AS THE odds ebb and flow on whether the US government will be forced into salvaging the twin towers of the country's mortgage market, beleaguered local and regional banks across America are feverishly hoping any bail-out doesn't send a fresh wave of adversity in their direction.
After a gruelling period of trading that saw shares in Fannie Mae and Freddie Mac plunge on speculation that the US Treasury would have to step in with public funds, market sentiment towards the government-chartered mortgage financiers improved last
week on a string of positive news. Chief among this was the successful sale of a combined $5bn of short-term debt by Fannie and Freddie, easing concerns about their ability to fund their operations without a government rescue led by US Treasury Secretary Hank Paulson – a move that could wipe out holdings by existing investors in Fannie and Freddie.
Though fears have been calmed for the moment, it is by no means certain that the crisis is over: Fannie and Freddie have about $225bn in short-term loans due between now and late September. This dwarfs the value of last week's debt sale, and if investors show little appetite, a public bail-out would again rise to the fore.
This all makes for a nervous game of wait-and-see for local and regional banks across the US, many of which have substantial holdings in Fannie and Freddie. They rely on these holdings to generate income and shore up their regulatory capital cushions. Any moves by the Treasury that might threaten this would prove yet another challenge in what has already been a toilsome year for small and mid-sized banking institutions.
Battered by bad mortgages, slumping property development, and unpaid credit card loans, shares in many US regional banks are already trading far below their book values. Their descent has been described as "remorseless"; the Standard & Poor's 500 Regional Banks Index is down by more than a third so far this year.
The state of the industry was reflected in the latest figures on so-called "problem banks" issued by the Federal Deposit Insurance Corporation (FDIC), one of the top regulators in the nation's banking system. Its list of troubled banks – those deemed most likely to go bust – jumped to a five-year high of 117 in the second quarter. That was up from 90 banks in the first quarter, and was nearly double the 61 names on the list at the same time last year.
Earnings by the roughly 8500 banks overseen by the FDIC, which insures customers' deposits in the event of a bank's collapse, plunged to $5bn during the April to June period. That was down from $36.8bn a year earlier.
The total assets of troubled banks jumped from $26.3bn in the first quarter to $78.3bn in the second, though much of this was attributed to California-based mortgage lender IndyMac Bancorp, which boasted assets of about $32bn before it collapsed in mid-July. The FDIC has faced criticism for failing to place IndyMac on its troubled list until just a few weeks before its demise.
Billed as the second-largest bank failure in US history, IndyMac has been the most noteworthy in a growing number of bank failures this year.
Attention is now focused on those institutions with large holdings in Fannie and Freddie, particularly those heavily invested in the mortgage giants' $36bn of outstanding preferred stock. These preferred shares are issued to a select class of investors attracted by the unusually high dividend payments, which amounted to a total of $1.1bn in the first half of this year.
Although preferred shares rank above common stock, a government bail-out of Fannie and Freddie would put taxpayers at the top of the list when it comes to any pay-outs by these institutions. Even if Fannie and Freddie scrape through the housing slump without government intervention, dividends will likely come under pressure.
