Problems For Banks, Problems For You?

In response to Drowning in Debt: How do we protect ourselves? I received the following Email advice from my friend Heinz:

Find a safe bank with a Weiss rating above 200 - a bank that has at least the bulk of deposits covered by its own free capital resources.

Thanks Heinz.

With that in mind let's now consider Mortgage Mistakes Help Tank NetBank.

Alpharetta, GA-based NetBank Inc., the first online bank to tank, in part, because of mortgage market missteps, is also the first federally-insured thrift to go because of mortgage issues.

NetBank is also the largest federally-insured bank to go under since the Savings and Loan Crisis cost the nation as much as $500 billion beginning decades ago.

The event raises red flags for consumers of the now bankrupt institution, many of them mortgage holders. Former NetBank customers are likely to be bombarded with misleading spam and phishing -- fraudulent emailed attempts to gain sensitive, private information by masquerading as a legitimate company.

Customers with less than $100,000 deposited with NetBank will be protected by FDIC insurance and have immediate access to all their funds in another online bank that as acquired NetBank assets.

However, there was approximately $109 million in 1,500 deposit accounts that exceeded the insurance limit. Depositing more than $100,000 in any single bank is frowned upon by financial planners and advisors just for this reason.

Anyone above the FDIC limit on NetBank can kiss it all goodbye.

Safety First

Right now everyone should be in safety first mode.

Professor Fil Zucchi is certainly on the safety first lookout in regards to Bank United Financial with this commentary in Wednesday's buzz:

Bank United Financial (BKUNA) just warned that EPS for the quarter will be roughly half of original estimates, because... well because the housing market around it is imploding, its sense of denial not withstanding.

The laughable part is that even though its non-performing assets (NPA's) jumped from $116 mln at the end of June to $210 mln three months later, it is adding a ridiculously low $8-10 mln to its loan loss reserves.

Just to give you a sense of a how ludicrous the whole thing is, on June 30, 2006 BKUNA showed $32 mln of NPA's for which it had reserved $32.3 mln; today the NPA's are $210 mln and the loan loss reserves are approximately $55 mln.

And the rationale for its accounting is that even though NPA's are skyrocketing, the value of the collateral still has plenty of equity above the debt. So riddle me this: is the company saying that property owners are not paying their mortgages on properties that actually have value above the debt?

I am not sure how/if I plan to play it just yet, but I am more confident than ever that the bad part of this story has yet to begin.

Prince vs. Prince

On the lighthearted side of banking (and in regards to Citigroup) please consider Prince vs. Prince.



On the more serious side of banks, opinions of Minyan Peter are hard to ignore. In case you missed it here is Wednesday's Buzz on Citigroup from Minyan Peter.

Many of the articles that I have read this morning have focused on the fixed income writedowns. While significant, I think the more important news coming out of Citigroup (C) is what it disclosed regarding its consumer credit businesses:

"An increase in credit costs of approximately $2.6 bln pre-tax versus the prior-year quarter due to continued deterioration in the credit environment, organic portfolio growth, and acquisitions. Approximately one-fourth of the increase in credit costs was due to higher net credit losses and approximately three-fourths was due to higher charges to increase loan loss reserves."

As a point of comparison, Global Consumer reported net provision expense of $1.736 bln in 3Q '06. If I have done the math correctly, Citibank is now suggesting that provision expense for consumer credit this quarter will be more than $4.3 bln - three times last year's amount.

Minyan Peter also has a A Look Inside Citigroup's Writedowns, that everyone should want to read. What Peter has to say about balance sheets at Citigroup (C) applies equally well to JPMorgan (JPM), Bank of America (BAC) and in fact all banks.

Returning to the theme of protecting oneself, it is absolutely imperative to not exceed the FDIC limits at any bank.

With that in mind, pay particular attention to what Prof. Zucchi has to say in regards to BKUNA and what Minyan Peter is saying about bank balance sheets. To that I would like to add a note of caution about banks offering above market rates on CDs. There is a reason for those above market rates. That reason is called "risk".

From the point of view of protecting oneself, it is absolutely imperative to not exceed the FDIC limits at any bank. I failed to mention that aspect in Drowning in Debt: How do we protect ourselves?

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/