Too Small to Succeed: Neighborhood Banks Becoming Extinct

There were hundreds of local banks that have struggled to survive the volatile economic wave over the past two years. Since 2008, 238 banks have failed, which translates to 613.2 billion in assets. Not to mention the amount of losses that had to be covered by the FDIC for depositors (the maximum insurance of $250,000 per account for each name on the account, which was increased from $100,000 prior to the recession). In 2009 alone, 140 neighborhood banks across the country were forced to shut their doors, accounting for nearly 60% of the total number of banks that have failed during this 2-year period. Apparently, they were too small to succeed. Totally passed over by the TARP bail outs distributed to banks identified as “too big to fail”, the small and midsized banks were left to sink or swim, with little or no support from the Federal Government.
It may appear to the layman, that neither the Bush, nor the Obama administration saw a need to include the little guys, who made up over a half a trillion dollars in assets. Meanwhile the small banks are the backbone of many communities throughout the country. It is the small bank that often provides construction loans, and mezzanine loans for housing development projects and small businesses that make up a more than 50% of our GDP. This year has seen 73 banks close, and we are only in the second quarter. I am not a big fan of banks, given their unsavory role in the near collapse of the financial markets, but I always take a stand for the overlooked and underserved.


K. Reilly
Cohn-Reilly Report

___________Comments

Charlie said.....
Great article! The media has not given this topic much headline space, but it is very important how this has affected regional areas around the country.

Katherine said.....
Thanks. Yes, you're right. The small neighborhood banks are a vital part the economic vitality of a community. They are responsible for fostering business development and growth, while stimulating the local economy. I am not quite sure why this has been completely under reported, but I suspect it’s not "sexy" enough for the Media. This isn't really an attention grabbing topic. Without an association or public figure advocating for the plight of the small bank, they don't have a voice to bring the much needed attention to this issue.

Follow-up: BP Deepwater Horizon Reminiscent of the Worst Accidental Spill in History

With over 40 million gallons of oil spewed into the Gulf, the disaster has already eclipsed the Exxon Valdez. It may become the worst accidental spill the world has seen. In 1979, the Ixtoc 1 blowout spilled between 126 million and 210 million gallons in Mexico’s Gulf Coast over a period of nine months, wiping out fishing in the area for over two years. Actually, during the Gulf War in 1991, retreating Iraqi troops intentionally spilled 462 million gallons, according to the Interior Department, making that the largest oil drop in history.

There are similarities between the two spills. Both involved the failure of a blowout preventer device, a kind of emergency shutoff valve. In each case metal domes were put over the well to stop the flow, without success. The Ixtoc 1 well was owned by Petroleos Mexicanos, Mexico's state oil company, known as Pemex. However, it was being drilled by Sedco, a predecessor to Transocean, owner of the BP Deepwater Horizon rig.

The Ixtoc 1 leak was finally capped on March 25, 1980; Pemex began drilling two horizontal relief wells soon after the spill in June 1979, but they did not reach the Ixtoc 1 well until November, five months later. The crews used the relief wells to pump mud and steel balls into the gusher, which finally succeeded. BP plans a similar maneuver, but claims the relief wells will not be ready until August. However, they must drill in 5000 feet of water compared to the Ixtoc 1 well, which was only in 160 feet of water. Based on BP’s past performance and reliability, who knows if this will really work? BP has tried other procedures that failed: The top kill method pumped huge amounts of mud into the well at a rate of up to 2,700 gallons per minute, without success; a robotic camera on the seafloor appeared to show mud escaping at various times during the operation. BP also attempted several times to shoot assorted junk into the well's crippled blowout preventer to clog it up and force the mud down the well bore and that failed too.

Many residents in Mexico now fear a repeat disaster. A variation in the Gulf currents that occurs every 6 to 11 months could eventually carry the oil toward Mexico, said Mike Pigott, a meteorologist with the AccuWeather forecasting firm."The winds are dead out there now, but in June, they're going to start blowing again," said Roman Dominguez of the Gavilan del Rio Fisherman's cooperative in Coatzacoalcos. "That's what people are worried about. Everyone here remembers Ixtoc." Likewise in the States, people are equally afraid. The currents may carry the oil to Florida’s Atlantic coast and potentially up the eastern seaboard. In Louisiana, the top official in coastal Plaquemines Parish, Billy Nungesser, said "They are going to destroy south Louisiana. We are dying a slow death here” - and hurricane season has just begun.

C. Cohn
Cohn-Reilly Report

Will Global Events and Economic Quandary Impede US Recovery?

