Anxiety about banks spreads

A few are expected to run into trouble

July 15, 2008|By New York Times News Service

As the Bush administration moved to rescue the nation's largest two mortgage companies, confidence in the banking sector spiraled downward yesterday.

In Southern California, lines snaked around branches of IndyMac Bancorp, the large lender seized by federal regulators Friday, while customers hurried to withdraw their money. As the anxiety spread through the financial markets, two other big banks, one in Ohio and another in Washington state, felt compelled to assert that they were sound.

As federal regulators issued assurances that depositors' savings were safe, Wall Street analysts circulated lists of lenders that might be vulnerable. Shares of regional banks plunged in one of the sharpest declines since the 1980s.

Many investors fear that the government's resolve to help Fannie Mae and Freddie Mac, the giant companies at the center of the nation's mortgage market, will not hold back the rising tide of bad loans unleashed by the weakening housing market and faltering economy.

Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corp., said the FDIC expects a few banks to run into trouble over the next year but that the worries driving down banking shares, fueled by rumors in the marketplace, do not presage widespread failures.

"People should not assume that just because the stock price has been going down, that we're going to close their bank," Blair said.

On Wall Street, investors fled banking stocks. The Standard & Poor's 500 Bank Index fell nearly 10 percent. Washington Mutual, the nation's largest savings and loan, lost more than a third of its value, prompting the lender to issue a statement saying it was "well capitalized."

The stock of National City Corp. of Cleveland, the largest bank in Ohio, fell almost 15 percent. That bank took the unusual step of issuing a statement that it was sound.

The worries about the financial industry that gripped Wall Street when Bear Stearns imploded in March, then spilled over to Fannie Mae and Freddie Mac last week are buffeting small and midsize banks, many of which are heavily exposed to weakening local property markets and loans to builders. Some investors fret that small institutions might not receive the kind of government support that rescued Bear Stearns and the two mortgage giants.

"The market wonders which institution is too small to bail out," said William H. Gross, chief investment officer of Pimco, the big money management company. Traders "seem to have picked on the regional banks as potential candidates to be the ones too small to bail out."

Several bank analysts issued dire warnings about the banking industry, particularly smaller, regional lenders. Goldman Sachs said regional banks might cut their dividends to safeguard their finances, driving down shares of banks such as Zions Bancorporation of Utah and the First Horizon National Corp. of Tennessee.

Regulators and investors are bracing for a small number of banks to fail over the next 12 to 18 months. Analysts think 50 to 150 banks might stumble. In the first quarter this year, the FDIC listed 90 banks as troubled, far fewer than during the savings and loan crisis of the 1980s. But Blair said that number will increase.

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