Events Trader #54: The banking bonanza you can't miss out on

11th May 2010

The banking bonanza

you can't miss out on

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Dear subscriber,

I don't miss the stress. And I don't miss the hellish hours. But I bet the last few weeks were an absolute riot around the trading desks of the Square Mile.

I spent 15 years working in the City. And you pray for weeks like this. As panic spread from Greece to Spain to Portugal traders would have made huge profits betting against Greek bonds, shorting the Euro and riding the VIX index Wall Streets fear gauge to a 12 month high.

Angela Merkel called these people irresponsible speculators this week. And she's right. These people are jackals. Always looking to tear the meat off the next carcass.

The thing is you can join them. There is no reason why you should be left out of the feeding frenzy. All you have to know is where the next crisis will be and exactly what to do the moment it strikes. That's where I come in.

Today I want to talk about a truly colossal crisis. Something that could wipe out hundreds of banks on both sides of the Atlantic and make you a killing in the process.

This will be a bonanza that could dwarf the profits traders made this week in the City. I'll explain why in a minute. But first

US banks are on the brink over another meltdown

The stock market has rallied hard for 12 months. And with most economies emerging from recession, the toxic debt problems that sent the global banking system into meltdown seem a distant nightmare.

It won't stay that way for long. There is a major black cloud hanging over British and American banks commercial property. In the easy credit years before the meltdown, banks did huge business lending to dodgy property tycoons and financing new office blocks, warehouses and shopping malls.

And those properties have been sitting empty for a long time now. In the US, commercial property values are still down about 40% since the 2007 peak. And about 18% of all office space is now sitting vacant.

More than $1.4 trillion of loans secured by commercial properties will need to be refinaced between 2011 and 2014. And there are over £300bn outstanding in Britain. If you compare it with subprime mortgages, which totalled something in the region of $300bn, you begin to recognise the scale of the problem.

Without a major recovery in the commercial property market soon, a lot of US banks will end up with a huge burden of failed debt on their balance sheets. Many will go bust.

Hundreds of banks are about to hit the wall

In fact, it's already beginning to happen. Last year, 140 US banks failed or had to be rescued by federal regulators. Already this year, 50 have been seized by the authorities.

It's the small and medium sized banks that are being hit hardest. These institutions can no longer afford to pay the interest on all the empty office blocks they own. So they are just walking away. Default rates are going through the roof.

According to Real Capital Analytics, the default rate for commercial property mortgages held by US bank more than doubled in the fourth quarter of 2009. And the Federal Deposit Insurance Corporation has acknowledged that the number of banks on its problem list climbed to 702 at the end of 2009. In the worst days of the banking crisis, there were only 552 banks on this list.

And with a vast array of commercial real estate loans just coming up for refinancing, we will see those default rates absolutely skyrocket over the next two years.

A trade that could double or triple your money

So how can we trade this crisis? Well most of these commercial property loans are rotting on the balance sheets of small and medium sized US banks. These are the ones who were not sophisticated enough to have investment banking divisions to trade their way out of trouble.

Politically too, it is becoming impossible to justify a second bank bailout. The kitty is empty the FDIC has nearly run out of money. And because this second tier of banks is not systemically important, they can be let go to the wall without causing too much damage.

That's why I have been scouting for the best banks to short. And I will get back to you as soon as I found the best options. Those small banks in the US heartlands, which are also being hit by credit card defaults and unemployment look especially interesting.

These are also the states with the worst exposure to commercial real estate areas like Michigan, Florida and Arizona.

There are a whole clutch of small US banks that you can short through IG Index, the spreadbetting group. And the fact that 200 banks have gone belly up in the last 18 months, makes me salivate at the scale of the opportunity here.

I will get back to you on this evolving story in forthcoming issues.In the meantime, if you like you can contact me at my e-mail eventstrader@moneyweek.com.

Riccardo Marzi

Events Trader

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