After declining nearly 300 points at the start of the trading day (Tuesday ), the Dow average was able to find its way back - ending the trading day only 22.8 points down. The global pull back in Europe and Asia's overnight trading rippled across the globe impacting London, Paris, Hong Kong and Tokyo indexes - bringing them to their lowest point for the year. It is speculated that the news of European banks having to pay premium to borrowing in interbank markets have contributed to the anxiety for investors. No doubt the temporary fix for Greece’s trouble remains a dark cloud for the Market. It certainly doesn’t help that tensions are mounting between North and South Korea. In spite of the fact that the Market was able to regain much of the day's earlier losses, there is still a feeling of lingering uncertainty among the investors. Traders and money managers are said to be getting the sense that this is not going to dissipate anytime soon.

A New York Times article points out that the troubles in Europe may have a negative impact on the US recovery. I couldn’t agree more. We are now more susceptible to volatility based upon the political and economic discord around the globe. After reading "The World is Flat" by Thomas L. Friedman, my perspective is forever changed. According to Friedman, in today’s globalization of commerce, as a result of the internet and other technological advances, we are all much more connected than we realize. Nevertheless, the fiscal problems mounting in Europe is only one of the factors impacting our economic recovery. The Wall Street reform legislation will dramatically impact the banking industry, which will, in turn, play a role in stunting recovery as well. Don’t get me wrong, I am all for Wall Street being lassoed in a bit, but the timing of these changes may prove to be challenging to our already sluggish recovery.

The Dow Jones Industrial Average is back in low 10,000 level, which is more in line with the where we are economically. I'm sure continued volatility should be anticipated until things settle down, both economically and politically, around the globe.

K. Reilly
Cohn-Reilly Report

___________Comments

Lisa said.....
I read the book "The World is Flat" and it was startling to read how the Internet and wireless communication has created a flattened landscape were business is concerned. The world really is leveled now! So I guess it going to be like dominos when financial troubles hit any of the continents. Nice article

Mark said.....
Technology driven Globalization is like Pandora's Box. Now that's open, there's no turning back. We have to take the good with the bad. Like they say...You can't un-ring the bell.

Katherine said.....
Yes Lisa, we must get used to the idea that the flattened landscape (as you put it) has created the domino effect that has to eventually change our perspective and fiscal strategies as a country going forward. Mark, your comment about Pandora's box is spot on.

The BP Oil Disaster Continues

Congressional investigators revealed last week that bad wiring, a leaking hydraulic system and a dead battery contributed to the massive oil rig explosion that killed 11 people on April 20, off the coast of Louisiana. They said that BP documents and others also indicated that conflicting pipe pressure tests should have warned those on the rig that poor pipe integrity may have allowed explosive methane gas to leak into the well. "Significant pressure discrepancies were observed in at least two of these tests, which were conducted just hours before the explosion," said Rep. Henry Waxman, D-Calif., at a House hearing on the rig fire and oil leak, citing documents his committee had received from BP. Asked about the tests, Steven Newman, president of Transocean, which owned the drilling rig, and Lamar McKay, president of BP America told the committee the pressure readings were worrisome. They indicated "that there was something happening in the well bore that shouldn't be happening," said Newman. McKay said the issue "is critical in the investigation" into the cause of the accident.

The Coast Guard estimates that 210,000 gallons of oil has been gushing into the Gulf each day, although BP claims the new siphoning tube that was inserted into the leaking pipe will cut that daily figure down by as much as 40%. With millions of gallons already spreading throughout the Gulf and climbing, the catastrophe will eventually eclipse the 1989 Exxon Valdez disaster, where a captain simply ran his ship onto a reef in Alaska's Prince William Sound, spilling nearly 11 million gallons of oil.

Worries over the ecological impact of the huge oil spill are growing, with fears focused on the spread into the 'Loop Current' that could carry the pollution to the Florida Keys and nearby areas. The Coast Guard was analyzing 20 tar stains found on a beach in Key West to determine if they were from the spill, a spokeswoman said today. If it proved to be true, it would mean powerful currents are carrying it around the southern tip of the peninsula and its fragile coral reefs. Today the federal government announced it is nearly tripling the size of an area in the Gulf that's closed to fishing; the National Oceanic and Atmospheric Administration said it was closing 46,000 square miles, or about 19 percent of federal waters, beginning today at 6 p.m.

'About 20 tar balls, three to eight inches in diameter, were found on Monday at Fort Zachary Taylor State Park, in Key West, on the beach of the park,' said Anna Dixon, a Coast Guard spokeswoman. In the region satellite images taken Saturday by NASA's Jet Propulsion Laboratory, it appears the oil may have already entered the Gulf Loop Current, which could pull it through the Florida Keys and into South Florida, some scientists say.

