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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Sorting out good from the bad

By JOE BEL BRUNO Associated Press

NEW YORK – Ronald Hermance, head of Hudson City Bancorp, has never made a subprime loan. His bank doesn’t keep risky mortgage securities on the books, and is headed toward another record year of profits.

Nonetheless, Hermance’s Paramus, N.J.-based savings bank finds itself cast alongside embattled institutions like Citigroup Inc. and Washington Mutual Inc. as the credit crisis continues. For executives at small regional and community banks around the country, selling their story to Wall Street is proving difficult amid all the negativity.

“We get lumped in with all the other financials,” said Hermance, chairman and chief executive of Hudson City Bancorp, which operates 125 branches in New Jersey, New York and Connecticut. “I’m going to have another record year, but who is going to know? We suffer from the company we keep.”

The implosion of the mortgage-backed securities market has punished U.S. financial institutions of all sizes, and banks and brokerages around the world have written down more than $300 billion of soured assets in the past 12 months. Investors are looking askance at the entire industry and have sold stocks lower regardless of how little exposure they might have to subprime mortgages or now-shunned investments like collateralized debt obligations.

Certainly, investor confidence in banks and brokerages has been almost nonexistent since the near collapse of Bear Stearns Cos. in March. And, nine U.S. banks have failed so far this year because of the loans they made to risky borrowers – that’s six more than in the previous three years combined.

And there likely will be more. The Federal Deposit Insurance Corp., the federal agency that insures banks and savings institutions, recently expanded its list of banks and thrifts considered to be in trouble during the second quarter to 117 from 90 – the biggest tally since mid-2003.

But FDIC Chairwoman Sheila Bair said she believes U.S. banks “will be able to weather” the economic and housing slump, with 98 percent of them still well capitalized by regulators’ standards. And analysts on Wall Street believe the time is coming when investors should begin to weed out the good from the bad when making investment choices.

Hernance believes it will take a full year before investors get a better gauge of which financial companies are in the clear. His own stock, while an anomaly because it is up 20 percent this year, has nonetheless suffered from sharp movements due to investors shorting the stock.

Shorting – bets that a stock will move lower at a certain level – used to be a technique used on more volatile sectors like technology stocks. But it’s become commonplace in financials – from Citigroup to community banks – and that has investors and CEOs wondering when things will return to normal.

“We never had big fluctuations,” Hermance said. “This year we had 45 million shorts; that’s double than usual. Financial stocks have become trading vehicles, we’re dealing with a whole different class of investors.”