Richard Bove, Banking Analyst at Ladenburg Thalmann Examines Freddie Mac, Fannie Mae & IndyMac
Monday, July 14, 2008PAUL KANGAS: Joining us now to talk more about Freddie and Fannie and reaction to the federal takeover of IndyMac Bancorp is Richard Bove, banking analyst at Ladenburg Thalmann. And welcome back to NBR, Dick. Good to see you.
RICHARD BOVE, BANKING ANALYST, LADENBURG THALMANN: Thank you, Paul.
KANGAS: First, Fannie and Freddie, what did you make of the moves by the Treasury, last resort?
BOVE: I think so, I think that if there was any other sources of capital to save these companies, the federal government would not have had to move in. I think the fact that the federal government has moved in, however, does tell you that these companies will not fail. The bigger question, though, is, do we really need these two companies? And I think that a year from now, you will see that there will be legislation that will probably break them up and make them into much smaller entities.
KANGAS: Well, this whole move was designed to bolster confidence in the companies. But the stocks were punished again. So now what happens now for these mortgage giants? Are they eventually going to fade?
BOVE: Well, they're going to stay there until there is some legislation that changes them. But I do think Congress will now recognize that they're too big -- they're too much of a threat to the United States financial system. They are poorly run and they should be broken up.
KANGAS: Moving to the banking sector in general, the regional banks in particular, they have been really hard hit. Are they in worse shape than the big city banks?
BOVE: No, actually, they are not. I think that the regional banks are actually in relatively good condition. And I think there are a number of ways to measure that. One way is to take a look at their loan losses or their nonperforming assets as a percentage of their loans. If you do that, you see that today the banking industry in this country is at a 3 percent ratio whereas in 1990 it was over 6 percent.
KANGAS: And the danger level now is what percent?
BOVE: Five percent. In other words, when banks have 5 percent of their loans on a nonperforming status, that tends to be a very dangerous position for them. And it is very difficult to recover from that position.
KANGAS: Mm-gm. And, well, I understand IndyMac had a 10.5 percent ratio of bad loans divided by overall loans out, is that true?
BOVE: That's correct. In other words, they were well above the 5 percent danger level.
KANGAS: A good warning that they were in trouble.
BOVE: I think so, yes.
KANGAS: Now you issued a clarification today saying that banks are doing better than most people think. Tell me more about that. I want to hear some good news.
BOVE: Well, this morning we put out this report which we thought said that the banking industry was in much less trouble than the market believed it was. But because we put this table in showing the banks that might be in trouble, no one read the report. They looked at the table. What we are trying to say is, look, number one, there is more equity in the banking system today than there has been in a number of years. Number two, that there is higher reserves in the banking system than there has been for the last couple of years. Number three, deposits are rising in the banking system, which is a very positive metric. Number four, the loans are increasing in the banking system. And number five, their margins are flat. So while the whole world seems to be concentrating on the bad loans, if they look beyond bad loans to the fundamental functioning of the business, they would see that the banks are not in terrible trouble.
KANGAS: Step number six, buy some bank stocks, is that true?
BOVE: Well, I think if you look a year from now, the prices of bank stocks will be considerably higher than they are today. But if you were to say, in this panic do I want to take a large amount of my money and bet it against bank stocks? Very risky thing to do.
KANGAS: Dick, I want to thank you for coming in and sharing your insights with our viewers.
BOVE: Thank you, Paul.
KANGAS: My guest, Dick Bove of Ladenburg Thalmann.
