These small-bank stocks are good values now

Tiny financial services companies could see big benefits from new regulations

SAN FRANCISCO (MarketWatch) -- Every Friday afternoon for the past year, it's been the small-bank death watch: Which U.S. bank would federal regulators seize next?

In 2009, it was 140 banks stretching from Florida to Washington state. The number is 85 and counting so far this year, including two failures announced late Friday.

Yet with federal banking reform moving ahead this week, shares of the smallest community banks are a good bet on any recovery in the credit cycle, say money-managers and industry analysts, who are becoming more bullish about a turnaround for banks with assets of $1 billion or less. See how financial stocks fared on Friday.

"We're in value territory for the right banks," said Michael Natzic, senior vice president of Stone & Youngberg's Community Bank Group, which tracks 60 California banks. "The strong will continue to get stronger and the weak will get weaker."

Branching out

Like their larger peers, tiny community banks have been struggling under the weight of the massive credit crunch. Since the end of 2007, when the U.S. recession took hold, the SNL Small Bank Index is down 36% as of June 24, compared to a 14% decline for the S&P Small Cap 600 Index and a 23% drop for the Russell Microcap Index.

Yet lately small bank stocks have been gaining traction. So far this year, the SNL Bank Index is up 14%, outpacing the 2% gain for the S&P Small Cap Index and a 3% gain for the Russell Microcap Index.

Investors and analysts who specialize in microcap banks say the ones that will emerge from the economic downturn in stronger shape are the banks that didn't make too many loans on speculative construction of commercial buildings, strip malls, or housing developments.

Debt pressure

For others, the picture is more ominous. Sinking commercial real estate projects have hammered bank profits, forcing companies to write-off bad loans and to allocate capital to shore up loan-loss reserves. For some banks, bad loans have become overbearing and regulators have moved in.

Moreover, many small banks are trying to pay back TARP monies, while commercial real estate vacancies and loan defaults are both still high.

G-20 leaders to discuss economy, global rebalancing, capital

Canadian prime minister says he 'seriously doubts' G-8 will be replaced by G-20

TORONTO (MarketWatch) -- The U.S., Europe and other G-20 countries are expected to spend Saturday and Sunday sparring over the proper timing for withdrawing fiscal stimulus packages, the need to rebalance global growth and the necessity for banks to hold more capital as a cushion against future economic disasters.

There is hope among members that the countries can get closer to reaching a consensus by the time leaders have their next meeting in Seoul, Korea in November on how much capital banks around the world should hold to ensure they can survive future financial crises.

"There is much more consensus that the global system was under-capitalized," said Bank of Canada Governor Mark Carney in a radio interview. "It [new capital standards] will apply equally to Canadian banks as it does to American banks, European banks, Japanese banks and emerging-market banks."

Carney added that Toronto has been a useful summit already to help "push people" to make some decisions and restrict the range of discussion about what capital levels each country's institutions should have.

However, Simon Johnson, a Massachusetts Institute of Technology Sloan School of Management professor and a former International Monetary Fund economic counselor, believes that the capital requirements G-20 leaders will agree on fall short of what is necessary to protect against future economic crises.

"Most indications are that they will seek tier-one capital requirements in the range of 10%-12%, which is what Lehman had right before it failed," Johnson wrote recently. "How would that help?"

G8 won't fade away: Harper

The G-20 includes 19 major economies plus the European Union, and encompasses more than three-fourths of global output and two-thirds of the population. It includes the G-8 -- America, Canada, France, Germany, Italy, Japan, Russia and Britain - a group that met in Huntsville, Canada, on Friday. In addition to the G8 countries, Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Turkey, Saudi Arabia, South Africa and South Korea, are members of the G-20.

On Saturday, after the conclusion of the G-8 summit in Hunstville, Canadian Prime Minister Stephen Harper said the Group of 8 world leaders known as the G8 is an essential organization that will not disappear, responding to assertions that the organization will be replaced by the year-and-half old Group of 20 world leaders.

"I think there is greater understanding of the necessity of like-minded advanced countries who can exchange views in much less formal setting and who can quickly bring resources to bear on certain world problems," Harper said to reporters. "The G-20 has done an amazing job in year and half, of responding to the economic crisis. But there are limits to what we can discuss and what we can achieve in a group of 20, which leads to much less informal discussion and much less commonality of purpose."

Goldman told to pay creditors in Bayou scam $20.6M

Goldman Sachs Group Inc. has been ordered to pay $20.6 million to scammed investors who say the investment bank should have known about the Ponzi scheme pulled off by the collapsed Bayou Hedge Funds.

A three-person arbitration panel of the Financial Industry Regulatory Authority held two of the bank's units, Goldman Sachs Execution & Clearing and Spear Leeds & Kellogg, liable in the dispute.

Stamford, Conn.-based Bayou collapsed in 2005, after the firm's then-CEO Samuel Israel III and Chief Financial Officer Daniel Marino admitted they lied about the company's profits and set up a fake accounting firm to falsify audits.

The $20.6 million award represents the money Bayou deposited into its accounts at Goldman, said attorney Ross Intelisano of Rich & Intelisano LLP, a New York firm that represents investors in securities cases. Goldman handled all of the hedge fund's trading between 1999 and 2004, when it stopped trading altogether, he said.

The fraud totaled about $250 million. The victims were mostly individuals who invested relatively modest amounts, about $300,000 to $500,000, he said. They were promised annual returns of 10 percent to 12 percent.

The Goldman money, when added to other funds recovered, will result in the investors getting back a total of about half of what they lost, according to Intelisano.

The case, heard by the FINRA panel, centered on the Bayou investors' claim that Goldman either knew or should have known of the deception, because it had marketing materials claiming consistent investment gains as well as account records showing losses.

"They should have done an investigation," said Intelisano. "They would have discovered, at least, that there was something wrong."

"We are disappointed with the award and are considering our options," said Goldman spokesman Ed Canaday.

Arbitration cases are rarely overturned, however. Intelisano maintains that the award will encourage other brokers and clearing houses to act if there is an indication their clients engage in questionable activity.

"I don't think that this is the last time that someone's going to steal money at a hedge fund," he said. "Now the firms that clear all those trades will have to pay more attention."

Israel and Marino pleaded guilty in 2005 to conspiracy, investment adviser fraud and mail fraud. Israel was sentenced to 20 years in jail for his role in the scheme, then staged his own suicide in 2008 in an attempt to avoid serving the time. He turned himself after a month on the lam.