Five minutes to midnight for banks

The real estate-led banking crisis in the United States has a bit ofa Las Vegasfeel to it these days asindustry analysts and business executiveshandicap when thenext American bank will shut its door.

If you are a betting person,do not take action beyond a year.

In August, Greenwich Associates of Stamford, Conn.,found that nearly 60 per cent ofU.S. and European financial institutions polled believe another bank or finance company will collapse with the next six months.

Add in another 15 per cent who believethe next institutional flop could take up to a year to happen,and fullythree-quarters of the globe's financial elite are casting a pretty gloomy eye over the near-term fortunes of thissector.

Spreading gloom

The sector's pessimism should come as littlesurprise.

For the past year, the global financial industry has sufferedthrough a massive restructuring as banks and brokerage houses deal with the fallout from the collapse of the asset-based commercial paper market in North America.

As a result, the United States has experienced a number ofhigh-profilebankruptciesalready in 2008:

• August: First Priority Bank of Bradenton, Fla., was taken over by U.S. Federal Deposit Insurance Corp. (FDIC) after incurring "significant loan losses" in Florida's commercial real estate market.
• July: $32 billion US IndyMac Bank of Pasadena, Calif., closed its doors, a movethat could cost the U.S. government $4 billion USto $8 billion US.
• March: J.P. Morgan Chase & Co. buysBear Stearns Companies Inc. in ahuge deal brokered by Washington.

Worse still, both the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) have been the subjects ofwidespread rumoursof a possible bailout by Washington.

These two corporations are responsible for nearly 50 per cent of the $12 trillionUSmortgage market.

In addition, news reports peggedBear Stearns's saviour, J.P. Morgan, asseeking an injection of foreign capital in order to stave off a distressed buyout of its own.

And it is not only the big players that have problems.

Earlier this year, FDIC, the government agency that insures bank deposits, took over $19 millionUS Hume Bank,in Hume, Mo., because of insolvency worries.

The same agency slapped a "smarten up" order on tiny Towne Bank of Mesa, Ariz., to prevent the bank from engaging in questionable banking practices in an effort to shore up a depleted balance sheet.

Overall, FDIC has 90 banks on its problem list.

Up here, Canada's financial sector is in better shape despite large mortgage-backed write-offs among the chartered banks.The Canadian banking system is not as fragmented as its American counterpart and, thus, not as open to bankruptcy as U.S. financial institutions, according to industry experts.

More failures looming

But, south of the border, analysts expect more carnage as the bad loans and write-offs raze the financial statements of undercapitalized banks.

RBC Capital Markets expert Gerard Cassidy already predicted that as many as 300 banks will fall by the wayside withina few years.

But, if the American financial market is becoming more of a gamble,then Ladenburg Thalmann analyst Richard Bove is probably itschief oddsmaker.

In July, the much-quoted and influential banking analyst published a reportin which he used two different yardsticks to pick which banks might be in the most trouble.

Forhis trouble, Bove was slapped with a defamationlawsuitfrom BankAtlantic Bancorp. The bank's shares dropped sharply after Bove's examination placed BankAtlantic in the "danger" category.

In fact, Bove was relatively optimistic about the sector's survival prospects in his report.

Indeed, afterhe asked the provocative question in the paper's title, he answered itwith: "Not as many as you think."

By financialmeasure, Bove estimated that only seven of more than 100 institutions studied are in any danger of financial insolvency.

Even FDIC, which might be forced to raise insurance premiums to other banks to cover these bailouts, noted that 3,000 banks and financial thrifts stopped operations in the 1980s.

The U.S. banking system is nowhere near in such dire straits today, the agency said.