Floyd Norris on the bad  — and worsening — loan problem:

“OVERALL loan quality at American banks is the worst in at least a quarter century, and the quality of loans is deteriorating at the fastest pace ever, according to statistics released this week by the Federal Deposit Insurance Corporation.

The report highlighted that even as the government and major banks have scrambled to deal with the impaired securities the banks own, the institutions have been plagued by an unprecedented volume of old-fashioned loans going bad.

Of the entire book of loans and leases at all banks — totaling $7.7 trillion at the end of March — 7.75 percent were showing some sign of distress, the F.D.I.C. reported. That was up from 6.9 percent at the end of 2008 and from 4.1 percent a year earlier. It also exceeded the previous high of 7.26 percent set in 1990 and 1991, during the last crisis in American banking. (The F.D.I.C. has been collecting the figures since 1984).”

The chart says it all:

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0530-biz-webcharts

graphic courtesy of NYT

>

Source:
Troubled Bank Loans Hit a Record High
FLOYD NORRIS
NYT, May 29, 2009

http://www.nytimes.com/2009/05/30/business/economy/30charts.html

Category: Credit, Finance

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

36 Responses to “Worsening Bank Loans”

  1. Steve Barry says:

    This is very bad…if those loans are going bad, derivatives sold off similar loans are going to go bad, and we are still waaaaay overleveraged. I have never wavered saying the real pain has not even started until the 370% Credit to GDP starts to correct itself…it is still going up. Think massive defaults and plant closings, in turn sending unemployment to Depression era highs.

  2. call me ahab says:

    probably good for another 200 on the DOW, 25 on the S&P and 50 on the Nasdaq-

    because I am certain it is better than expected

  3. Loans are getting worse but lenders are still very reluctant to foreclose. With low rates, prices still above historic norms and a tax credit.. this is about a good of a market as you will get in California to liquidate inventory. Sure the economy could be better.. but this level of Notice of Defaults does not happen in a good economy. California has a high percentage of renters (over 50% in many areas).. That is a ready supply of buyers. We are actually experiencing a tremendous lack of supply here due to all the foreclosure moratoriums.. Months supply by the local REALTOR® association peg inventory in the 5-6 month range but that is highly misleading. The supply is all top weighted by the upper end inventory unable and unwilling to cut prices and just sitting on market. The number of homes in the bottom third of the market is maybe a month to month and a half supply… extremely tight.

    Last month trustee sales in Los Angeles County and nearby Ventura County were up ~20% MoM what was interesting about the sales was the breakdown of homes going back to the beneficiary versus going to third parties (investors mostly). Third party sales were quite high.. Investors know inventory is light and are snatching up even the marginal deals in the belief they have pricing power (however temporarily) on the low end.

    Banks should be liquidating. They will get less later. Those that get out the soonest get the most.

    Here are the trustee sales for this year for LA & Ventura if anyone is interested:
    http://effectivedemand.blogspot.com/2009/05/foreclosure-sales-for-la-and-ventura_30.html

  4. Bruce in Tn says:

    http://www.bloomberg.com/apps/news?pid=20601068&sid=aZMsPVTXn9I8&refer=economy

    Zoellick Warns Stimulus ‘Sugar High’ Won’t Stem Unemployment

    May 30 (Bloomberg) — World Bank President Robert Zoellick warned policy makers that fiscal-stimulus plans are insufficient to turn around the “real economy” and rising joblessness threatens to set off political unrest across the globe.

    “While the stimulus has given an impulse, it’s like a sugar high unless you eventually get the credit system working,” Zoellick said in an interview yesterday with Bloomberg Television’s “Political Capital with Al Hunt.” “When unemployment increases, that’s probably the most political combustible issue.”

    Zoellick’s caution is a contrast with private economists, who are raising their outlooks for growth from India to China as stimulus measures take effect. The biggest developed and emerging nations have committed spending increases and tax cuts totaling 2 percent of their combined economies, a level the International Monetary Fund recommended to end the recession.

