Analyst: Banking Industry Risks "Implosion"

Chris Whalen says at least 1,000 banks are in danger of collapse, a far gloomier assessment than the FDIC’s forecast earlier this week. Predicting an “impending implosion” in the banking sector in 2010, the noted financial industry analyst says in a post that the government is running out of options.

“Despite all of the talk and expenditure in Washington, the US banking industry is still sinking steadily and neither the Obama Administration nor the Federal Reserve seem to have any more bullets to fire at the deflation monster.”

That’s largely because the Treasury Department has spent its ammo bailing out big banks, Whalen adds. Smaller institutions, along with the companies and investors who depend on them, are out of luck. More than 2,200 banks are under “extreme” financial duress, while the number of strong banks is dwindling, according to his analysis. Despite massive government intervention, in other words, the banking industry is about as vulnerable as it was during its dark night of the soul in late 2008.

Whalen is particularly critical of Citigroup. The “queen of the zombie dance party,” as he describes the company, slipped badly in the second quarter amid falling earnings and rising loan defaults (click on chart to expand). And he advises investors to abandon ship.

“Whether or not there is value inside [Citigroup] is not the issue; it is just not kosher, to us, for a manager to put investment grade investors into a situation that is basically a restructuring, with the government as the largest, senior creditor — and one in which the ultimate liabilities are as yet to be quantified.”

Whalen makes a key, and generally neglected, point. The government’s rescue effort has targeted a handful of large, and in its view “systemically important,” banks. That has left thousands of institutions that need help out in the cold. While these institutions may not be systemically vital, they are vital to the economic health of their communities. When those banks fall, local employers and individuals — which is to say the U.S. economy at large — will suffer for it.

Citigroup chart courtesy of Institutional Risk Analytics