Number Of Banks Holding A Threatening Number Of Toxic Assets Has Doubled This Year

toxic-wasteLast week, the Congressional Oversight Panel overseeing the TARP program released a report stating that the toxic assets sitting on the books of many of the nation’s banks still pose a serious potential threat to the economy. “If the economy worsens, especially if unemployment remains elevated or if the commercial real estate market collapses, then defaults will rise and the troubled assets will continue to deteriorate in value…The financial system will remain vulnerable to the crisis conditions that TARP was meant to fix,” said the report.

In light of that report, these new numbers from Bloomberg News regarding how many banks are holding a lot of toxic loans are rather sobering:

More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival. 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.

These numbers are off the charts,” said Blake Howells, an analyst at Becker Capital Management. Banks are losing the “ability to try and earn their way through the cycle,” he added. Given that Treasury’s strategy has been to prop the banks up long enough to let them earn their way back to health, this a problem. And it’s also troubling for smaller banks, which have toxic whole loans instead of the securitized loans that are plaguing Wall Street banks and don’t have the same sort of financial support that the big banks have received.

The administration’s plan for dealing with the toxic assets (the Public-Private Investment Program or PPIP) folded under the weight of bank indifference (like so many other programs, recently). And as the LA Times reported this morning, the smaller PPIP that is still getting underway may have a loophole that could cost taxpayers billions.

As David Corn put it, “Treasury officials will tell you that they used the [TARP] money to pump capital into banks — rather than buy their garbage — and this stabilized the financial system. Perhaps that worked. But, as the report makes clear, the original sin still stands.” Maybe the banks can keep ahead of the curve and make enough of a profit that the assets won’t be a problem. But maybe not, at which point Treasury is going to rethink the way in which it is trying to salvage the banking system.