According to the Merrill Lynch Corporate Master Index, which tracks the performance of dollar-denominated, investment grade-rated corporate bonds, there are 72 bonds trading in distressed territory, 28 of which have been issued by banks.
Washington Mutual Inc., National City Corp. and Huntingdon Capital in the U.S., HBOS PLC in the U.K. and Iceland's Kaupthing Bank HF, Landsbanki Islands HF and Glitnir Bank HF all have bonds trading in distressed territory -- a spread of 10 percentage points and over an equivalent treasury.
"This unusual development could indicate expectations for more bank failures following IndyMac Bancorp. closing its doors last month," says Martin Fridson, chief executive of Fridson Investment Advisors, a U.S. credit-investment firm. IndyMac was seized by Federal Deposit Insurance Corp. of the U.S. after a run on the bank by depositors left the California lender short on cash.
The episode fueled speculation about which banks, particularly in the U.S., will be next to fail, as declining house prices erode the value of mortgage holdings, resulting in increasing loan defaults.
We are forecasting 110 banks with $850 billion in assets to fail by next July. That's eight times the FDIC's total reserves," says Chris Whalen, managing director of Institutional Risk Analytics. "The next president of the U.S. is going to have to create a vehicle to buy banks that we can't sell after they fail."
The fallout from IndyMac has hit the broader banking sector hard, as evidenced in the option-adjusted spreads -- a measure of a security's extra yield over the yield of a comparable treasury security after accounting for any options or sinking funds -- on outstanding bank bonds.