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I'm going to try not to say I told you so...
For those that believe mark to market rules are useless (I know
they make it hard to goose your share price in a deflationary market,
see "Charting the Truth"), I bring you the collapse of a bank last week that wasn't even on the FDIC's troubled bank list. To add misty eyes to
JPM Public Excerpt of Forensic Analysis Subscription - misery,
the mis-marking of the banks assets will cost the FDIC nearly a billion
dollars. That's a lot for a bank that wasn't even on the watch list. If
the banks were forced to carry assets at market value, REAL market
value, these little surprises will not be allowed to sneak up.
Investors, regulators, bloggers, etc. will be able to see them coming a
mile away - or at least they should. Alas, I am able to see them
anyway. Is it because I am hyper-intelligent, possessive of meta-human
powers, or employ an army of elfin dwarves to hide in the boardroom
duct vents to eavesdrop on the board meetings? No, its none of those.
Its because I PAY ATTENTION, and odn't have any conflicts of interests
and axes to grind that color my observations and analysis.
Subscribers should keep this in mind when reading about this big bank
that has written a bunch (more than a quarter of its tangible equity)
in naked, unhedged credit default and total return swaps - see "And the next AIG is....".
Knowing what they have acquired as of late, and what their subsidiaires
have been trying to unload, there is no telling what the hell the
quality of the underlying is. One thing is for sure, it is probably not
very pristine!
Before we move on to the Blooberg article that sparked this blog post, let's excerpt some key snippets from the latest FDIC memorandum to its Board of Directors. It is written in the coded language of regulator-ese, but I will translate for you in red font:
1. The FDIC not impose additional special assessments in 2009. Because we have hit them pretty hard already and they are already broker than we are!
2. The FDIC maintain assessment rates at their current levels through
the end of 2010 and immediately adopt a uniform 3 basis point increase
in assessment rates effective January 1, 2011.
3. In October 2008,
the Board adopted a Restoration Plan to return the Deposit Insurance
Fund (DIF or the Fund) to its statutorily mandated minimum reserve
ratio of 1.15 percent within five years. In February 2009, given the
extraordinary circumstances facing the banking industry, the Board
amended its Restoration Plan to allow the Fund seven years to return to
1.15% percent. We're in trouble
and need more time. We will crush an already insolvent banking system
(despite the proclamations to the contrary by the government and bank
management) if we attempt to return the fund to a prudent level in less
than 7 years. Its getting worse quickly even as the bank stocks
skyrocket over 100% - just a few months ago we throught we could do it
in 5 years.
Pursuant to these requirements, staff estimates
that both the Fund balance and the reserve ratio as of September 30,
2009, will be negative. This is techincially and effectively insolvent! This
reflects, in part, an increase in provisioning for anticipated
failures. In contrast, cash and marketable securities available to
resolve failed institutions remain positive.
Staff has also
projected the Fund balance and reserve ratio for each quarter over the
next several years using the most recently available information on
expected failures and loss rates and statistical analyses of trends in
CAMELS downgrades, failure rates and loss rates. Staff projects that,
over the period 2009 through 2013, the Fund could incur approximately
$100 billion in failure costs. Staff projects that most of these costs
will occur in 2009 and 2010. Approximately $25 billion of the $100
billion amount has already been incurred in failure costs so far in
2009. Staff projects that most of these costs will occur in 2009 and
2010. So, only 25% into this mess
by the FDIC's own calculations, and they are already negative and
insolvent. They believe the worst is yet to come (versus Bernanke,
Paulson and Geithner saying the worst is behind us), and that worse
will come rather quickly. To make things worse, as you read the article
excerpted below, the FDIC doesn't even seem to have a firm graps on the
risks, as they were blindsided by a nearly billion dollar failure that
wasn't even on thier problem bank list, and this was last Friday! You
all know who has been the most bearish on the financial sector through
all of this.
If the Board imposes no further special
assessments and leaves existing risk-based assessment rates in place,
staff projects that the Fund balance would become significantly
negative in 2010 and may remain negative until 2013. According to these
projections the reserve ratio would not return to the statutorily
mandated minimum reserve ratio of 1.15 percent until late 2018. 'Nuff said!
