Wednesday, October 1, 2008

The Next Banks and Brokers to Cash Out

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The New York Investing meetup first predicted a major broker failure, Bear Stearns, in August 2007. Bear went under in March. The bailout of Fannie Mae and Freddie Mac was predicted in December 2007. They both had to be bailed out this July and then taken over by the government in September. In April 2008, our list of the dirtiest dozen financial companies included AIG, Lehman, Fannie Mae, Freddie Mac, IKB Deutsche Industriebank, Merrill Lynch and Washington Mutual (see 'Night of the Living Fed' at Lehman and Washington Mutual, Merrill Lynch and Wachovia led our list of 'The Banks and Brokers Most Likely to Fail' in September. All of these banks and brokers no longer exist as independent companies, if they exist at all.

While the next wave of failures could include Morgan Stanley (on the April list), it will mostly consist of regional banks. When the market crashed on Monday, regionals were some of the worst hit of all stocks. Many are dependent on the Wall Street bailout bill to keep them in operation. Without it, a number will fail in the near future, with it, they will fail in the not so near future. Top of the list in the next round of the insolvency sweepstakes is National City (NCC), which dropped 63% on Monday after falling 25% on Friday. Management insists everything is fine even though the stock price looks like it could soon be negative and vultures have started circling the branches of the bank. After National City, Sovereign (SOV) and Fifth Third Bancorp (FITB) took some of the biggest hits, dropping 32% and 20% respectively. Fifth Third was on our September list. Sovereign would have been included if we had added one more bank.

The full list of regional banks and brokers that we considered most troubled (we only looked at banks with a market cap over $1 billion) in September is:

•E*Trade (ETFC)
•Corus Bankshares (CORS)
•First Horizon (FHN)
•National City (NCC)
•Provident Bankshares (PBKS)
•Colonial BancGroup (CNB)
•Fifth Third Bancorp (FITB)
•Regions Financial (RF)
•Zions Bancorp (ZION)
•Huntington Bancshares (HBAN)

While these banks are sizeable, they are not 'too big to fail' like a Citibank or UBS. If some form of the Wall Street bailout bill passes then these banks will have a lifeline thrown to them. That lifeline may prove to be fairly short however.

NEXT: Short Selling Democracy - Senate Resurrects Bailout Bill

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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