Housing fallout haunting banks

Analysts say government's bailout papered over serious problems

8/11/2011

WASHINGTON -- The recent swings in the stock market have hit U.S. banks hard, but falling share prices are only one in a long list of troubles for financial institutions.

Nearly three years after the government infused the banking industry with hundreds of billions of taxpayer dollars, many large banks continue to struggle with the fallout of the housing bust.

"They have some fundamental issues that some are improving, but as an industry they're still weak and haven't fully healed from 2008," said Matthew McCormick, a banking analyst at Bahl & Gaynor in Cincinnati. "I fear it's going to be several years before they get out of the woods."

Some analysts argue that the government's extraordinary efforts merely papered over deeper problems that are resurfacing as the economy slows and the housing market remains depressed.

Chris Whalen, a financial industry analyst and managing director of Institutional Risk Analytics, said government officials erred by failing to restructure the banks in the wake of the crisis by making them smaller and forcing them to acknowledge the depth of the losses.

"Here we are and the markets are getting antsy" again, he said. "If we restructured banks two years ago, we'd be done."

Bank of America, the largest bank in the country by assets, has faced the most pressure from investors. The company has lost roughly half its market value since July amid doubts about its ability to manage its large portfolio of bad mortgages. Last month, the bank reported its biggest quarterly loss of $8.8 billion. The stock price has hit a low not seen since early 2009. Chief Executive Brian Moynihan was asked this week in an interview on CNBC whether he planned to resign. He said no.

In addition, the bank faces a barrage of lawsuits by investors who plowed money into loans that turned out to be worthless.

"We are aggressively taking action to put the legacy mortgage issues behind the company -- even at great short-term cost -- and to help get the U.S. housing market going again," Mr. Moynihan said Monday in a letter to bank employees. "We have weathered challenging times before and we will now."

It's not just Bank of America getting battered on Wall Street. Wells Fargo's stock is down about 20 percent for the year. J.P. Morgan Chase has fallen 14 percent, and Citigroup has dipped 32.7 percent.

Large banks aren't alone in their struggles. Smaller banks have continued to wrestle with falling commercial real estate values and a lack of demand for new loans. Still, Federal Deposit Insurance Corp. officials point out that smaller banks aren't at the mercy of the stock market swings, because their funding comes primarily through deposits.

Even so, 63 banks have failed this year. That's down from 109 at this time last year, but still far higher than the historical average.