Bank Cannibalism

What are the banks going to do next. Only a brave or foolhardy man would try to guess. I am not brave.

The big banks are facing potentially crippling loses on Second Lien and Heloc loans as well as on Option ARM’s, each of which would be enough to bankrupt them. Taken together, not one of the big banks can survive without more bail-outs, of them or, their ‘insurers. These bail outs will be unpopular. What might sweeten the pill is if they could show how they were also making profits themselves and their balance sheets were generally recovering.

There is also a wave of FDIC disposals of seized assets from already failed banks that will force others holding similar assets to mark them to their market price. This too will collapse many banks. And there are also half a million homes still waiting to come on the market being held by the banks and their proxies.

So what to do?

Here is one of the things I think will happen. It is a tale of two banks – or rather of two kinds of bank – regional and BIG.

The BIG banks are, as I mentioned facing more rather frightening losses. Of course they have already been declared too big to fail and so they won’t. Their losses will be assumed, bought-out or deferred. This last, particularly because the losses are on residential real estate, can be talked about in terms of ‘helping ordinary people’.

The regional banks have a quite different problem – commercial real estate loans. These are dropping like diseased fruit. These banks are NOT too big to fail and the losses are NOT connected to residential loans. So they are not going to get the same level of bail-out-of-gaol-free protection.

What will happen is that regional banks and their commercial loans will be allowed to self-destruct. The FDIC will then seize assets, reveal the ‘much larger losses than expected’ and conduct fire sales of assets, whose sale will force other regional banks to mark down the similar assets they are holding, and self-destruct in turn. Should be quite a year in that respect.

All this sounds bad. Too bad to allow were it not for the fact that the FDIC is already too broke to stop it AND that it may HELP the BIG banks. They are, after all, the ones with the ear of Washington and upon whom we have already bet our children’s future.

The regionals go broke. Their assets are sold at fire-sale market prices. Who will be there to buy them? Why the BIG banks of course. Now remember just because the value of Commercial assets has plummeted doesn’t mean they are worthless. Many will still have some value and some cash will flow from them. Just, not enough to save the banks holding the assets at full face value. But if you can pick up the assets for a fraction – then the cash flow works.

Enter the BIG banks. They pick over the corpses of their banking cousins, and use some of the new found profits (underpinned by bail out cash of course) to buy up the bargains. These bargains will become assets on the BIG banks balance sheet. Assets that show positive cash flow. They will be profitable.

It may also be that the BIG banks will benefit in a second and in the long run even more important way from the collapse of the regional banks. Regional banks have modern banking gold – depositors. As banks collapse depositors are concentrated in those that survive. Wouldn’t the BIG banks love to find they could reap a rich harvest of depositor’s cash? It would change the shape of American banking, further concentrating power in fewer and larger national banks away from the local. It would make the too-big-to -fail even bigger and give them even more power over their regulators.

In short I suggest for your consideration the idea that the regional banks will be slaughtered so that the BIG banks can gorge themselves on the remains. Bank cannibalism. Just an idea.