  5. call me ahab says:

    Efftve Dmnd-

    “Banks should be liquidating. They will get less later. Those that get out the soonest get the most.”

    couldn’t agree more

  6. urbandigs says:

    agreed with Ahab – this should be good for another 5-7% surge in stocks because you know, 40% rally in 12 weeks didnt price in the fact that this is not as bad as expected. If your not for stocks rallying, your not for America!

  7. hrux says:

    All (especially BR, LB, Ben22, Karen, Andy T, Manwich, Bruce in TN, etc….),
    Attached is an interesting article at Minyanville advocating a continued countertrend rally based on all the global government intervention. Quite interesting read and would appreciate everyone’s thoughts?

    http://www.minyanville.com/articles/rally-dollar-Fed-VIX-spx-SP500/index/a/22862

  8. franklin411 says:

    Heavens! One would think we were in a recession!

    Seriously, this data would be much more useful if it was compared to prior recessions. It’s not terribly informative to compare the ratio of bad bank loans against data from periods of growth. And frankly, the last 25 years doesn’t even cover the only comparable recession in recent history, which is the Reagan Recession of 1981/2. It would make a lot more sense, and be a lot more elucidating, to compare bad bank loans now with bad bank loans during prior recessions so we can determine the real severity of the current crisis.

    Now you may return to your previously scheduled wailing and gnashing of teeth.

  9. Steve Barry says:

    @hrux:

    I can’t take seriously any article where a key point is that stocks are undervalued at 30 times forward as reported estimates. Using a 10 year P/E when the last 10 years were a giant bubble, makes no sense.

  10. gordo365 says:

    @Hrux – Minyanville article was written by James Kostohryz

    paraphrasing: … Consensus economic views are far too bearish. … Most of the arguments … based on discredited ideological precepts that have become urban legends and have very little empirical evidence to support them. I haven’t written in detail on debunking these urban legends for a reason: The market isn’t ready for it…

    Net – they are all wrong – I can’t explain why because it is a secret. Huh?

  11. Mannwich says:

    @hrux: I’m slowly coming around to the idea (however absurd I think it may be based on reality) that the markets could continue going to 9,500-10,000 on the DOW and 1,000-1,050 on the S&P before the bottom drops out, especially after considering how long the absurdity lasted in ’06/’07. Could end up being the easiest (or second easiest to Oct. ’07 in hindsight) short of all time if it gets to that point. This market rally is mostly all liquidity/bailout money driven combined with setting expectations so absurdly low and spinning every piece of news they can into “better than expected” or things are “turning around”. It’s been a brilliant PR campaign by the administraiton and their cohorts in the MSM. I’ll give them that. It’s really working with the rank and file out there based on discussions I’ve had with people. The obliviousness and lack of any critical thinking astounds me but we shouldn’t forget that most “normal” people don’t get anywhere near as far into detail on this stuff as we folks on TBP and other sites like it do. Maybe we’re the insane ones (or at least masochistic) for getting into this much detail and maybe their way is better? Quick, give me my balance-free credit card! Time to go on a binge! ;-)

    Of course, now that I’m finally coming around to the idea that the markets could keep going up for a while, it probably means they are due for a big pullback any day now! ;-)

  12. Transor Z says:

    @Bruce: “Sugar high” — nice metaphor.

  13. I’m, personally, surprised that these charts aren’t done in shades of Green.

    Those spikes, on the right-hand side, would have, then, looked like the “Greens Shoot” everyone, in the MSM, has been talking about..

  14. Mannwich says:

    The MSM can only ignore the CRE story for so long. Someday they’ll have a eureka moment (probably 6 months – 1 year from now) and we here at TBP will just smile……well, except for franklin411, who will just make a snarky, sarcastic remark to try to get the attention here that he never got as a child.

    http://www.calculatedriskblog.com/2009/05/cre-see-through-buildings-on-beltway.html

  15. [...] When are the banks returning taxpayer money again? Jump to Comments Because things look so rosy: [...]

  16. YY says:

    I am with Steve Barry on the centrality of debt level in this crisis.

    The minyanville article ignores many critical factors such as debt level, profitability of companies and commodity prices, and barely touches on the impact of bond yields.

    Current market action is driven almost entirely by very short term trades and not long term investments.