The projections in the preceding paragraphs address the effect of
projected failures on the Fund balance (its net worth, which is assets
minus liabilities), not the cash balance of the Fund, which provides
needed liquidity. Staff has also estimated the FDIC’s need for cash to
pay for projected failures. At the beginning of this crisis, in June
2008, total assets held by the DIF were approximately $55 billion, and
consisted almost entirely of cash and marketable securities (i.e.,
liquid assets). As the crisis has unfolded, the liquid assets of the
DIF have been used to protect depositors of failed institutions and
have been exchanged for less liquid claims against the assets in failed
institutions. As of June 30, 2009, while total assets of the DIF had
increased to almost $65 billion, cash and marketable securities had
fallen to about $22 billion. The pace of resolutions continues to put
downward pressure on cash balances. While the less liquid assets in the
DIF have value that will eventually be converted to cash when sold, the
FDIC’s immediate need is for more liquid assets to fund near-term
failures. Translation: We were
forced to accept the trash assets from the fail banks that we could not
convince the private sector to accept, as we mean (by using the term
"less liquid claims") that these assets are effectively unmarketable,
and must be traded at an extreme discount which renders them for all
intents and purposes of the fund, effectively worthless in comparison.
Staff ‘s projections take into account recent trends in resolution
methodologies, such as the increasing use of loss sharing—especially
for larger institutions—which reduce the FDIC’s immediate cash outlays,
and the anticipated pace at which assets obtained from failed
institutions can be sold. If the FDIC took no action under its existing
authority to increase its liquidity, the FDIC’s projected liquidity
needs would exceed its liquid assets on hand beginning in the first
quarter of 2010. Through 2010 and 2011, liquidity needs could
significantly exceed liquid assets on hand. So, not only are we balance sheet insolvent, we will be cash flow insolvent within one quarter.
Imposing an additional special assessment as provided for in the May
2009 final rule would bring in approximately $5.5 billion in revenue to
the Fund; imposing two (one at the end of September, one at the end of
December) would bring in approximately $11 billion in revenue. Given
staff’s projections, neither amount would prevent the Fund from
becoming significantly negative or prevent the Fund’s liquidity needs
from exceeding its liquid assets on hand in 2010. Even combining these
special assessments with higher risk-based assessment rates would not
solve these problems, unless rates were set very high or more was
collected in special assessments. Furthermore, any additional special
assessment or immediate, large increase in assessment rates would
impose a burden on an industry that is struggling to maintain positive
earnings overall. Translation:
Damn, even if we hit the banks at the continuing rate that we have
already elevated the special charges to, we are still insolvent. No
matter if hit them much harder, insolvent we will still be. The only
way out of this is the same accounting game that the banks pulled.
Hopefully, we will be able to fool somebody. See below.
An alternative—borrowing from the Treasury or the Federal Financing
Bank (FFB)— would also increase the liquid assets available to fund
future resolutions but would not increase the Fund balance as there
would be a corresponding liability recorded. Hey,
wait a minute here. How is this any different from asking the banks to
prepay thier insurace premiums. In the prepay scenario, there will be
an increase in cash (an asset) as well as an associated liability
(unearned insurance premiums). Do the FDIC folk believe me to be as
dense as some of those bank investors that really believe that banking
industry is solvent. I posit this query to all interested pundits: how
can the banking industry be solvent if the banking industry insurance
fund is insolvent, and by thier very own admission, very
insolvent!??!!?!?!?!?!?!?!?
Staff projects that
failures will peak in 2009 and 2010 and that industry earnings will
have recovered sufficiently by 2011 to absorb a 3 basis point increase
in deposit insurance assessments. Adopting a uniform increase in
assessment rates of 3 basis points now, effective January 1, 2011,
should ensure that the prepaid assessments would address current
liquidity needs without materially impairing the capital or earnings of
insured institutions. Advance adoption of the rate increase also should
help institutions plan for future assessment expenses. So,
whatcha sayin' is that we all know the banks are playing accounting
games, we will just go along and play the games with them. Fu$% the
economic earnings and cash, as long as we don't harm the accounting
earnings, all will be fine. The problem with this is economic earnings
actually mean cash and real capital. Accounting game or not, if you hit
an insolvent bank hard for cash, it will give it to you and maybe even
be able to gloss it over with pretty accounting tricks to make it look
like its making some money, but in the end all you will be doing is
using that money that you took from the bank to eventually take IT
over. Garbage in, garbage out - old school programming! There is more,
but I am sure you've got the message by now. Now, on to the article of
the day...
From Bloomberg:
Oct. 1 (Bloomberg) -- There was a stunning omission from the
government’s latest list of “problem” banks, which ran to 416 lenders,
a 15-year high, as of June 30. One outfit not on the list was Georgian Bank, the second-largest Atlanta-based bank, which supposedly had plenty of capital.
It failed last week.
Georgian’s clean-up will be unusually costly. The book value of
Georgian’s assets was $2 billion as of July 24, about the same as the
bank’s deposit liabilities, according to a Federal Deposit Insurance
Corp. press release.
The FDIC estimates the collapse will cost its insurance fund $892
million, or 45 percent of the bank’s assets. That percentage was almost
double the average for this year’s 95 U.S. bank failures, and it was the highest among the 10 largest ones.
