Last week, the FDIC oversaw the second biggest bank failure in U.S. history -- $32 billion IndyMac Bancorp (NYSE: IMB). I thought more would be on the way and this morning's New York Times estimates that 150 of the 7,500 U.S. banks will fail in the next 12 to 18 months. The FDIC only has $53 billion in its fund to cover bank failures so it is going to be needing much more cash, which it may get from raising insurance rates. No doubt those of us with bank accounts will pay the price.
For those looking to profit from this failure, it's time to get a hold of the FDIC's problem bank list and start estimating the ones that are most likely to get taken over. Here are some hints: look at their mortgages as a percent of total loans, their cash flow, when they have to pay back their debt, and the increase in the rate of their bad loans. The Times mentions two that are probably already on the radar of short sellers:
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BankUnited Financial Corporation (NASDAQ: BKUNA) in Florida, which trades at 77 cents a share and is probably too far gone to profit from as a short, went for $20 a share a year ago.
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Downey Financial Corporation (NYSE: DSL) in California, which trades at $1.69 today, traded at $65 a year ago.
What worries me is whether there will be any end to this scheme of giving profits to the executives and losses to taxpayers. To profit from this, it's time to start shorting these banks well before they fail -- CNBC has some more of the names here.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
7-14-2008 @ 12:55PM
Jason said...
Another idea to profit from this is to buy SKF.
eeinvesting.com
7-14-2008 @ 1:56PM
william lindblad said...
Peter, you are walking on thin ice. The FTC is coming down on the Jay Gould types and you are posting to a public forum. If it's an opinion and you don't own any interest it's still under the bill of rights, but contray to that they are calling it rumor mongering. The easy way to stop all of this is to put a moratorium on all short selling. Since this has been done in the past they have precedent.
Turth is, few will profit from bank failures as this just continues to undermine the economy.