A big week for American banks and financial markets generally with four of the biggest US banks due to report quarterly earnings and a major finance company tottering as doubts grow about its health.
In the banking sector, investors will first hear from Goldman Sachs on Tuesday, followed by JPMorgan on Thursday, and then Bank of America and Citigroup on Friday.
Friday saw just one small US regional bank in Wyoming fail to take the number this year to 53.
It was a quieter Friday than the previous week when seven regionals failed: six in Illinois in one common group and one in Texas.
It was the first bank to fail in Wyoming since 1991. It was only small: around $US70 million in assets.
The continuing spate of regional and local bank failures indicate the still fragile nature of the US banking industry, something that the results this week from the big four money centre operations will both confirm and hide.
Their results will go a long way to either calming the current unease among investors about the health of the market, or adding to the belief that the rebound has gotten ahead of itself and share prices are overvalued.
Analysts are looking for good profits, but also watching for an expected surge in bad and doubtful debts and losses on mortgages, credit cards, home loans and especially commercial property, which is behind many of the regional bank failures so far this year.
But the problems assailing CIT Group, a century old finance group with over $US70 billion in assets, are becoming a worry.
It needs to raise cash in the market, but investors won’t lend unless the debt is backed by a federal government guarantee, which has not been forthcoming.
America’s Federal Deposit Insurance Corp, the key regulator of banks and finance groups, has been unwilling to back a funding offer from CIT because of concerns about the size of the potential risk involved.
CIT Group shares fell to a record low on Friday in New York on fears about its future.
The FDIC has reportedly declined to allow CIT to join the Temporary Liquidity Guarantee Program because CIT’s credit quality is worsening.
The program has allowed dozens of financial services companies, many of which are suffering big losses, to sell "triple-A" rated debt at low cost.
Bloomberg said at the weekend that up till the end of May more than $340 billion of debt issued under the program was outstanding.
CIT has said it is having an "active dialogue" with the government, but that there is no guarantee the FDIC will approve its application.
Other media reports at the weekend pointed out that the CIT situation tells us a lot about how the US government currently views the health of financial markets.
The prognosis is grim for CIT. The FDIC, likely unnerved by CIT’s asset quality, hasn’t yet approved the company’s application to issue government-guaranteed debt. Failure to issue such debt could strain CIT’s liquidity.
Fitch Ratings, the number 3 rating group, has said that if CIT isn’t approved "over the very short term" it would cut its ratings to a level implying default is a real possibility.
Over the weekend Bloomberg also reported that CIT had hired a high powered New York law firm Skadden, Arps, Slate, Meagher & Flom LLP as an adviser. Bloomberg said the firm has a strong specialty in bankruptcy, as well as being one of Wall Street’s premier corporate law firms.
CIT wouldn’t say why the firm was hired; just that it had been retained.
CIT specialises in lending to small- and mid-sized businesses: the credit crunch saw its wholesale funding dry up and it was forced to become a banking company last December to get aid of $US2.33 billion from the US treasury’s Troubled Asset Relief Program.
But it has racked up close to $US3.3 billion since the end of 2007, and in a May SEC filing said it needed to find a total of $US10 billion of new funding (including rollovers) by March 31, 2010.
Last Wednesday, Fitch Ratings downgraded CIT deeper into "junk" status, a move that affected $US35 billion of CIT debt.
It said CIT "remains heavily reliant on wholesale funding amidst challenging market conditions" and said if the company cannot access the FDIC program soon; another downgrade could follow, indicating that "default is a real possibility".
That added to the growing reports that the FDIC was resisting CIT’s applications to back its lending program.
Reports say the FDIC wants CIT to find more capital before it will be considered for the assisted lending program.
US financial services groups in the FDIC’s program include GE Money and GMAC. Both have had to find billions of dollars in new capital and own up to huge losses.
GE is rated Aa2 by Moody’s Investors Service and AA+ by Standard & Poor’s, the third- and second-highest credit grades. GMAC is more lowly rated-Triple C, but is 49% owned by the newly emerged from bankruptcy, General Motors. The new GM is 60% owned by the US government.
If CIT was to fail, it would be the biggest financial bankruptcy in the US since Washington Mutual fell over last year.
Bloomberg and Reuters have reported that CIT reported $US75.7 billion in assets and $US68.2 billion in liabilities, including $US3 billion in deposits, at the end of the March quarter.
CIT says it’s the third-largest US railcar-leasing firm and the world’s third-biggest aircraft financier.
Its Canadian arm recently advanced short term funding to the struggling CanWest Global media company which faces another deadline to stay alive as soon as this week.