How many other seemingly healthy multibillion-dollar community banks
are out there waiting to implode? That’s impossible to know, which is
what’s so unsettling about Georgian’s sudden downfall. Just when the
conventional wisdom suggests the banking crisis might be under control,
along comes a reality check that tells us we’re still flying blind. You can't say I didn't warn you at least two years in advance:
- Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux
- More on the banking backdrop, we've never had so many loans!
- As I see it, these 32 banks and thrifts are in deep doo-doo!
- A little more on HELOCs, 2nd lien loans and rose colored glasses
- Capital, Leverage and Loss in the Banking System
- Doo-Doo bank drill down, part 1 - Wells Fargo
- Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank
- The Anatomy of a Sick Bank!
- Doo Doo Bank 32 Drill Down 1.5: Wells Fargo Bank
The cost of Georgian’s failure confirms that the bank’s asset values were too optimistic. I have been alleging this for some time now, see "Is JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful!".
It also helps explain why the FDIC, led by Chairman Sheila Bair, is
resorting to extraordinary measures to replenish its battered insurance
fund.
...
As recently as its March 31 report to regulators,
Georgian said it met the FDIC’s requirements to be deemed “well
capitalized.” By June 30, that had dropped to “adequately capitalized,”
after a $45 million second-quarter net loss.
Georgian also
reported a 12-fold jump in nonperforming loans to $306.4 million from
$24.7 million three months earlier, mostly construction loans. Again, you can't say I didn't warn you well in advance:
- Who are ya gonna believe, the pundits or your lying eyes?"
- Who are you going to believe, the pundits or your lying eyes, part 2
- GGP and the type of investigative analysis you will not get from your brokerage house
Georgian’s numbers made it seem as if the surge arose from nowhere. On
its March 31 report, the bank said just $79.1 million of its loans were
30 days or more past due. That included the loans it had classified as
nonperforming.
Survival Mode
Georgian’s new CEO, John Poelker,
downplayed any concerns. “Whether there is enough capital for the bank
to be a survivor isn’t an issue,” he told Bloomberg News for an Aug. 5
article.
What wasn’t made public until Sept. 25, the day it closed, was that Georgian Bank had agreed to a cease-and-desist order
with the FDIC on Aug. 31 after flunking an agency examination. The
19-page order described various “unsafe or unsound banking practices
and violations of law and/or regulations,” including failing to record
loan losses in a timely manner. Again, something that I have sounded the horn on, see "They ARE trying to kick the bad mortgages down the road, here's proof!". Georgian neither admitted nor denied the allegations.
The FDIC updates the public about the number of banks on its problem
list once a quarter. An FDIC spokesman, David Barr, said Georgian was
added to the FDIC’s internal list in July. He said the agency adds
banks to the list based on exam ratings, not the data in their
financial reports.
As for the 416 banks on the list as of
June 30, up from 305 a quarter earlier, the FDIC said their combined
assets were $299.8 billion. (The FDIC didn’t name the banks, per its
usual practice.) If Georgian’s experience is any guide, the real-world
value of those assets probably is much less.
Rising Losses
That might help explain why the FDIC keeps increasing its estimates for
the losses it’s anticipating from future bank failures. In May, the
agency said it was expecting $70 billion of losses through 2013. This
week, it bumped that to $100 billion. The agency also said its
insurance fund would finish the third quarter with a deficit, meaning
liabilities exceed assets.
The FDIC, backed by the full faith
and credit of the U.S. government, will get whatever money it needs to
protect depositors. For now, it plans to raise $45 billion
by collecting advance payments from the banking industry. Those
payments will cover the next three years of premiums that the banks
owe.
In effect, the FDIC is taking out a
massive, no-interest loan to cover its bills. Borrowing from the future
won’t improve its insurance fund’s capital, however, only its
liquidity.
The big question is what the
FDIC will do next time, should its loss estimates keep rising -- and
there’s no reason to believe they won’t. By statute,
the insurance fund is supposed to be funded solely by the banking
industry. The FDIC could keep borrowing from the banks, directly or
through more advances. No it can't. The industry doesn't have the money.
The agency could tap its $500 billion credit line with the U.S.
Treasury. It still would have to pay back the money with fees from the
industry, assuming the banks can’t persuade their minions in Congress
to change the law. As it stands, the only way to boost the fund’s
capital immediately is by charging the banks a lot more money for their
insurance premiums.
Given the odds that other surprises like Georgian Bank are lurking, the FDIC will have to bite this bullet eventually.
- advertisements -
A concise and insightful analysis. Well done.