    There maybe money to be made on the swings, but when the music stops you better be protected.

  17. km4 says:

    Mark E Hoffer Says: May 30th, 2009 at 10:49 am
    I’m, personally, surprised that these charts aren’t done in shades of Green.

    ************************
    You need to wear rose colored glasses when reading these charts ;)

  18. [...] May 30, 2009 · No Comments Sure, there’s a few green shoots of good news. But in general, the economy is still limping along, with more pain to come. [...]

  19. Marcus Aurelius says:

    We haven’t even begun to see the depths of this downturn. The MSM and “conventional wisdom” (run the other way whenever “conventional wisdom” is rearing its stupid head) are anticipating a bottom, but that’s only because the measuring device they’re using doesn’t extend far enough into the muck (like the amplifiers in Spinal Tap, they need something that goes to “11″).

    Residential RE isn’t finished its unwinding, and we still have CRE and CC debt to go after RRE hits its nadir. Think the banks are in trouble now? What’s coming will crush them to a fine powder .

  20. zot23 says:

    I stride through the slag pools of the post-fiscal cityscape, the broker boys are rounding up wood and victims for the nightly pyre. A quick flash of my scoped .44 lounging low-slung on my thigh makes them respect a comfortable distance. The smell of decay is heavy in the air today, a sulfurous emission that seeps up from the rock, the dirt, the undergrounds of fisca-topia. The sun is unrelenting, shining bright off the submerged sections of the city. Scrapers rise like gigantic gravestones from the foetid seascape, the grime gators and mucksharks cruise the shallower pools and watered lobbies in hungry, unrelenting circles.

    I climb the long abandoned barricades on the Street, lugging my daily scrap back to the forge pits in exchange for a covered room to sleep, a meal ration or two from the overseer, and perhaps a shot of corn squeezings if the haul was particularly fruitful. The cloth sack is heavy, my back groans under the strain of the daily toil. At least I hadn’t needed to venture into the suburbs today. My God, the ‘burbs. The crazed squatters, the cannibal children, the nightly “entertainments” showcasing man’s unyielding depravity in a carnival of inhuman delights.

    That reminds me, I wonder what the DOW did today? Gotta check my 501(k)!

  21. usphoenix says:

    FWIW The thought comes to mind that there’s a squeeze going on. Those smaller banks still reasonably healthy are getting crushed under increasing FDIC premiums, becoming more likely to fail as well.

    We would be better off giving Gov support (TARP,TALF, whatever) to the FDIC to subsidize earlier cleanup as opposed to later cleanup or no cleanup. And let the TBTF banks figure out a way to unwind themselves to qualify for FDIC cleansing. IMHO this would have maxed the earlier cheaper cleanup.

    But they were TBTF, and the world order would have collapsed otherwise and the Bilderberg grop would be very unhappy with BHO.

  22. Onlooker from Troy says:

    Then bankers own the congress and executive branch, still, apparently. It’s astonishing how easily they’ve kept any actions that need to be done (bond holder haircuts, debt for equity swaps, etc.) from happening, instead sucking the blood out of the taxpayer. One day the history written on this period will show Geithner, Summers, et al for the rubes they are.

  23. km4 says:

    @zot23
    sounds just like BladeRunner the film depicting a dystopian LA in November 2019

  24. Onlooker from Troy says:

    re: The Minyanville rally defense http://www.ritholtz.com/blog/2009/05/worsening-bank-loans/comment-page-1/#comment-177757

    I’ll admit that it’s very unsettling to think that any significant portion of the investing community may be, or will be, thinking along these lines. If this mindset gets going the herd may indeed be hard to stop.

    I don’t know if that guy really believes what he’s saying or if he’s just trying to fuel the rally. He completely dismisses and ignores the huge debt overhang, calling it an “urban legend.” He seems to be of the mindset that it’s all just a liquidity problem. There are reams of data out there that clearly contradict his stance on this. I don’t know what else to say.

    He talks about a “strong momentum in the economic data” that will “continue.” Huh? This too has been debunked in so many ways and by so many people. Grasping at the straws of second derivative change.

