The Second Wave of Bank Troubles

Floyd Norris notes that the S&P financials have sunk back to their mid-March lows. But although the index as a whole is back at its mid-March level, its components generally aren't. What we're seeing is pretty much what Mohamed El-Erian predicted in April: the second shoe dropping, and the bad news moving from the world of financial engineering into a much more real world of struggling businesses.

During the next few months there will be a reversal in the direction of causality: the unusual adverse contamination by the financial sector of the real economy is now morphing into the more common phenomenon of recessionary forces threatening to undermine the financial system...
While the financial system has taken steps to enhance balance sheets, they speak essentially to addressing the consequences of excessive leveraging and imprudent financial alchemy. As such, the nasty turn in the real economy may fuel another wave of disruptions that, this time around, would also have an impact on mid-size and smaller banks.

So far, Wall Street still looks noticeably healthier than it did during the worst days of the Bear Stearns crisis. But Main Street, as exemplified by lenders in places like Ohio, looks much worse. Here are the biggest financial stock-price losers in the banking industry, from Norris:

First Horizon, down 43 percent. (It is the parent of First Tennessee Bank.)
National City, down 34 percent. Ohio's largest bank is under increased regulatory scrutiny.
Wachovia, down 21 percent. Its CEO was fired for losses.
Huntington Bank, down 21 percent. Also from Ohio.
Regions Financial, down 21 percent. It is based in Birmingham, Ala., where the county government may have to declare bankruptcy after getting caught in the derivatives mess.
Fifth Third Bank, down 21 percent. Another Ohio bank.
KeyCorp, down 19 percent. Another Ohio bank.

These aren't institutions which came unstuck when their leveraged super-senior trades imploded; these aren't banks which were lending billions of dollars to private-equity firms in the form of PIK-toggle bonds. Yes, they have real-estate exposure, but look at the states here: Tennessee, Ohio, Alabama. Not California or Florida, where the real-estate bubble burst most spectacularly.

Commercial banks are in many ways a leveraged play on the strength of their local economy. So while the March dip in the S&P financials was symptomatic of Wall Street's troubles, the June dip indicates something much broader.