Toxic Trouble Trap

Expanding on yesterday's stories about bank loans underperforming by hundreds of billions and the banks doing everything they can to keep from having to count those bad loans at market value, comes this Bloomberg story that over 150 banks have underperforming toxic loans on the books that total more than 5% of their total holdings.

The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.

The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound.

“At a 3 percent level, I’d be concerned that there’s some underlying issue, and if they’re at 5 percent, chances are regulators have them classified as being in unsafe and unsound condition,” said Walter Mix, former commissioner of the California Department of Financial Institutions, and now a managing director of consulting firm LECG in Los Angeles. He wasn’t commenting on any specific banks.

Missed payments by consumers, builders and small businesses pushed 72 lenders into failure this year, the most since 1992. More collapses may lie ahead as the recession causes increased defaults and swells the confidential U.S. list of “problem banks,” which stood at 305 in the first quarter.

In other words, there's literally hundreds of banks out there that are in real trouble of going under here, especially as the commercial real estate collapse picks up speed. More and more banks will be shuttered, assets absorbed by bigger banks, and those toxic loans stuck with the American taxpayer as the FDIC bank failure fund picks up the tab.

The forced consolidation of the banking industry continues. The stock market continues to bet on a V-shaped recovery that will not happen. The next bubble is forming already. It's 2003 all over again only this time when the bubble bursts, there's not going to be anything to do other than hyperinflation and prayer.