Grant’s
Almost Daily reports that despite the seemingly calm economic winds,
“Banco Popular has managed to run the ship aground. In order to shore up their
sickly balance sheet, the acquiring [Banco] Santander will issue a €7 billion
rights offering to shareholders. Banco Popular’s equity and junior debt are
wiped out, to the tune of €3.3 billion.”
While America breathlessly waited for former FBI Director Comey
to boast daytime TV ratings, the “announcement that Banco Popular Espanol
SA will be absorbed by the sounder Banco Santander under the auspices of the
European Central Bank for considerations of €1 harkens back to March 2008, Bear
Stearns and J.P. Morgan,” writes Philip Grant.
Have the world’s financial dominoes started falling on that side
of the pond?
Here in
the good old USofA. the DJIA rocks while Tesla and Amazon shares roll, but
“Total US business bankruptcies in May rose 4.7% year-over-year to 3,572
filings, according to the American Bankruptcy Institute. That’s up 40%
from May 2015 and up 10% from May 2014.”
Wolf Richter points out that bankruptcies are seasonal.
Fewer of the hopelessly indebted normally throw in the towel in May. However,
this year, “Total US bankruptcy filings by consumers and businesses in May rose
5.3% year-over-year to 69,668, the highest May since May 2014.”
Credit card debt is now a trillion dollars, auto debt is $1.12
trillion and student loan debt now totals $1.44 trillion. A trillion
here, a trillion there. It starts to add up. And all of this doesn’t
include the big driver of consumer bankruptcies, medical costs.
Meanwhile
Green Street’s Commercial Property Index has rolled over, falling 0.4% in May
to the lowest level since May 2016. Plus, over the first four months of
this year, Commercial real estate transactions dropped 17% year-over-year, to
$121 billion, plunging 30% from the same period in 2015, according to Real
Capital Analytics.
This
matters because, “$14 trillion of real-estate debt is why real estate can trigger
financial crises, and why real estate bubbles, when they implode, are so
pernicious,” writes Richter.
Homes mortgages make up $10.3 trillion of the total real estate
debt, with the rest being commercial real estate loans, the majority of which
are held by small banks–$1.2 trillion. Regulators have warned about another
bubble but banks are loading up on commercial real estate anyway–especially apartments.
Boston Fed President Eric Rosengren says,
Over the past year, holdings of commercial mortgages by the
banking sector have increased 8.9%, while bank holdings of multifamily
mortgages have increased 12.0%.
This growth has occurred while bank supervisors have been
cautioning about the potential risks emanating from the high valuations in some
sectors of the real estate market.
Here in
the U.S., six banks have failed this year, one more
than all of 2016. While four of the banks were small, one was a billion
dollar bank and First NBC Bank of New Orleans had $4.75 billion in assets.
First NBC survived just over a decade, having started in 2006, with a who’s who
of backers, including Peyton and Eli Manning, the New Orleans-born star NFL
quarterbacks. The bank set a Louisiana record for capital raised by a start-up
bank.
Growing a
bank from zero to nearly $5 billion in ten years is beyond aggressive, not to
mention First NBC had a taste for the exotic. As Richard Thompson reports
for The New Orleans Advocate the bank would not only
fund construction projects that generated tax credits (say low-income
apartments), but would invest depositor money in those tax credits as well.
Of course, for tax credits to have value, the bank must be
earning significant profits and paying large tax bills. First NBC had no
such burden.
When the bank’s loan portfolio was written down by regulators,
this led to a devaluation of the bank’s deferred tax credits, whatever profits
were expected evaporated and — poof — the bank’s capital was gone. With
fractionalized banking an auditor’s recognition of dodgy assets leads to
failure overnight.
However, the bank’s founder, Ashton Ryan, believed the press was
the problem. He “blamed The Advocate’s reporting at the time for the bank’s
troubles, saying the news coverage sowed more unease than the bank’s admissions
themselves,” Thompson wrote.
Murray Rothbard anticipated the Ashton Ryan’s of the banking
world, writing “the entire fractional-reserve system is held together by lies
and smoke and mirrors; that is, by an Establishment con…. The banking system,
in short, is a house of cards … Banking is not a legitimate industry, providing
legitimate service, so long as it continues to be a system of
fractional-reserve banking.”
A few bank failures hither and yon do not a trend make. However,
needles are everywhere, waiting to pop the bubbles keeping banks afloat.
Doug French
[send him
mail] writes from Las Vegas and is the author of three books; Early
Speculative Bubbles and Increases in the Supply of Money, The Failure of Common
Knowledge, and Walk Away: The Rise and Fall of the Home-Ownership Myth. He is
the former president of the Ludwig von Mises Institute in Auburn, Alabama.
Previous
article by Douglas French: The Biggest Little Housing Boom in the World
