News and commentary

The Anniversary of the Discovery of “The Great Credit Crunch”

By Richard Suttmeier
Updated: Monday, August 04 2008 12:08:PM

I began my investigation of Community and Regional Banks in March 2006, and published my first of many blogs in April 2006, where I predicted the problems faced in the finance sector today. Attached are those original columns as published on RealMoney.com.
 
I was a frequent guest on CNBC’s Worldwide Exchange, and included my warnings many times and well in advance of the events that led to the beginning of “The Great Credit Crunch”, which finally came to light a year ago.
 
Here are comments from www.CNBC.com from Interviews in April 2007:
 
On April 11, 2007, Strategist: Smaller Banks Most Exposed to Real Estate Downturn
 
Richard Suttmeier told CNBC’s “Closing Bell” that he believes community and regional banks carry the most risk from the current real estate downturn. “I definitely think the financial sector is the most vulnerable sector in the market,” Suttmeier said Tuesday. “We’re looking at an over-valued sector getting weaker because of the stress in the banking system over the last five years given the troubles relative to the real estate market.”
 
On April 16, 2007, Is Goldilocks Getting Wrinkles?
 
A market expert told CNBC that the Goldilocks economic scenario is getting a little long in the tooth and is especially concerned with the financial sector, which may show cracks in the façade this week. "The stock market is overvalued," said Richard Suttmeier. "I'm viewing this as another opportunity for investors to lighten up on positions." Suttmeier said he was particularly worried about the financial sector. "Sure, some of the financial stocks are rallying, but that's because they're coming off pretty much near 52-week lows," he said.
 
Suttmeier said this "Goldilocks" economic outlook was no longer relevant. "I think Goldilocks is getting wrinkles," he said. "It's an old scenario, now we're in a situation where we're seeing inflation above the Fed's target range, and we're seeing that the distress in the banking system." Suttmeier predicted that warnings signs are likely to appear this week when more than 60 community and regional banks are set to report. "They're going to tell us that they're having an increase in 90-day past due loans and noncurrent loans and that is going to be a problem," he said.
 
My Assessment in August 2008
  1. The Great Credit Crunch – We are still in the discovery stage, and more bad loans are coming our way. Mortgage resets go right through 2011. I evaluate the FDIC Quarterly Banking Profiles. Between the end of 1988 and 1992 the banking system lost 4.2% of its total assets. This has not yet begun in this credit cycle, which I project will be worse than the last one.
  2. Community & Regional Banks – Sever exposures to Construction & Development Loans that home builders and developers will have difficulty paying back. Bank failures are now underway.
  3. The Top Five Problem Loans – Credit Cards, Home Equity Loans, Commercial Real Estate Loans, Construction & Development Loans, and Notional Amount of Derivative Contracts.
  4. Fannie Mae & Freddie Mac – They are the “Frick & Frack” of the mortgage market. The Housing Bill puts their $5.2 trillion in mortgages on the back on US taxpayers, which in my judgment questions the Constitutionality of the bill.
  5. The Weaknesses of the Housing Bill – The 700 page bill should be given to the makers of Charmin.
  6. Recession in 2008 – 2009 – The stimulus bill kept the US economy out of Recession, so it’s “Mission Accomplished” for the President, but the economy has lost jobs in each of the first seven months of the year. I predict that year over year current dollar GDP will be lower in 2009 than in 2008 for the first time since 1948 – 1949.