I think our government is going full tilt to not only make sure tomorrow looks like today, but with one difference: the S&P up tomorrow another 1% or so. So far, they are executing very well. Let's face it, this week we'll hear "better than expected" about fifty thousand times on CNBC and both Dow 10,000 and perhaps S&P 1100 will be in the rear view mirror, dollar will no doubt stabilize somewhere in the low 70s, gold's brief ascent will also end, oil will head up near $80, and QE will end without so much as a hiccup in the Treasuries sales. Let's be honest, and I'm not a fan of any of this: there are no signs at all of any real or impending cracks in the facade. Perhaps the containment vessels are of sound design and construction.
JPMorgan just announced $.82 vs. $52 est. Classic.
Kudos, Jamie, Hank, Larry, Ben and Timmah. Well, to Timmah for following instructions and not "messing up."
key:
"Absolute wealth, like energy, is neither created nor destroyed. It is recognized, and we have as yet to begin recognizing the readily available wealth we inherited from the universe."
"Once you begin to understand transformation, through time, from
E = mc2 to V = CR, you are well on your way to creation, to tapping your own circuit, and you require nothing more than the instrument in your head, productive alignment."
whispering: We see a stuctural decline in C & G. That affects the equations on each side of the fulcrum differently. Because there is no material accounting system on the magnetic side, BB publicly assumed that computer monetary policy may be continued infinitely, and so he began loading up the blackhole, which has quantum characteristics. What is the effect on the length of the lever on the magnetic side? On induction?
Tax receipts are real. Transfer payments are real.
Who will they sacrifice next?
nice work balancing the fulcrum.
at the end of the day, what is important is the amount of effective work done with the gravity resulting from the blackhole. That's where the real money is. the rest is just a show.
At the margin is everything during a period of transition, and at the margin, what people do not see has a much bigger impact than what they see.
Funny thing about blackholes. People assume they are safe, until they are not, and then it's too late. Because their lives are relatively short, they assume tomorrow is going to look much like today, despite all historical evidence to the contrary.
Quite devious the blackhole. It's almost binary, and it feeds in quantum bites. People just can't help themselves; they feed the bear, and are then surprised when they get eaten.
Mine asked if I liked Pina Coladas and walks in the rain.
The banks are marked to fiction. I'm just waiting for everything to explode.
Thanks Reggie, for another interesting article.
WTF?! I just got a goddamn pop-up ad for Nielsen's online ratings service wanting me to take a survey about my use on this website...
Me too. Hell, I answered it. The more PR this site gets, the better.
Hmm, now why they needeed my bank account and PIN #, I'm not quite sure.
Yeah, and what use are my measurements? Rusty, Unscarred, did you answer that one too?
I think it is great for them to have these answers, cept no one asked income, which is one of the misnomers about this site, I suspect.
I don't earn $200,000 a year.
Under "sex," I responded "yes, please!"
Then, it kept asking me my for my sign, and whether I enjoy poetry or long walks on the beach...
I hope Tyler will post the Sheila Bair interview from CNBS sometime today. When discussions hit "mark to market accounting" in the banking sector, you could sense the sleaze ooze out of Sheila and that crony senator out of Missouri.
Of course they don't want market to market accounting... you could put the FDIC 6 foot underground today if they did.
"The big question is what the FDIC will do next time, should its loss estimates keep rising"
Reggie, I think we know the answer to that. Witness: no banks closed last week.
The FDIC is just going to stop taking hits to their fund, by not closing failed banks. It is that simple.
What a disaster.
And that approach only increases the eventual losses to the Deposit Insurance Fund.
However, lack of buyers rather than lack of FDIC money may be the reason that there were no closures last weekend.
It's pretty clear that the FDIC does not select banks for closure based on their degree of insolvency. Although Georgian was clearly insolvent, at least a dozen Georgia banks are far more insolvent than Georgian ever was.
It seems that the FDIC decided to close Georgian because it could find a sucker who was willing to buy some of the assets. Meanwhile, 200 fully insolvent banks stay open because the FDIC can't find buyers.
Reggie, glad you have found our little truth atoll in the middle of the boisterous sea of lies and deceit.
Welcome
I am delighted to see Reggie Middleton posting as a contributor at Zero Hedge.
For those not familiar with Reggie, I would suggest to you that he is a great source for information about the financial sector and I find him to be a must read.
Thanks to both Reggie and ZH for getting together.
+1
+2 Great to see you here Reggie and great work! I have been following you on SA for a while now, but since that sight is having "problems" your being here on ZH is especially sweet. Thanks for your contribution.
I'll thrice that.
ZH is rapidly amassing the finest bullshit detectors in the world.
The truth is all we ask.
REGGIE,
nice to see you here.
Kind of makes you wonder whats at the end of the road. It's a good thing for FDIC insurance (adequately funded or not) or there would have been bank runs long ago....
Isn't that exactly how we ended up with TARP?