Headline: Expect Banks To Take A Hit From Bad Loans

Source: John Crudele, New York Post, 27 September 2001

URL: http://www.nypost.com/business/5037.htm

The next big problem area for the stock market could be money center banks - and it has nothing to do with recent terrorist acts and all to do with dot-com bombs.

Sources say that three government agencies will soon report a huge jump in "criticized" big loans held by banking syndicates. Washington was supposed to already have released the results of its so-called Shared National Credit Exam but held back because of the Trade Center attack.

Now the results are supposed to come out in early October, and I'm told they will show that "criticized" assets at banks will double this year to more than $200 billion.

The Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency annually survey tens of thousands of syndicated loans at major banks to judge the health of loan portfolios.

In last year's survey the group found that "criticized" loans, as they are called, rose 45 percent. And just a month ago OCC deputy comptroller for credit risk said these potentially bad loans were expected to jump "at a rate at least equal to the rate of increase experienced last year." Now I'm told the government would be happy with just a 45 percent increase. In fact, the word getting around banking circles is that the increase this year will be 100 percent. And since this survey was taken before the Trade Center terrorism there is no telling how big the real problems will eventually be. While the government won't single out particular banks, among the most likely to be hurt are the biggies like Bank of America, J.P. Morgan Chase, Fleet Boston, Bank of New York and Citigroup.

"Criticized" loans are ones that are found to be deficient in some way. It doesn't necessarily mean that the borrowers are going to default - but it also doesn't mean the loans will not go into default.

There could also be a wider economic effect. Rising criticism of these loans could cause banks to be more selective in lending money at a time when the Fed is trying to get them to be more receptive to borrowers.

Charles Peabody, my favorite banking analyst - who is now with Ventana Capital - says most of the newly endangered loans are from the telecommunications, media and technology companies that over-borrowed during the bubble years. "Charge-off and reserve levels," says Peabody, "are going to rise."

So, banks earnings will be hurt.

The OCC wouldn't comment on how much the critiicized loan levels would rise, nor would it say when the report would be released.

*********** The word on Wall Street yesterday was that the Bass brothers of Texas were trying to unload another major stock position. The story is that the Basses, who recently sold off a huge hunk of Disney to meet Wall Street margin calls, are now going to dump 5 million to 10 million shares of Merrill Lynch stock. Merrill is the broker that allowed the Bass family to buy on margin in the first place.

No one was confirming the information. But the rumor is that Prudential Securities was attempting to find a home for the Merrill Lynch stock.

Last week the Basses sold the Disney shares at a deep discount to the current market price.

-- Andre Weltman (aweltman@state.pa.us), September 27, 2001

Answers

For some reason the emergence of the term "margin calls" sends chills through me. This is a throw back to Great Depression terminology.

-- Harmon De Mines (harmondemines@webfoot.net), September 27, 2001.

Seems like we are going the same road as Japan.

-- Uncle Fred (dogboy45@bigfoot.com), September 27, 2001.