What’s happening to the regional banks this afternoon threatens to become a textbook example of a self-fulfilling market prophesy.
National City shares are down more than 25 per cent, even after the bank issued a statement seeking to reassure investors that it was not the next IndyMac.
Washington Mutual lost around a quarter of its value after Lehman Brothers said the bank could face $26bn in losses, with $21bn stemming related to mortgages.
Meanwhile, RBC Capital Markets analyst Gerard Cassidy expects some 300 banks to fail in the next three years, saying:
You have to look at companies with the greatest exposure to the highest-risk assets, which include construction loans and exotic mortgages…The final nail in the coffin for any depository institution would be a funding crisis where it is unable to gather deposits at reasonable cost, or wholesale funding markets are cut off.
In this environment of “sell on the rumour, sell on the news”, these comments add significantly to the fear and uncertainty gripping the markets.
Take Chuck Schumer and IndyMac. On June 26, the senator leaked to the press a letter questioning the thrift’s ability to survive.
In it, Schumer said he “concerned that IndyMac’s financial deterioration poses significant risks to both taxpayers and borrowers.”
Outcome: classic bank run, in which panicked customers withdrew $1.3bn in 11 business days, leading to the third largest bank failure in US history.
Now, Schumer is on the defensive, saying he was merely stating the obvious and should not be blamed for IndyMac’s demise.
US regulators disagree: the Office of Thrift Supervision cited Schumer’s letter and the deposit run it sparked as the “immediate cause” of IndyMac’s closing.
Nor are the regulators entirely innocent. Per John Bovenzi, FDIC’s chief operating officer, in an interview with Reuters on Monday:
I don’t expect there will be large bank failures. There will be small bank failures.
Cause small bank failures are a-ok.
