Great Credit Crunch Issues Remain Five Years After Start

NEW YORK ( TheStreet) -- This week marks the fifth anniversary of when the banking regulators finally realized that the Great Credit Crunch was a real and current danger to the banking system and hence the U.S. economy.

Today, the National Association of Home Builders, or NAHB, reports its Housing Market Index for September. The reading for August was a multi-year high of 59, well above the neutral 50 reading. This reading was just 17 and on the way to a record low of 8, in January 2008.

Five years ago, the federal funds rate was at 2%, lowered to that level on April 30, 2008. On Oct. 8, the rate was cut to 1.5% then to 1% on Oct. 29, and then to 0% on December 16, where it remains today. In my opinion, this rate should never have been taken below 3%, as savers have been pinched for five years now.

In mid-September 2008, initial jobless claims were 488,000 and this statistic did not peak until March 2009, at 651,000. Last week, this reading was below 300,000. The four-week moving average was 321,250, below the recessionary threshold of 350,000.

The "too big to fail" money-center banks began to get bigger in January 2008, when Bank of America ( BAC) bought Countrywide Financial. Then in mid-September, it took over Merrill Lynch. Next week, the company gets booted from the Dow Jones Industrial Average, despite being up 56.2% over the last 12 months.

JPMorgan Chase ( JPM) took over Bear Stearns in March 2008, after the Federal Reserve stripped out the toxic assets. Then in late-September, it added Washington Mutual. JPMorgan is the only money center and major regional bank with a buy rating, according to ValuEngine, but it appears to be on the cusp of a downgrade to hold. Today the banking giant faces a fine of up to $800 million in settlement of the legal issues associated with the $6 billion loss from the "London Whale" trade.

Citigroup ( C) appeared to have added Wachovia in an FDIC-led merger on Sep. 29, 2008, but was left at the merger altar when Wells Fargo ( WFC) bought Wachovia with a much better bid on Oct. 3, 2008.

Last week, on Sept. 9, I wrote JPMorgan Upgraded as Banking System Heals, where I showed that the "too big to fail" banks continue to get bigger. As a foursome, JPMorgan, Citigroup, Wells Fargo and Bank of America control about 44% of the $14.41 trillion total assets in the banking system.

Also on Sept. 9, I wrote, Housing Bubble Is Re-inflating and on Wednesday morning, we will get the latest reading on single-family housing starts, which is the key statistic for the homebuilders. Higher home prices, higher mortgage rates and continued tight lending standards for C&D loans for builders and mortgage loans for home buyers could result in a slowdown in the housing market.

On Sept. 10, I wrote, Bank Earnings Rise, but Not Real Estate Lending and on the same day we learned that the "too big to fail" banks were experiencing a significant drop-off in mortgage originations, and the foursome announced significant job cuts in this business line.

A key statistic that has been ignored on Wall Street and in the media is the fact that the FDIC Quarterly Banking Profile for second-quarter 2013 showed a mark-to-market loss of $51.1 billion in fixed-income securities in the "available for sale" category. So far in the third quarter, U.S. Treasury yields have moved even higher, so this mark-to-market is likely growing.

On Sep 11, I wrote, Community Banks With CRE Loan Exposures, where I showed 90 publicly traded banks that were still overexposed to CRE loans. I followed up this story on Sep. 13 in, Umpqua Holdings Buys Sterling Financial; Sterling Financial ( STSA) was on my list of 90 that I profiled in this post. Sterling had a buy rating, according to ValuEngine.

Last Friday, the FDIC closed First National Bank, Edinburg, Texas, using their bank failure procedures. This bank was not publicly traded, but it illustrates the problems that remain in the banking system. First National had $3.28 billion in assets at the end of the second quarter, with $341 million in C&D loans on its books. Its C&D to risk-based capital ratio was 314.4%, well above the 100% regulatory guideline. Its CRE to risk-based capital was 1,214.1%, well above the 300% regulatory guideline. The CRE loan commitments were 94.3% funded. This failure cost the FDIC Deposit Insurance Fund $637.5 million.

At the end of fourth-quarter 2010, First National Bank had $3.83 billion in assets with $622 million in C&D loans on its books. Its risk ratios at the end of 2010 were 181.0% and 492.7%, respectively, with a pipeline 90.7% funded. Clearly an overexposure to CRE loans caused its demise.

The FDIC has slowed down the bank failure process. Only 25 in 2008, 140 in 2009, 157 in 2010, 92 in 2011, 51 in 2012 and only 22 so far in 2013. That's a total of 487 bank failures, with more to come. My ongoing prediction has been that at least 500 failures would occur before the Great Credit Crunch comes to an end.

An ignored victim of the Great Credit Crunch has been Main Street USA. We see a higher cost of living as the costs of home and health insurance rise, while family incomes slip. Even with a five-year U.S. Treasury yield up to 1.6%, most big banks offer savers only 0.8%. The big banks have also raised rates on loans to small businesses. The best rate you can get on a credit card is about 12%. Explain that, given a 0% federal funds rate.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at