in at 140% and then inevitably the bottom fell. The Japanese stock market is the lowest it has been since the 80s.
Now, to presume that this is a fate we are impervious too, is a whopping presumption. All we need do is look at the real estate market – do you honestly believe that we have seen the worst there is in the housing market? This year alone witnessed house equity fall by $2T and we haven’t even reached the full throws of summer. To top that, consumption is plummeting and unemployment is at record levels and will rise further.
Fundamental scrutiny of economic data illustrates we are no way out of the woods. Unfortunately recovery is not around the corner. In all seriousness, we have not even bottomed in this recession. To be able to genuinely declare an upturn, we have to dissect the issues surrounding the banks credit quality, deposit growth, real estate foreclosures and toxic assets.
Banking insiders will tell you that until the credit quality calamity and toxic assets, now referred to as "legacy" assets are resolved; they will be severely restricted in their lending practices. This is the main reason we haven't seen much on the merger and acquisition front. The only way the M&A activity will pick up is when the banks feel confident about their internal business.
When you have a credit crisis of this magnitude, it is essential we are cautious and steer away from reckless, baseless and hasty declarations that assert all is well. News of good tidings is always welcome, but don’t let this false prophet make phoney declarations.
Not so long ago, Japan’s economic “Lost Decade”- between 1990 and 2000 was seen as one of the most turbulent ever for the archipelago (in a sense, the country is still waiting to fully recover). Nevertheless in that first year, pundits squealed that the worst was over as the Nikkei peaked at 38,900. At one point the biggest rally came in at 140% and then inevitably the bottom fell. The Japanese stock market is the lowest it has been since the 80s.
Now, to presume that this is a fate we are impervious too, is a whopping presumption. All we need do is look at the real estate market – do you honestly believe that we have seen the worst there is in the housing market? This year alone witnessed house equity fall by $2T and we haven’t even reached the full throws of summer. To top that, consumption is plummeting and unemployment is at record levels and will rise further.
Fundamental scrutiny of economic data illustrates we are no way out of the woods. Unfortunately recovery is not around the corner. In all seriousness, we have not even bottomed in this recession. To be able to genuinely declare an upturn, we have to dissect the issues surrounding the banks credit quality, deposit growth, real estate foreclosures and toxic assets.
Banking insiders will tell you that until the credit quality calamity and toxic assets, now referred to as "legacy" assets are resolved; they will be severely restricted in their lending practices. This is the main reason we haven't seen much on the merger and acquisition front. The only way the M&A activity will pick up is when the banks feel confident about their internal business.
When you have a credit crisis of this magnitude, it is essential we are cautious and steer away from reckless, baseless and hasty declarations that assert all is well. News of good tidings is always welcome, but don’t let this false prophet make phoney declarations.
Wednesday, June 3, 2009
Bamboozled By Banking Fees: When Will Banks Stop Gouging the Public!
How would you like to pay $ 51 dollars for a $1.70 cup of coffee at Starbucks or $ 16,500 dollars for a 550 dollar small laptop computer from Comp USA or even $75 dollars for a 2.25 gallon of gas?! Sounds preposterous right?
Wrong! Banks are charging in many cases over 3000 % mark-up over their costs for many of their basic services from overdrafts and wire transfers to account fees.
I continue to be dumbfounded at how banks are reporting historic loses. It's really quite simple; banks make money by charging interest on loans. In fact they have preserved the old “3-6-3 rule,” bankers paid a 3 percent rate of interest on deposits, charged a 6 percent rate of interest on loans, and then headed to the golf course at 3 o’clock.
Even though this is known as banker’s banter, the “3-6-3 rule” mixes a grain of truth with a hard dose of reality. Today the joke is on us with the NEW BANK RULE, ".65 - 5 to 27% - 3! According to the New York Federal Reserve statistics, banks today typically pay on aggregate less than 1%(.65%) for all deposits and charge an alarming 5% to 27% interest.
Unquestionably, the interest margin banks earn by intermediating between depositors and borrowers continues to be the primary source of profits for most banking companies. But banks also earn shameful amounts of non-interest income by charging their customers fees and penalties in exchange for a variety of financial services.
Over the last decade, advances in information, communications, and financial technologies have allowed banks to produce many of their traditional services far more efficiently for only pennies on the dollar. These efficiencies have clearly not been passed on to the "Valued Customer".
For example, banking cost of ownership statistics and metrics will tell you that world class banks can process a wire transfer for $1.75 but the cost to the customer is a whopping $45.00. A simple overdraft on a checking account routinely costs about $1.50 - the charge to the valued customer is about $35.00 to $50.00.
Personally I find this situation infuriating, having worked in banking over the course of 25 years. When a branch manager looks you in the eye and acts like he is doing you a huge favor by cutting the penalities in half. The reality is instead of charging you 3000% markup he is giving you a deal by only charging you 1500%.
The ABA described these exception fees as “avoidable” through some simple changes. The banks have conditioned us into thinking that it is our fault for these fees and if only we managed our money better they could be avoided. The fact is the banking industry is exploiting the public because we have become so dependant on their services. All banks are complicit – they know what the real costs are and what they end up charging the customer.
The bottom line is that banks have to change their outdated business model and come up with creative ways to increase revenues and drive efficiency, rather than charging shameful fees to people who can least afford them.
Wrong! Banks are charging in many cases over 3000 % mark-up over their costs for many of their basic services from overdrafts and wire transfers to account fees.
I continue to be dumbfounded at how banks are reporting historic loses. It's really quite simple; banks make money by charging interest on loans. In fact they have preserved the old “3-6-3 rule,” bankers paid a 3 percent rate of interest on deposits, charged a 6 percent rate of interest on loans, and then headed to the golf course at 3 o’clock.
