NEW YORK (TheStreet) -- The Federal Deposit Insurance Corporation produces a Quarterly Banking Profile (QBP) approximately two months after the end of each quarter. I have been dissecting the information and data presented in these reports since early 2006 when I first predicted that community and regional banks would fall like dominoes as the housing bubble popped.My analysis of the housing market began in the second quarter of 2005 when I predicted the housing bubble and in May of that year advised investors to sell their homebuilder stocks. These stocks peaked in June/July of 2005 a full year before the peak in home prices. As the air began to seep out of the housing bubble I turned my attention to the community and regional banks, which had been benefiting from the financing of community development through the issuance of construction and development loans, and nonfarm-nonresidential real estate loans. On the consumer side the larger money center banks and regional banks, including the four considered 'too-big-to-fail,' were focusing on issuing mortgages of all shapes and sizes and were coaxing homeowners to leverage the increasing home values with home equity lines of credit. In the fall of 2005, the Federal Reserve, US Treasury and the FDIC realized that community banks were loaning funds to the housing and real estate markets at a pace above what these regulators thought as prudent. Guidelines were set and monitored via quarterly filings to the FDIC. These guidelines were formalized by the end of 2006, and included the following stipulations: Overexposure to construction and development loans The first guideline states that if loans for construction, land development, and other land are 100% or more of total risk capital, the institution is considered to have loans concentrations above prudent risk levels, and should have heightened risk management practices. Overexposure to construction and development loans including loans secured by multifamily and commercial properties If loans for construction, land development, and other land, and loans secured by multifamily and commercial property are 300% or more of total risk capital, the institution would also be considered to have commercial real estate loans (CRE) concentrations above prudent levels, and should employ heightened risk management practices.
Instead of enforcing these guidelines the regulators ignored them. Even as the subprime mortgage problems began to surface, these regulators shrugged them off saying that subprime issues would be contained and not spread to the rest of the economy. Unfortunately they were wrong. The regulators could have let the economic forces of capitalism work their way through the resulting Great Credit Crunch, but instead there was an alphabet soup of bailout programs that included TARP, the Troubled Asset Relief Program. The Federal Reserve pushed the federal funds rate down to zero on Dec. 16, 2008, and shortly thereafter came quantitative easing programs that continue today in QE3 and QE4. Today's post begins a series that explains how the housing market and banking crisis evolved and how the housing market and banking system are doing today in an environment of a failed Federal Reserve monetary policy and the ongoing Great Credit Crunch. As a backdrop to my analysis I believe that the FDIC QBP is the balance sheet of the U.S. economy, as the assets on the books of FDIC-insured financial institutions are the loans to corporate America and individuals. The borrowers have these loans as liabilities on their balance sheets. An important component of the economy is the real estate market including bank exposures to construction and development loans (C&D), nonfarm-nonresidential real estate loans, mortgages on the books of the FDIC-insured banks, home equity loans and other real estate owned. Combined C&D and the nonfarm-nonresidential real estate loans are known as commercial real estate loans. The FDIC QBP also tracks the banking system exposures to the notional amounts of derivative contracts, noncurrent loans and reserves for losses. Community and regional banks that do not adequately manage their assets and liabilities become vulnerable for failure and the FDIC states the number of banks on their Problem List, but does not name names. The lifeblood of the housing market is C&D loans for community developers and homebuilders, and mortgages for homeowners and home buyers. In my opinion the speculative juices that kindled the housing bubble began in 1996 when President Clinton signed the bill that gave sellers of homes significant tax incentives. If a married couple sells their home and the property was their primary residency for two of the last five years, the capital gain of up to $500,000 is exempt from federal taxes. The benefit is $250,000 for individuals. There is no limit on the number of times that homeowners can take advantage of this law. The only stipulation is that the home was the primary residence for two of the last five years.
As time went on our banking regulators allowed Wall Street to develop all sorts or mortgage loan products and to package them carte blanche into derivative securities, which eventually choked investors around the world who did not understand the trumped up stories Wall Street presented. The problems first surfaced with subprime mortgages and soon after that other type of derivatives imploded and the Great Credit Crunch began. Today I am profiling the four 'too-big-to-fail' money center banks to show how they are thriving thanks to the free money given to them since mid-December 2008. On July 22 I wrote, Big Banks Are Beating Earnings Estimates and showed that three of the four big banks were bigger in terms of assets in the first quarter of 2013 vs. the end of 2010. Here are the profiles that incorporate second quarter data from the FDIC. Bank of America ( BAC) ($14.36 vs. $14.75 on July 19) set a multi-year high at $15.03 on July 23 and maintains a hold rating, and is trading just above its 50-day simple moving average at $14.20. My semiannual value level is $10.09 with a monthly pivot at $14.26 and annual risky level at $17.07. Bank of America increased assets in the second quarter by $21.2 billion to $1.658 trillion, which is 11.5% of the total assets in the banking system. Citigroup ( C) ($49.22 vs. $52.35 on July 19) set a multi-year high at $53.56 on May 30 then traded as low as $45.06 on June 24. This hold rated bank is below its 50-day SMA at $50.55 with a semiannual value level at $47.14 and a monthly risky level at $54.62. My annual value level lags at $33.19. Citigroup increased assets in the second quarter by $7.147 billion to $1.315 trillion, which is 9.1% of the total assets in the banking system. JP Morgan ( JPM) ($52.56 vs. $56.16 on July 19) and ended August at $50.53 after setting a multi-year high at $56.93 on July 24. September began with JP Morgan upgraded to buy from hold according to www.ValuEngine.com. JP Morgan is trading between its 200-day SMA at $49.57 and its 50-day SMA at $54.00. My semiannual value level is $50.37 held at the end of August. Lower annual value levels are $44.04 and $42.87 with this month's risky level is $57.50.
JP Morgan decreased assets in the second quarter by $47.5 billion to $2.027 trillion, which is 14.1% of the $14.409 trillion of total assets in the banking system. Wells Fargo ( WFC) ($41.43 vs. $44.45 on July 19) set a multi-year high at $44.78 on July 23 then traded as low as $40.92 on Aug. 30. This hold rated bank is below its 50-day SMA at $42.77 with a semiannual value level at $40.04 and this month's risky level at $44.12. My annual value levels lag at $34.17 and $32.82. Wells Fargo increased assets in the second quarter by only $25.5 million to $1.332 trillion, which is 9.25% of the total assets in the banking system. In total the four 'too-big-fail' banks have $6.333 trillion of the $14.410 trillion assets in the banking system which is a concentration of 43.95%, down slightly from 44.04% at the end of the first quarter. In my judgment a single bank should not be allowed to control more than 10% of the total assets in the banking system, which means that the Bank of America and JP Morgan should be forced to reduce assets. At the time of publication the author held no positions in any of the stocks mentioned. Follow @Suttmeier This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.