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Money Rates Signal Worst of Credit Crisis May Be Over (Update1)

By Lester Pimentel and Liz Capo McCormick

May 7 (Bloomberg) -- The worst of the credit crisis that prompted banks to restrict lending and the Federal Reserve to rescue Bear Stearns Cos. may be over, short-term borrowing rates show.

The difference between the yield on three-month Treasury bills and the rate on dollar-denominated loans in London, an indication of credit risk known as the TED spread, narrowed 11 basis points to 0.89 basis points, the smallest since Feb. 20. The gap reached 2 percentage points on March 19.

``It indicates at least that the worst part is over,'' said Theodore Ake, head of Treasuries trading in New York at Mizuho Securities USA Inc., one of the 20 primary dealers that trade with the Fed. ``There was a lot of panic built into that trade, which is going to continue unwinding. There was a massive flight to quality.''

Fed Chairman Ben S. Bernanke is restoring confidence in credit markets after slashing interest rates seven times since September, backing the Bear Stearns takeover and pumping more than $900 billion through the financial system. The measures have eased market turmoil amid $329 billion of losses and writedowns from mortgage-related securities and leveraged loans reported by banks.

Stock Gains

Bernanke has reduced the target rate for overnight loans between banks by 3.25 percentage points since September, including two three-quarter point cuts this year. The central bank provided $29 billion of financing to secure JPMorgan Chase & Co.'s takeover of Bear Stearns. Policy makers have also offered loans to securities firms as part of its biggest expansion of credit since the Great Depression.

The Standard & Poor's 500 Index has gained 6.87 percent since the TED spread reached its high for the year on March 19.

``There has been some stabilization of credit,'' said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut, at RBS Greenwich Capital, a primary dealer. ``We are not out of the woods yet as there are still a lot of unknowns. But it is an easing of the situation that had concerned markets through much of last year and the beginning of this year.''

To contact the reporter on this story: Lester Pimentel in New York at lpimentel1@bloomberg.net; Liz Capo McCormick in New York at Emccormick7@bloomberg.net

A small bank in Arkansas was recently shut down for "unsafe and unsound practices." More banks are probably going to meet the same fate.
Last Updated: May 12, 2008: 12:16 PM EDT


NEW YORK (CNNMoney.com) -- Bear Stearns may have been deemed too big to fail. But ANB Financial, a small bank in Arkansas, wasn't. And we might need to brace for even more bank shutdowns.

ANB, a privately held bank based in Wal-Mart's home town of Bentonville with $2.1 billion in assets, was closed on Friday by the Office of the Comptroller of the Currency. The OCC is a division of the Treasury Department that regulates banks.

Apparently, ANB got into trouble by making bad loans for construction projects in Idaho, Wyoming and Utah in addition to Arkansas.

TalkBack: Are more banks going to fail?
It is the third bank failure of the year, and it reminds us that many financial institutions beyond heavyweights like Bear Stearns (BSC, Fortune 500) are struggling because of the subprime mortgage mess and resulting credit crunch.

"We are going to see a fair number of bank failures," said Chip MacDonald, partner in the capital markets group Jones Day, a law firm headquartered in Cleveland. "We are in the early innings. For the public banks that have reported earnings for the first quarter, it has not been a pretty picture."

MacDonald predicts that more small banks like ANB will be shut down and that the list of so-called "problem institutions" being monitored by the Federal Deposit Insurance Corp. will grow much larger.

According to the most recent figures from the FDIC, the government agency which insures bank deposits of up to $100,000, 76 banks were on the FDIC's "problem list" as of the end of December.

A spokesman for the FDIC said the agency will report figures for the first quarter on May 29. MacDonald said it would not surprise him if the number of problem banks is now up to 100 to 125 institutions.

What's more, MacDonald said that larger banks could also be at risk of failure. He noted that Brea, Calif.-based bank Fremont General (FMNT), a big subprime lender, could be in trouble.

Fremont, which had $8.8 billion in assets as of last September (its most recent figures), was ordered by the FDIC to either raise more capital or find a buyer back in March.

The company has agreed to sell some of its mortgage servicing rights to an affiliate of Goldman Sachs (GS, Fortune 500) and sell bank branches and deposits to finance firm CapitalSource (CSE). But on Friday, Fremont warned that despite these transactions, it may still have to file for bankruptcy.

"Fremont General could be in trouble. It's on a short string to raise capital or sell," said MacDonald. "It's companies like that are on a high wire with the FDIC."

So what's this all mean for the financial services industry, investors and consumers? Well, this is exactly what is needed right now.

The OCC and FDIC should shut down failing banks and then sell off the deposits instead of engineering bailouts ala the Federal Reserve's "rescue" of Bear Stearns by JPMorgan Chase (JPM, Fortune 500).

To that end, $213 million of ANB's insured deposits and branches are being acquired by Iberiabank (IBKC), a holding company for Little Rock, Ark.-based Pulaski Bank and Trust.

The FDIC will cover the remaining $1.6 billion in ANB's brokered deposits, i.e. large deposits broken up into smaller chunks and sold to brokerages.

This process may be painful but it will weed out the weak banks that were reckless.

"In general, I think it's a bad idea to let banks go under that are dealing with consumers and individual investors directly. But I think that having an efficient capital markets system requires that companies that perform at a subpar level have some repercussions from that," said Brian Hamilton, CEO of Sageworks, a financial information research firm that values public and private companies.

It's not good news for shareholders of the publicly traded banks that are failing but the collapse of more banks should hopefully lead to a healthier financial system going forward. Hamilton pointed out that the rash of bank failures during the savings and loan crisis of the 1980s did help accomplish that. And MacDonald thinks it will work again.

"The system is working as is. There shouldn't be issues of confidence about customers' deposits," MacDonald said.

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