    And there’s his contention that the market is undervalued. He also seems to be of the mind that once this “liquidity” problem is surpassed that we’re going to return to the profit margins and valuations of the last bull market. You can’t talk sense into this generation of investors who grew up in the great bull and don’t know good value anymore.

    His other points about performance anxiety, etc. are valid. He basically argues that more people will be drawn in as they worry about the risk of not being in the herd.

    One more thing to note. It’s interesting that he refers to this as a counter trend rally, implying that he thinks that we are still in a bear market. But his valuation arguments don’t jibe with that. He thinks that 135o on the S&P 500 would be at the upper end of it’s normal valuation range. If you think that and that this market doesn’t need to correct from here (another of his contentions/points) then you ought to be thinking this is the new bull. So I don’t know what to think of that.

  25. [...] post on Big Picture points  us to a story, which originally ran on the NYT, displaying some nice charts on the state [...]

  26. ben22 says:

    @hurx,

    I basically don’t agree with anything in that link except where this countertrend rally could go to. My target for months has been 965-1k. I might even be too low, and 1,100 would not shock me. You will see many similarities between the peak of this rally and October 2007′s peak but the bear market is not over. As I have said for some time here are four I think you could see:

    1. AAII bulls rival the 10/2007 bull levels, despite the fact we aren’t near that high. So far only the DSI at trade futures got to an extreme on 5/8 with 85% bulls for the S&P.
    2. Statements from the gov, the Fed. and the Treasury, that they have done enough to bail out the economy (this is already happening)
    3. Some economic numbers could actually start looking positive towards the peak of the countertrend rally. I would not be surprised to see positive GDP in a quarter or two, which will be treated as an all clear of course.
    4. More bullish articles via the MSM. We are already getting tons of examples of this, but more will come. This week I saw 90% of economists predict a second half recovery. I also saw this one: The bull market isn’t on the way, it’s already here.

    A few other points to consider that are counter to the article, remember also CNBC is saying “down is the new up” as Steve said above, it’s not even worth commenting on the valuation statements in the article

    1. The article is not in touch with reality when it states that consensus is too bearish. A survey of 45 economists by the National Association for Business Economics Outlook finds that for all 45, : The end of the recession is in sight. Have you seen the new graph at the NABE website for projected GDP? It is not too bearish. Many noteable bears have recently become more “constructive”, see: bullish, as well.

    2. Government fights the uptrend as social mood rises, gives in as the peak arrives and then tries to prevent the resulting crash – after it has already happened. An example I gave yesterday was the implementation of Glass Steagall, which was to prevent a crisis that already happened, and the repeal of it in 1999, just as the long term uptrend was ending in real terms. The policy response has not gotten better, no, not the response itself or the implementation, it is still misplaced and will ultimately fail.

    2. There are many warnings signs if you are paying close attention. For one, CBOE put/call has closed below 1 every single day since 3/30. weekly II has risen from -32.2 near the 10/20 low to +12.5, which is the biggest move I can find in nearly a year. This is emotion driven, nothing more. The VIX is in the range it was back from 8/07 – 9/08, so there is less fear, it could be in the teens before this rally is over. If you plot the VIX out there is a pattern if you look hard enough, the next major turn should be mid-July if I’m seeing it right, and this is a warning.

    3. All those sentiment indicators are flying in the face of other things getting worse. Most here already know the economic data so here are two examples of where people that actually control real money are not showing sings of improvement. There are so many others. Share Buybacks were a staple of the bull market. Plenty of buyers of shares (CAT, for example) during the bull run. Where are they now, especially with all the lower prices? The other is in Derivatives, which I’m sure WB can tell you all about. According to the Bank of International Settlements, the value of all outstanding derivative contracts at the end of 2008 showed a 13.4% decline, the first since they began recording them in 1998.

