Are We On The Precipice Of A Financial Cataclysm? Not In My View

Obviously the world of banking/finance has changed dramatically in the last 12-14 months, so let’s quickly look at the major changes:

The Mortgage GSEs are now under Government control, and their shares are now trading for pennies on the pink sheets.

We started the calendar year with five major independent investment banks and are now down to two, Merrill Lynch (MER) and Bear Stearns were saved from collapse via buyouts and Lehman was forced to file for Bankruptcy. Only Morgan Stanley (MS) and Goldman Sachs (GS) remain.

In the mortgage lending space the country’s largest mortgage lender was saved from disaster via being bought out by Bank of America for roughly $4 billion, a steep discount to a company that was worth over $20 billion at the beginning of 2007.

IndyMac was shut down by the FDIC in the largest bank closure since 1984, in fact the size of the IndyMac closing ($32 billion in deposits) exceeds the size of all banks closures in the last 15 years by nearly 50%. In fact the IndyMac closing (according to the FDIC) has the potential to be the most expensive bank failure in history.

In the last nine months there have been over 3X as many bank failures as there had been in the previous two years; and the FDIC faces a potential shortfall as a result.

It’s almost a guarantee that AIG Insurance (AIG) is going collapse if the company isn’t able to raise additional capital, and both WAMU (WM) and Wachovia (WB) are facing significant struggles of their own.

What makes all of the above especially significant is that all of the above events have occurred within the last nine months , with the GSE takeover, Lehman Bankruptcy and Merrill Lynch buyout all happening within the last 10 days.

So much for the cry of “subprime containment” that certain individuals were preaching (still) at around this time last year.

Does all of this mean that we’re on the precipice of a financial cataclysm? Not in my view (and it’s no secret that I tend to lean towards the bearish side of things) because we still have areas of strength left within the nation’s financial system, however all of the above are symptoms (if not extreme symptoms) of what is turning into the largest banking shake-up since the great depression. While the current times may not be exactly pleasant they’re undoubtedly historic on a magnitude that’s rarely witnessed, as the events of the past year simply don’t fall into the realm of your typical failures, mergers and buyouts.

Things already look markedly different and the banking crisis has yet to fully run its course, 3, 5, 10 years from now the banking environment will undoubtedly be un-recognizable in comparison to how it looked at the beginning of last year.

Sources:

The WSJ: “FDIC Weighs Tapping Treasury as Funds Run Low” — Damian Paletta and Jessica Holzer, August 27, 2008.

CNNMoney.com: “Regulators size troubled IndyMac” — Catherine Clifford, Chris Isidore, July 11, 2008.

The WSJ: “Old School Banks Emerge Atop New World of Finance” — Carrick Mollenkamp, Mark Whitehouse.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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