There are also concerns that huge underwater plumes of crude could be starving the sea of oxygen. A research vessel has located plumes reported to be up to 16 kilometers long, 4.8 kilometers wide and 92 meters thick that suggest a far greater impact on the marine environment than previously thought. 'BP is burying its head in the sand on these underwater threats,' said Democratic congressman Ed Markey. An expert from the Hart Research Institute for Gulf of Mexico Studies told AFP that deepwater spills posed greater risks due to these plumes.

Response crews have used some 560,000 barrels of controversial chemical dispersants, spraying them onto surface oil and also directly into the leak in a bid to break up the oil. However, the limited progress is unlikely to take the heat off BP. Congressional and political pressure will continue, along with the investors response; the stock has declined nearly 25% since the incident occurred.

In light of the failed effort to cover the well with a large containment dome, BP’s next attempt will be a 'top kill' procedure to inject heavy drilling 'mud' into the well and permanently seal it with cement in the next 7 to 10 days.

C. Cohn
Cohn-Reilly Report


________Comments

Katherine said.......
Great article Charlie! That photo you posted with the oil-slick gunk on the duck swimming in goo is exactly the vision that is most disturbing about what’s to come. I have deep concerns about the long-term ramifications of the oil spill on our ecosystem. Sad realization of how quickly this disaster will ripple through the waters and destroy wild life; the many species of plants, fish, birds, as well as the all of the livelihoods whose futures are uncertain and hanging in the balance. This is really troubling. The imminent destruction of the coral reefs, begs the question; how many decades will it take before the ocean’s reefs are replenished? We watch helplessly, as our waters become an ever spreading killing field. This is clearly something that no amount of money can reverse at this stage.

Marilyn Casey said...
Quite inclusive, Charlie. BTW -- did you happen to catch 60 Minutes last Sunday? There was a story about someone who worked at BP with knowledge that there was a BP cover up. / May 21, 2010 1:45 PM

Charlie said...
Thank you Marilyn. I did not see the program, but am not surprised to hear about the cover up. The daily reports of the devastation are hard to take, and we can only guess what the long term effects of this catastrophe will bring./ May 21, 2010 2:35 PM

Wall St.: Surviving the Plunge

Last Thursday was a scary ride for traders and investors alike. The 1000 point drop in the DOW amounted to over 9%, representing nearly a trillion dollars wiped out of the market in less than an hour. To put it in perspective, this was the steepest loss ever in the course of a trading day. Imagine the global message the deep plunge must have sent to those who watched in horror. Once sentiment spread of an erroneous trade or a computer glitch, the market was quick to recover all but 347 points. Meanwhile, as the world looked on, the SEC and federal officials were left to ponder whether this was a result of the mayhem unfolding in Greece, or the technical glitch theory. It was plausible that a combination of the two caused the savage meltdown, given that the financial and political unrest in Greece was already reflected in the market - which had declined roughly 500 points by early afternoon. However, the abrupt and swift decline of an additional 500 points only took a matter of minutes. What a rollercoaster ride it must have been for traders on the exchange floor. We can’t even fathom what it felt like at 11 Wall Street, that afternoon on the floor of the exchange.

That following Friday morning was undoubtedly filled with trepidation for traders. There was heightened uncertainly concerning the cause of Thursday’s down swing, which was made even worse by the troubles in Greece. The SEC and the CFTC* issued a joint statement that they are continuing to review the issues. The Wall Street Journal reported that the SEC and federal official were focusing more on the different trading rules of the various Exchanges. As the weekend progressed, there seemed to be movement away from the “trading error” theory, which the media ran with for provocative headlines.

As it turns out, the investigation of the historic 9 percent drop revealed that trading was halted on certain Exchanges, while others continued trading activity on the same stocks. This explains why Federal officials hinted at their belief that differences in trading rules on the Exchanges may have also contributed to the problem.

What a Difference a Weekend Makes:

Amid news of the EU bailout of Greece, the DOW got a much needed boost, amounting to a 4% gain of $404.71 on Monday. The DOW's net loss for the week of May 3rd was 629 points, but yesterday’s euphoria wiped out much of the losses of last week. Nevertheless, all is not forgiven, as the SEC summoned a meeting of the Exchange CEOs to Washington.

Continued on next page

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* Commodity Futures Trading Commission


K. Reilly
Cohn-Reilly Report

_________Comments

Erin Thak said.....
The deep plunge should be a sign to al of us that the market is still not stable for individual investors

Anonymous said.....I think the market was influenced more by the Greece debt issues than we may realize. The televised exchanges between the Police and the protestors were violent and more dramatic than we have seen in the US since the civil rights movement. Also, having experienced fiscal discord ourselves, perhaps investors are more readily shaken by what’s going on globally than in the past. The protests in Greece have a visceral impact on our psyche, and leave us feeling uncertain about our own future.