    4. As far as I can see, the main “green shoots” sightings of late revolve around consumer confidence rising and unemployment claims starting to fall lower as layoffs slow (lets not mention that pesky 4 week contininous claims figure). They even pushed the ISM Manufacturing data in May at 40.1 as a green shoot even though it has to be at least 50 to mark an expansion. I might add that at 40.1 the index is still ower than it was at any time during our last recession. That should explain how severe this is. I find the consumer confidence hype most funny. I talk to plenty of consumers, they don’t seem confident to me. Are people not hearing the grumblings from, for example, the governor of Texas saying that they want to secede, or did they not see that in Georgia the state Senate supported a resolution that would allow the state to secede from the union given certain unpardonable acts by the federal goverment. heard the newswoman call this “wacky” It passed 43-1!!! South Dakota and Oklahoha, I have read, are considering something similar. You want global confidence, well, heard anything about building in Dubai lately? The press there isn’t even allowed to report anything that MIGHT hurt the economy.

    5. CRE problems are still just coming into play, and the residential market has many problems of it’s own as have been discussed at length on this blog and at calculated risk. CRE property owners cannot refinance debt and about $200 billion in CRE debt comes due over the next 12 months, and another 1.2T in the following three years. Property values are way off so how is it going to be restructured. Lets not even mention that lending standards are tighter and banks don’t have incentive to lend. The author can talk all he wants about TALF or PPIP, they won’t help.

    The credit deflation cat is out of the bag and it can’t just be put back in until the credit deflation has run it’s course. Just be careful, it’s a fast moving market and if you don’t want to trade it keep your capital safe.

  27. tt79 says:

    Irresponsible lenders, some of which do not follow “the rules” for this reason I made a website about removing a default notice from your credit file if you want to check it out.

    I am not the master of website design! But the content I hope will be of use to someone.

    Thanks

    http://www.defaultremoval.com

  28. thetanman says:

    Obama calls the bottom and you guys think this market is going anywhere else besides where they want it to go. Just ask yourself, what does the cartel want? Does it want the market to go back to 666. No, not unless they need to scare people to get something through the congress, which is a rubber stamp anyway. So its up from here, with a few blips so the cartel can harvest some of our greed/and or trust. See you doubt the FED and administration and go short. You get squeezed and the cartel gets richer, and you get poorer. In a year or so the syndicates literally has all of the money and all we have are a bunch of pretty sounding arguments. The market has been climbing a wall of worry warts. If you want this move to end-quit opposing it!

  29. drey says:

    Nevertheless, SRS continues to bump along it’s 52 week bottom as CRE implodes in slow motion.

    Explanations? I’m running out of patience with some of these double inverse etf’s…

  30. frizzione says:

    Ben22, I take it you write the Elliott FF, since you’re not citing it and no one on this blog would ever plagarize.

  31. Pat G. says:

    “and the quality of loans is deteriorating at the fastest pace ever,”

    Not too worry. The FED will just monetize some more debt which the taxpayers will be obligated to pay off.

  32. drollere says:

    i love karma, because “what goes around, comes around.”

    those who live by incompetence and delusion, fail by incompetence and delusion. and maybe … those who live by the short, die by the short.

    “i’m losing patience …” — indeed.

  33. drollere says:

    @franklin411 10:32am: i agree completely. there ought to be a big picture editorial policy under “data hygiene”: whenever possible, a standard “big picture, fusion iq” analysis time frame. my ideal choice would be: 1950 (or back to inception; we can’t track nasdaq back to 1950).

    1950-2009 has the benefit of spanning several wars, fiscal policies, economic cycles, productivity spurts, inflation spates, bubbles, price spikes and market crashes, and is also pre- and post gold standard. every story, theory and prejudice would have an equal footing in the facts. of course, the data won’t be consistent across that period (cpi as one glaring example), but it’s better than nothing.

  34. Cursive says:

    Yeah, but will it matter if there is PPIP? It seems like the banks’ problems are not even their problems anymore; the banks’ problems belong to the taxpayers. Moral Hazard to the power of 10. Geithner/Obama have innoculated the banks and given a terminal illness to the U.S. taxpayer. It’s called Fascism.

  35. hrux says:

    Thanks to all for the comments

  36. [...] foolish Green Shoots compost.  As we have detailed since this nonsense first started spreading earlier this year, the data simply did not support the notion of  a 2nd half recovery.  Not only below [...]