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IndyMac's Failure Makes Investors Edgy On Banks

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The Associated Press

Published: July 15, 2008

NEW YORK - The bank executives who promised months ago the worst of the financial crisis had passed are looking less and less credible to investors. And that could pose a problem as the industry releases what are expected to be dismal second-quarter earnings over the next few weeks.

Certainly, not all banks are going the way of IndyMac Corp., which was seized by the government on Friday. In fact, analysts expect several banks to come out on top as the industry consolidates in the coming years.

But for now, investors are not taking any chances. After IndyMac was seized - the seventh bank to fail since the credit crisis began last summer and the second-largest bank to fail in the 75-year history of the Federal Deposit Insurance Corp. - stocks in nearly all the nation's banks were clobbered Monday as the market bet that there will be more failures.

Hardest Hit Stocks

Stocks that were hit the hardest Monday included First Horizon National Corp., which operates in the Southern United States; Zions Bancorp, located in Utah and Idaho; and Washington Mutual Inc., the nation's largest savings and loan. Stocks of bigger banks such as Wachovia Corp., Citigroup Inc., Bank of America Corp., and Wells Fargo & Co., also tumbled.

It's going to take more than a few hopeful corporate outlooks and capital raising plans this earnings season for investors and consumers to feel at ease again. No matter how much cash a bank has on hand, if enough customers worry about their deposits and withdraw them, that bank will be in trouble, said Adam Schneider, a principal with Deloitte Consulting LLP.

"The noise becomes the story after a while," Schneider said. "Any institution can be hurt by a run on the bank."

A virtual run by investors who had bought securities through Bear Stearns Cos. led to its demise in March, when the flailing investment bank was bought by JPMorgan Chase & Co.

By examining banks' ratios of defaulting loans to total outstanding loans and to reserves and stock - two measures of a bank's health - only a handful of companies appear to be in jeopardy, said bank analyst Richard Bove of Ladenburg Thalmann. These small banks include Downey Financial Corp., Corus Bankshares Inc., Doral Financial Corp., BFC Financial Corp., BankUnited Financial Corp. and FirstFed Financial Corp.

Bank Runs Unpredictable

But bank runs are unpredictable. To be sure, IndyMac did hold an extremely high number of defaulting loans compared with total loans and reserves. But the Southern California lender was not on the FDIC's list of 90 banks that could be in danger of failing.

This is why banks that have worked to raise extra cash are still losing investors.

Responding to its plunging stock price, National City said Monday that it "is experiencing no unusual depositor or creditor activity," and it had more than $12 billion in extra short-term liquidity at the close of the business day Friday. National City is expected to report a second-quarter loss July 24.

Washington Mutual tried to reassure investors Monday by saying it has enough cash available to survive tough conditions.

But home values are still falling, giving the market little reason to believe in a rebound anytime soon.

"It is a bit premature to suggest that this is the bottom," said Aite Group LLC bank analyst Eva Weber. "We'll need to keep a close eye on what the housing market continues to do."

The situation could be worse, said Deloitte's Schneider. "We're not seeing massive runs on the bank on a Depression-era scale." And the ones that have occurred are "pretty orderly failures."

Also, big-name banks that have been losing money for nearly a year now - like Citigroup Inc. - have not yet seen depositors bail out.

Citigroup, the nation's largest bank by assets, is expected on Friday to post a second-quarter loss that would be its third-straight quarterly shortfall. The other four big U.S. banks also are expected to report worse results than last year and issue grim outlooks.

Wachovia Corp. has announced it will post a loss for the second quarter, and analysts predict JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo will report profit declines.

Washington Mutual is expected to report a second-quarter loss next week. Lehman Brothers analyst Bruce Harting predicted Monday that the thrift will take a $4 billion loss provision, and its loan losses will reach $26 billion.

For consumers, the worry is that they will have a more difficult time finding loans at affordable rates. When a bank says it is tightening lending standards and shedding assets, it means it's issuing fewer loans and charging higher rates - particularly for mortgages and home-equity loans.

"They can expect a harder and longer search, and they can expect that rates will vary from institution to institution," Schneider said, noting that banks are targeting customers with better credit histories and more stable jobs and incomes.

The FDIC estimated it will take $4 billion to $8 billion to cover IndyMac's deposits.

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