The First National Bank of Florida, Milton, Florida, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with CharterBank, West Point, Georgia, to assume all of the deposits of The First National Bank of Florida.
All fine, right? All insured depositors are protected, we’re all ok.
Yes, from that point of view – so far.
So what’s the problem, you ask? Right here:
As of June 30, 2011, The First National Bank of Florida had approximately $296.8 million in total assets and $280.1 million in total deposits. In addition to assuming all of the deposits of the failed bank, CharterBank agreed to purchase essentially all of the assets.
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $46.9 million. Compared to other alternatives, CharterBank’s acquisition was the least costly resolution for the FDIC’s DIF.
Let’s “do the math.”
As of June 30th, less than three months ago, if you believe this bank’s balance sheet the institution had an excess capital position (that is, assets .vs. liabilities) of 5.96%. That is, it had 6% more assets than liabilities and thus was (almost) within regulatory capital minimums.
Today, we are told that the FDIC is going to lose $46.9 million on this transaction.
In order for the reported balance sheet to be true the bank had to lose $16.7 million (its entire surplus) plus the $46.9 million the FDIC is now going to lose in less than three months.
That is, it had to lose $63.6 million in asset valuation in three months or about 22% of it’s asset value.
Note that this institution has been claimed to be “troubled” for quite some time with non-performing loans.
If you believe that the alleged balance sheet presented on June 30th of this year was materially accurate in all respects as to the valuation of those assets, and that in less than three months time the bank lost 22% of its asset value and thus placed the FDIC in the position of losing $46.9 million on this transaction you’re dumber than a box-o-rocks.
If you want to know why bank stocks are collapsing around the world and why credit markets are at risk of another seizure, you need only look right here for the reason. 12 USC Sec 1831o requires:
Each appropriate Federal banking agency and the Corporation (acting in the Corporation’s capacity as the insurer of depository institutions under this chapter) shall carry out the purpose of this section by taking prompt corrective action to resolve the problems of insured depository institutions.
We have a nearly-unbroken chain of bank failures going back to 2008 in which (c)(3) critical capital levels have been massively invaded without FDIC response and which in turn have led to these failures.
Incidentally the word shall appears in that statute 47 separate times. The word “may” appears only 13 times. The word shall has, quite simply, been repeatedly and intentionally ignored for the last four years and continues to be ignored today.
It is therefore only reasonable for the market to assume that all large financial institutions are similarly underwater on any sort of honest accounting basis and thus the only thing preventing them from blowing up is the ability to continue to roll over indebtedness and pick up dropped pieces of crack from between carpet fibers with which they can claim all is ok as they take another hit from the pipe.
This is where the confidence problem is rooted in the current market volatility and neither political party in the United States Congress nor either of the other two branches of government has done a damned thing about the wanton and outrageous violation of this section of law — law that was put into place after the S&L crisis which arose due to the precise same willful and intentional aversion of regulatory eyes.
If this crap is not stopped the market will continue to press this bet on insolvency whenever it sees an opening to do so and eventually one or more large financial institutions will collapse exactly as occurred with Creditanstalt. Since the governments of the world have “blown their wads” with lower interest rates, balance sheet expansion and outrageous deficit spending trying to cover up their own internal corruption and willful refusal to enforce the law that led to the 2008 market collapse when, not if, the market manages to tip one or more of these institutions “over the edge of the cliff” there will be no ability to stop the cascade of defaults and bank failures.
This is the legacy of our government on both sides of the aisle and will be written in the history books as the root cause capital market implosion that appears at this time to be utterly inevitable – not because we can’t stop it but because our government refuses to hold the responsible parties accountable for both their actions and intentional inactions.