Even though this is known as banker’s banter, the “3-6-3 rule” mixes a grain of truth with a hard dose of reality. Today the joke is on us with the NEW BANK RULE, ".65 - 5 to 27% - 3! According to the New York Federal Reserve statistics, banks today typically pay on aggregate less than 1%(.65%) for all deposits and charge an alarming 5% to 27% interest.
Unquestionably, the interest margin banks earn by intermediating between depositors and borrowers continues to be the primary source of profits for most banking companies. But banks also earn shameful amounts of non-interest income by charging their customers fees and penalties in exchange for a variety of financial services.
Over the last decade, advances in information, communications, and financial technologies have allowed banks to produce many of their traditional services far more efficiently for only pennies on the dollar. These efficiencies have clearly not been passed on to the "Valued Customer".
For example, banking cost of ownership statistics and metrics will tell you that world class banks can process a wire transfer for $1.75 but the cost to the customer is a whopping $45.00. A simple overdraft on a checking account routinely costs about $1.50 - the charge to the valued customer is about $35.00 to $50.00.
Personally I find this situation infuriating, having worked in banking over the course of 25 years. When a branch manager looks you in the eye and acts like he is doing you a huge favor by cutting the penalities in half. The reality is instead of charging you 3000% markup he is giving you a deal by only charging you 1500%.
The ABA described these exception fees as “avoidable” through some simple changes. The banks have conditioned us into thinking that it is our fault for these fees and if only we managed our money better they could be avoided. The fact is the banking industry is exploiting the public because we have become so dependant on their services. All banks are complicit – they know what the real costs are and what they end up charging the customer.
The bottom line is that banks have to change their outdated business model and come up with creative ways to increase revenues and drive efficiency, rather than charging shameful fees to people who can least afford them.
Monday, June 1, 2009
GM Today, State and Local Government Tomorrow
GM has been a sinking ship for decades – a company that stopped moving with the times and found it more and more difficult to adapt to the shifting landscape. The failure of management to adjust to change and a broken financial business model has ended up costing the taxpayer billions.
They had their eye off the ball, thinking that they could make money through their financing rather than building more competitive and innovative vehicles. Today, the GM website’s home page parades the words “RE: INVENTION” – a day late and $50 billion dollars short, don’t you think?
Why do we have to come face to face with disaster before we get the message and take action? GM's failure is an indictment of American mismanagement – a mismanagement that has been tolerated for far too long. It highlights the damage to our economy and demonstrates what happens when we refuse to move with the world around us.
The parallels within the government at the Federal, state and local levels are bloodcurdling. I have been on the inside of the hallowed walls of government and observed first hand the enormous misuse of taxpayer’s funds. California is a prime example of failures in management – both at State and local level. I have seen first hand hundreds of millions of dollars literally thrown down the drain, because Government departments fail to execute cost-effective, premptive business models.
There is unprecedented growth in government entitlements, unemployment benefits, housing subsidies, health care, etc. Legacy costs, exhaustive project cost overruns, no focus and clear set of priorities. To top it off, there is little if any accountability by government to get things done.
Governor Schwarzenegger has gone to Washington to ask for government assistance. At the same time he’s making a public statement that California is spending more money than it is taking in. The Governor has an eye for the obvious.
The question is what we are prepared to do to rectify the problem, and keep it from happening again. Sadly drastic measures like layoffs and closing parks does not solve the problem. This is not unlike taking an obese person and amputating his leg, instead of putting them on a strict diet and exercise program.
We need a plan of action not rhetoric to solve these problems in the form of a “New American Business Model” for both the private and public sector. One that mandates three basic tenants:
1) Don’t spend more than you make.
2) Increase productivity and efficiency equal to any increase in spending.
3) Refresh and modernize your business model and strategic plan every two years.
It really couldn’t be simpler. If the Governor of California is serious about getting back on the right track, he can always can give me a call.
They had their eye off the ball, thinking that they could make money through their financing rather than building more competitive and innovative vehicles. Today, the GM website’s home page parades the words “RE: INVENTION” – a day late and $50 billion dollars short, don’t you think?
Why do we have to come face to face with disaster before we get the message and take action? GM's failure is an indictment of American mismanagement – a mismanagement that has been tolerated for far too long. It highlights the damage to our economy and demonstrates what happens when we refuse to move with the world around us.
The parallels within the government at the Federal, state and local levels are bloodcurdling. I have been on the inside of the hallowed walls of government and observed first hand the enormous misuse of taxpayer’s funds. California is a prime example of failures in management – both at State and local level. I have seen first hand hundreds of millions of dollars literally thrown down the drain, because Government departments fail to execute cost-effective, premptive business models.
There is unprecedented growth in government entitlements, unemployment benefits, housing subsidies, health care, etc. Legacy costs, exhaustive project cost overruns, no focus and clear set of priorities. To top it off, there is little if any accountability by government to get things done.
Governor Schwarzenegger has gone to Washington to ask for government assistance. At the same time he’s making a public statement that California is spending more money than it is taking in. The Governor has an eye for the obvious.
The question is what we are prepared to do to rectify the problem, and keep it from happening again. Sadly drastic measures like layoffs and closing parks does not solve the problem. This is not unlike taking an obese person and amputating his leg, instead of putting them on a strict diet and exercise program.
We need a plan of action not rhetoric to solve these problems in the form of a “New American Business Model” for both the private and public sector. One that mandates three basic tenants:
1) Don’t spend more than you make.
2) Increase productivity and efficiency equal to any increase in spending.
3) Refresh and modernize your business model and strategic plan every two years.
It really couldn’t be simpler. If the Governor of California is serious about getting back on the right track, he can always can give me a call.
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