Another Early Bank Warning


I have sent two bank warnings in the past couple of months, one highlighting Federal bank examiner concerns over rising bad debt and higher risk taking by large banks. The second pointed out grave risks in the federally backed mortgage companies and how defaults there could destabilize the entire banking community.

Now today two articles from completely different sources show that these risks are growing even worse.

The October 28th Economist (http://www.economist.com) article (page 65) entitled "Banks In Trouble" points out that there are signs that big banks are messing up. One of the main problems the article states is that these banks have huge lending exposure to telecoms firms. This concentration risk is so grave that a special committee has been formed to try and understand just how bad it is.

Britain's Barclays Bank alone had 20 billion dollars of exposure to just three telecom firms (British Telcom-Vodaphone and Orange). Regulators are trying to count the total risk of all the banks and believe it to be many tens of billions.

Then the November 2 issue of USA Today (Money section B, page1B) writes "Long distance phone carriers left hanging". The article states that vicious competition and a tech revolution are pushing traditional firms out of the loop. A graph in the article shows that revenues have dropped from 41.2 billion in 1998 to only 40.2 billion in 2,000. These changes according to the article are the first tremors in a seismic shift that analysts say could mean the end of the telecom business as it is known.

Do you see a troublesome connection?

Loans to telecom companies are only one of the growing problems for big banks. The syndicated loan market (bridge loans to companies with debt of three and a half times equity or more) has grown and deteriorated at the same time. In 1993 about 7% of new syndicated loans were leveraged. By the first quarter of 2000 this figure had risen to 36%. Recently the Fed and FDIC noted a sharp deterioration in these loans . Those that may be problematic have shot over the 100 billion dollar mark and the worst (those called classified) total 64 billion dollars.

The banks that are lead managers for much of these leveraged loans are Bank of America (at over 50 billion dollars) and Chase/JP Morgan with over 40 billion.

The article also points out that in a recent report by Keefe Bruyette & Woods, a securities firm that specializes in banks, found it interesting that so many chief credit officers and other senior bankers have decided to retire or resign in recent months.

Adding all this to the fact that this is happening while the U.S. economy is booming is sobering. What happens when business slows down?

If a bank crunch is coming, what can one do? One easy step is to spread out your money a bit. I am personally shifting accounts so I don't have any (or much) over the FDIC guarantee in any one name in any one bank. Plus be careful of each bank's quality (bigger is not better). Taking a few precautions now can really help later if there is a crunch. Keeping an eye of bank safety now can help you continue to have good global investing later!

Gary


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