We loaded the final Q1 2009 data from the FDIC into The IRA Bank Monitor on Friday and the results are rather striking. As you will recall, our preliminary Stress Index score for the banking industry was over 5.7 or half an order of magnitude above the 1995 benchmark year. This result excluded the ratings for the lead units of the largest money center banks, data for which was not released until last week.

With the large bank data added to the rest of the industry, however, the Stress Index score fell to "only" 2.36, which still is a 33% increase from the 1.8 at year-end 2008. The final Q1 Stress Index score is higher than any time in the past 25 years. More, the difference between the preliminary results (5.8) and the final Stress Index score (2.36) for Q1 2009 illustrates the degree of subsidy provided to the large banks by the Fed, Treasury, etc. Thus the true economic situation in the broad industry is illustrated by the preliminary result, while the final score for the entire industry inclusive of the largest banks is illustrated by the blended Stress Index result.

At the current rate of deterioration, that could put the Stress Score for the entire industry over 10 by Q4 2009 or a full order of magnitude above the 1995 baseline. Such a worst case scenario suggests that we could see one in four US banks merged or resolved through the cycle. In the event, that suggests that over 2,000 institutions, large and small, will be resolved. Put that into context with the FDIC's "official" dead pool of 300 or so institutions and that gives you a tangible measure for how much "spin" might live within the official version of the problems facing the US banking industry.  We'll expand further on the possible scenarios for the US banking industry in our PickingNits blog.  

As we told subscribers to the IRA Advisory Service last week, in Q1 2009 Citigroup (NYSE:C) and other large banks evidenced improvements in ROE, Efficiency and Exposure thanks to the generous subsidies being provided by the US government from several sources:

1) Government subsidized TARP capital injections,
2) Below-market loans via repurchase transactions with the Federal Reserve Banks,
3) Below-market funding via FDIC guarantees on debt, and
4) Subsidies for Bear, Stearns, AIG and other credit default swap ("CDS") counterparties of the large banks.

Subscribers to the consumer or professional versions of the IRA Bank Monitor may view the Q1 2009 profiles for all US banks. We'll be talking more about zombie banks later this week in an interview with Professor Ed Kane of Boston College. As we discussed with Dr. Kane and also with our friend Josh Rosner last week, without the bailouts of Bear, AIG and the work-around of many other CDS counterparties, the capital of JPMorganChase (NYSE:JPM) would have evaporated several times over as CDS contracts were triggered. But given that the big news today is the bankruptcy of General Motors (NYSE:GM), we thought it would be useful to take a look at GMAC and its FDIC-insured bank unit, GMAC Bank, now known as "Ally."

Most of the readers of The IRA are aware that GMAC, the financing arm of GM, is insolvent. At the behest of President Barrack Obama and the Democratic leadership in the Congress, the US Treasury and the Federal Reserve Board have taken extraordinary and, we believe, illegal actions to keep GMAC afloat.

The reason is simple: without GMAC, GM cannot finance car sales and has little chance of emerging from bankruptcy. And without GM and its parts suppliers, the Democrats will begin to lose millions of voters in heartland rust belt states where the legacy automakers are located as workers migrate south looking for jobs. For the Democrats, slowing the liquidation of the UAW beyond the 2012 general election is "job one."

So let's examine Ally, f/k/a GMAC Bank (FDIC Cert# 57803). As of Q1 2009, Ally was rated "F" by the IRA Bank Monitor, due to severe degradation in ROE. The Stress Index score for Ally was 21.2 driven by a score of 100 for the ROE subindex. Like the larger zombie banks, the other Stress Index factors for GMAC Bank/Ally for loan defaults, capital, lending capacity and efficiency are all currently below the industry averages (and indeed, below the 1995 benchmark levels of stress). But these "improved" measures are, in our view, a mirage created by the fact of government subsidies.

Without the billions of dollars in public funds already injected into GMAC Bank/Ally's parent, the bank arguably would already be in the hands of the FDIC. More, when you examine the profile for GMAC Bank/Ally on The IRA Bank Monitor (the legal name had not been changed at the end of Q1, so search for "GMAC"), here are some of the factors that jump out and bite you in the face:

** First, Ally has non-performing loans equal to almost 6% of loans and leases. Subtract those from the bank level TCE and you get closer to the cash reality of Ally's capital base, which puts it into the regulatory category of "undercapitalized."

** Second, while Ally's deposit base appears to be stable, due in large part to the above-market rates being offered in TV and print media across the country, one quarter of the bank's assets are funded off the FHLBs -- well above the regulatory limit of 15% established by regulators as "unsafe and unsound." The percentage has come down from 30% several quarter back, but is still too high. In The IRA Bank Monitor, banks with > 15% FHLB advances trigger a moral hazard flag.

** Third, the moral hazard of GMAC Bank is clearly illustrated by the fact that the bank has apparently decided to double down at the derivative roulette table. As of Q1 2009, OBS derivatives positions reported by the $30 billion asset GMAC Bank/Ally to the FDIC jumped from $13.3 billion at the end of Q4 2008 to over $40 billion as of Q1 2009. This dramatic increase in OBS derivatives positions NOT FOR TRADE suggests that GMAC is trying to hit a home run and thereby salvage their position.

But the real issue to us is why is this marginal lenders being allowed to compete with solvent, well-run banking institutions? The answer obviously is the same politics behind the GM bailout. Give the recent decision by the FDIC to limit the interest rates offered on deposits by institutions that are less than well capitalized, we wonder: When is the OTS and the FDIC going to restrict the full-page advertisements by GMAC Bank/Ally that were running in newspapers around the US offering rates that are nearly 1.5% above the rates offered by sound institutions?

As in the case of Ford Motor (NYSE:F) competing with the two auto GSEs, Chrysler and GM, well-managed banks in the US now have to compete with an irrational, GSE bank in the form of GMAC Bank/Ally whose only apparent objective is to raise enough cash today to survive until the next bailout from the US Treasury. If you believe the statements by the Obama Administration that $30 billion will be the limit of US government assistance to GM, then you should feel less than confident in keeping your money in GMAC Bank/Ally.

Questions? Comments? info@institutionalriskanalytics.com

The Institutional Risk Analyst is published by Lord, Whalen LLC (LW) and may not be reproduced, disseminated, or distributed, in part or in whole, by any means, outside of the recipient's organization without express written authorization from LW. It is a violation of federal copyright law to reproduce all or part of this publication or its contents by any means. This material does not constitute a solicitation for the purchase or sale of any securities or investments. The opinions expressed herein are based on publicly available information and are considered reliable. However, LW makes NO WARRANTIES OR REPRESENTATIONS OF ANY SORT with respect to this report. Any person using this material does so solely at their own risk and LW and/or its employees shall be under no liability whatsoever in any respect thereof.