Market Update: 12 8 08_Non-Performing Assets comparison

So did you hear the big news on Friday? Yep…OJ finally got some jail time. Oh yeah, and Initial Jobless claims came out about 200,000 higher than the estimate. TWO HUNDRED THOUSAND HIGHER THAN THE ESTIMATE of 335,000. I was on the road last week, and when I checked the news I thought it was a misprint or that my eyes were going bad. It is difficult to recall a number that outran the survey by that amount…especially a big important number like that one. The number was so bad that it surpassed the worst expectations of all 73 of the dismal scientists surveyed.

Fridays report brings the number of job losses this year to 1.9 million. Last year you could look around and find plenty of people saying that we weren’t likely to have a recession and that if we did it would be a mild one like the 2001 recession. I’m looking around now that we’re “officially” 12 months into this thing and I can’t find any of those folks. The length of the average recession in the US in the post WWII era is 10 months. The 2001 recession lasted 8 months. We are 12 months into this one, we appear to still be headed downhill, and we’re speeding toward the 16 month record of the 1981 to 1982 recession that most economists have been using as our worst case benchmark. 2008 has been an exceptionally volatile year but at this point it looks like 2009 is shaping up to be the one everyone remembers.

533,000 people lost their jobs last month. That ripple effect from a number that big will have far reaching and long lasting effects throughout the economy. Those are 533,000 Americans that may have credit card balances, that may have auto loans, home loans, home equity lines, they used to spend money going out to eat, going on vacation, buying (insert your holiday here) gifts, and they just lost their jobs. The numbers show that the average American has very little in savings, and with all major stock indices down they will have a far smaller cushion to land on if they have one at all.

I spoke with a number of bankers last week and while many are wrapping up a decent year in 2008 they are all looking at 2009 with a bit more caution. Loan problems are popping up everywhere. Problem loans are now a topic of conversation at banks almost everywhere. As I sat in the airport on the way home I got to thinking about problem assets this recession vs the 2001 recession. I thought it might be interesting to look at Non-Performing Assets as a percentage of Total Assets over the two time periods. Saturday afternoon I only had two things on my schedule…to give my 100 lb dog a bath which he sorely needed, and to put together an analysis on Non-Performing Assets across two recessions. How hard could it be? The dog turned out to be the easier job.

I thought the best way to show the data would be with the heat maps below. These allow me to show activity by regions (by county in this case). Below you will see two maps. I took data for the current recession (4^th Quarter 2007 through 3^rd Quarter 2008) vs the 2001 recession (I used 4Q 2000 through 4Q 2001) and I plotted the CHANGE in Non-Performing Assets as a percentage of Total Assets for all commercial banks in the country for which I had data. All in all we’re talking about 6,087 banks for the 2001 recession and 6,984 banks for the current recession.

The first thing I noticed when doing the math was the absolute range of values for NPA’s between the two periods. In 2001 the worst bank in the pool had an 18% increase in NPAs and the best bank reduced their NPA’s by 8%.

Over the course of the current recession the worst bank (worst that is still filing call reports) had an increase in NPA’s of 31% and the best bank had a reduction of 38%. The magnitude of the changes is enormous.

The averages provide an alarming contrast between the two periods. The average INCREASE in NPA’s at banks in 2001 was 0.09 as a percentage of Total Assets. In the current recession that has ballooned to 0.81…that is an 800% increase from the 2001 number.

You’ll notice in the first map that there were not a terribly high number of banks that saw more than a 4% increase in NPA’s in 2001 (dark red areas). Much of the country was unchanged to improved (light blue areas) or had only modest increases in the NPA’s (light pink areas). There were some areas that saw NPA’s increase by 1% to 4% but they were in pockets separated by great distance and didn’t seem to follow any pattern.

By contrast the second map below virtually explodes with concentrations of dark pink (1% to 3% increase in NPA’s) and dark red clusters (NPA increases over 4%). Clear trends of very poor numbers are immediately evident this time. The west coast, the southeast, the rust belt, and many places across the middle of the country are struggling with NPA’s.

What makes this picture worse is that we appear to still be on the way down with the economic data showing no signs of improvement over the near term. Against this backdrop one begins to see the urgency at the Fed and the Treasury.

I hope you find the data below useful. If you have any questions on this material just let me know.