Katherine said.....
You make a strong argument for how the volitality remains an issue for the market. I do beleive that Greece's fiscal problems ultimately have an impact on the European Union and eventually impact the US. Hopefully the measures taken to bail out Greece, will buy time for the country to restructure and rebuild their financial house.

Will History Be Kind to Wall Street?

In hindsight, will this period in history become known as “the decade of greed”? It will likely be known as the decade when corporate America and Wall St demonstrated the worst of capitalism. We still have scar tissue from the downfall of corporate giants like Enron - being the first of the titans to implode in 2001, followed by WorldCom in 2002. There were countless others to follow suit. In fact, there were over 430 securities fraud cases in 2000 and 500 such cases in 2002. Just when the ills of capitalism was beginning to fade from the public psyche, the financial crisis ripped through the economy like a tornado. Bear Stearns’ near collapse, and the Lehman Brothers meltdown were monumental events that represented a serious underlying problem in the system. We all know what eventually transpired, amounting to historic losses, a disastrous housing market and a broken economy. Although Wall Street fraud cases dropped 87 percent by 2008, the cloud of distrust remains thick. Quite frankly, a drastic drop in securities fraud cases may simply mean reduced effort to investigate financial firms, as in the case with ponzi King, Bernie Madoff and Allen Sanford. Public perception is unfavorable to say the least. Numerous ponzi schemes have come out of the woodwork since Madoff, only to further taint the image of the financial industry.
The fall out of deregulation and securities fraud, sparked a call for Wall Street reform and tougher regulations from the White House and Capital Hill. The trouble is, the members of the sub-committee responsible for writing new legislation for Wall Street don’t seem to have strong enough knowledge of the inner workings of sales and trading. This was painfully apparent as I watched the senators grill Goldman’s CEO, Lloyd Blankfein. Anyone working as a trader, analyst, fund manager, or even sales clerk knows that detailed information and credit ratings for securities are fully disclosed in the official statements, but this point seems to have escaped the senators interogating the Goldman CEO.

There’s a negative perception of Wall Street and an overall feeling of distrust on Main Street. This is certainly justified, given a decade of seemingly endless instances of fraud and deception. I can only imagine how this period will be perceived in the history books in years to come. Hopefully, the national and global lessons derived from the past 10 years will serve to keep us from repeating our mistakes. With the swift actions of the White House and the Treasury Secretary, the Country managed to avert the worst case scenario - and we are actually starting to see an economic turnaround. We may not be so lucky the next time around.

For details on the Goldman Sachs probe click Here

K. Reilly
Cohn-Reilly Report

Goldman On Trial

The Securities and Exchange Commission filed a civil suit against Goldman Sachs accusing Goldman of “defrauding investors by misstating and omitting key facts" about a financial product based on subprime mortgage-backed securities. As everyone knows by now, this type of security was a major contributor to the financial crisis of 2008.

The charges are believed to be the first brought against a Wall Street firm for speculating on the collapse of the housing market, which is still struggling to emerge from one of the steepest declines in history. The SEC is accusing Goldman of failing to tell investors that a major hedge fund, Paulson & Co, had helped put together the controversial financial product known as collateralized debt obligation (CDO), and was at the same time betting against it.The transaction occurred in 2007. CDO's are sophisticated financial tools that repackage loans into a product that can be sold on the secondary market. They are called mortgage-backed securities if the loans are mortgages. If the mortgages are made to those with a less than prime credit history, they are called subprime mortgages.

Goldman claimed it lost 90 Million dollars for its own investment in the security and said it would "vigorously contest them (the SEC) and defend the firm and its reputation." The lawsuit also named Fabrice Tourre, then a vice-president at Goldman who allegedly knew of Paulson & Co.'s undisclosed short interest and role in the collateral selection process, according to the SEC. He was said to be the creator and salesman of the product, which caused investors to lose about one billion dollars. Analysts said a long courtroom battle could now be expected.

Goldman is also facing a potential backlash in Europe; Britain's Prime Minister Gordon Brown called for authorities there to investigate and accuse the investment bank of "moral bankruptcy." In Germany, the Welt am Sonntag newspaper quoted Chancellor Angela Merkel's spokesman, UIrich Wilhelm, as saying that German regulator BaFin will ask the U.S. Securities and Exchange Commission for detailed information.

Although Goldman reported strong earnings this week, nearly double from the same period a year ago, investors focused on the charges, and sold off the stock by two percent, with a decline of $13 billion over a three day period.

Goldman’s gain from the alleged fraud was $15 Million - not a huge figure for this financial giant. However, SEC fines could be $70 Million plus $1.20 for each share, which could bring the total penalty to near $700 Million, a significant dent into Goldman’s capital. Furthermore, many large institutions, as we know, were involved with transactions of this type, and this could just be the tip of the iceberg.

C. Cohn
Cohn-Reilly Report