Thoughts On Banks From IRA

I just scanned Institutional Risk Analyst’s latest post and it has two pretty interesting comments. One pertains to their projection for bank closures/consolidations and the other to GMAC.

With regard to bank closures they point out that the small and medium sized banks have not had the benefit of the subsidies extended to the large banks. Their projections based on their own stress testing project that up to 2,000 banks may be shuttered.

On GMAC they correctly point out that this bank is alive only for political reasons. Here is their analysis:

Without the billions of dollars in public funds already injected into GMAC Bank/Ally’s parent, the bank arguably would already be in the hands of the FDIC. More, when you examine the profile for GMAC Bank/Ally on The IRA Bank Monitor (the legal name had not been changed at the end of Q1, so search for “GMAC”), here are some of the factors that jump out and bite you in the face:

** First, Ally has non-performing loans equal to almost 6% of loans and leases. Subtract those from the bank level TCE and you get closer to the cash reality of Ally’s capital base, which puts it into the regulatory category of “undercapitalized.” 

** Second, while Ally’s deposit base appears to be stable, due in large part to the above-market rates being offered in TV and print media across the country, one quarter of the bank’s assets are funded off the FHLBs — well above the regulatory limit of 15% established by regulators as “unsafe and unsound.” The percentage has come down from 30% several quarter back, but is still too high. In The IRA Bank Monitor, banks with > 15% FHLB advances trigger a moral hazard flag.

** Third, the moral hazard of GMAC Bank is clearly illustrated by the fact that the bank has apparently decided to double down at the derivative roulette table. As of Q1 2009, OBS derivatives positions reported by the $30 billion asset GMAC Bank/Ally to the FDIC jumped from $13.3 billion at the end of Q4 2008 to over $40 billion as of Q1 2009. This dramatic increase in OBS derivatives positions NOT FOR TRADE suggests that GMAC is trying to hit a home run and thereby salvage their position. 

But the real issue to us is why is this marginal lenders being allowed to compete with solvent, well-run banking institutions? The answer obviously is the same politics behind the GM bailout. Give the recent decision by the FDIC to limit the interest rates offered on deposits by institutions that are less than well capitalized, we wonder: When is the OTS and the FDIC going to restrict the full-page advertisements by GMAC Bank/Ally that were running in newspapers around the US offering rates that are nearly 1.5% above the rates offered by sound institutions? 

As in the case of Ford Motor (NYSE:F) competing with the two auto GSEs, Chrysler and GM, well-managed banks in the US now have to compete with an irrational, GSE bank in the form of GMAC Bank/Ally whose only apparent objective is to raise enough cash today to survive until the next bailout from the US Treasury. If you believe the statements by the Obama Administration that $30 billion will be the limit of US government assistance to GM, then you should feel less than confident in keeping your money in GMAC Bank/Ally. 

Certainly a different spin than you hear from Washington or the MSM for that matter. Now the question is whether the government extends subsidies to the smaller banks — look for political pressure to do so. As for GMAC, well don’t worry about them, they’re as critical as a defense contractor at this point in time. Take advantage of their rates.

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