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Archive for the ‘Bank Failures’ Category

The Federal Reserve has been going back and forth with reporting from Bloomberg regarding the massive bailouts and loans made to the financial sector during the crisis.  What is rather astonishing is the ability to discuss trillions of dollars of loans made to largely irresponsible financial institutions with absolutely no oversight.  Like an angry couple on Maury Povich, only an objective outsider can see how dysfunctional the relationship has become.   All of this happened in the shadows.  What is more astonishing is a large amount of questionable assets that were shifted from bank balance sheets are still sitting comfortably in the balance sheet of the Federal Reserve.  This is not disputed.  Profits at banks are on the rise but it is hard to lose money when you have unlimited access to taxpayer bailouts and the ability to dilute the currency of the nation.  U.S. banks hold $9.7 trillion in deposits with a FDIC Deposit Insurance Fund (DIF) that currently has $7.8 billion.  Do the math on that one.

A glance of U.S. banking data

Here is a nice snapshot of U.S. banking data:

Source:  Bank Tracker

What is the most amazing fact is that over $9.7 trillion in deposits is backed by a measly $7.8 billion.  This is like trying to stop a hurricane with a paper napkin.  Most Americans are earning virtually nothing on their deposits at banks but what other options are available?  Should they enter the highly volatile and opaque stock market?  When a typical savings account is paying close to 0 percent it is hard to digest but the volatility of the stock markets for this entire year have rendered a nearly neutral result.  Even money market accounts have fallen strongly since the recession hit:

“The typical money market account is down over 80 percent since 2006.  It isn’t like inflation has suddenly disappeared or that our debt problems have gone away like dust in the wind.  To the contrary the economy has gotten much more mired in a stagnating funk.”

Banks are back at making profits but it is hard to lose when you have unlimited taxpayer bailouts:

Source:  FDIC

While the Federal Reserve was trying to cast doubt on the results published by Bloomberg, they failed to address the massive amount of “assets” that remain on their balance sheet.

Read the rest at My Budget 360

A 3,000 to 1 shot, Wall St. took it, collected billions in
bonuses, blew it and you paid for it.

Before 2008, how Too Big to Fail Banks’ hidden
3,000 times leverage rigged the Real Estate market and defrauded EVERY mortgage
borrower and many others…

This article disabuses the notion that “deadbeat borrowers” caused the financial crisis.  And offers an  answer to the question that still lurks in the mind of every American; whether black, white, native American, asian or  Hispanic; whether educated or not; whether English, Spanish, or Mandarin speaking.

Taking a big step back, and looking at it like a business process:  “How could so many Americans ALL have made the same ill-advised mortgage borrowing decisions?”  The answer lies in what did they ALL have in common…

It was all about leverage

What is leverage?

Leverage is a way to control more of something when you can’t pay for it in full.  We do it all the time; when we buy a car – except few of us actually buy the car, we finance it or lease it.  We also do it when we buy a house – except almost no one pays cash for a house, we finance the purchase with a loan; it’s secured by a mortgage on the property.

Example of 5 times leverage:

When we buy a house and put 20% down, we buy a house worth 5 times as much as the down payment.  If we put $100 thousand down we can buy a house worth $500 thousand.  $500 thousand divided by the $100 thousand we put down equals 5 times leverage.

100 times leverage:

By the same calculation ZERO down mortgages were suffice it to say, 100 times leverage, it’s actually more but that’s a discussion for later.   Repeat after me, no money down mortgages equal 100 times
leverage.

(Click for Sharper Image)

Who controlled and approved EVERY leverage decision?

Leverage Approval #1 by:

TBTF Banks (ultimately) approved every one of these loans and bundled thousands of others like them initially into mortgage backed securities (MBS).

Leverage Approval #2 by: [the key, little known fact]

In the past, TBTF Banks used to sell them off (remember that word) to investors like mutual funds, insurance companies and pension plans.  In the 2000’s TBTF banks issued almost $17 Trillion of MBS, but did not sell all of them OFF to 3rd parties.  They held massive amounts of them to turbo-juice their bonus checks in a 2nd set of books (legally) in OFF balance sheet, special purpose entities.  As a refresher Enron did the same type of thing.

In the decades, make that for over 60 years before the 2000’s TBTF banks’ leverage was around 12 times; however when they concealed trillions worth of MBS – their leverage increased to over 30 times.

Remember 5 times leverage?  It was based on how much the house was worth right?

And when TBTF banks add more leverage on top of the borrower’s leverage we don’t just add it – we ______? You guessed it – we multiply it.

3,000 times leverage on house prices:

100 times leverage on the borrowers side times 30 times leverage on the TBTF banks’ side is 3,000 times leverage ON house prices.

Lather, rinse and repeat – 100 times 30 equals 3,000 times leverage.  Lather, rinse and repeat

100 times 30 equals 3,000 times leverage.

Remember what I first told you about leverage?

Leverage lets you (or TBTF bank) control something that you can’t fully pay for.  Well the TBTF
banks’ way of financing them in the Asset Backed Commercial Paper market began to dry up in August 2008, so they couldn’t pay for these assets.   This is the direct cause (but not the root) for the Fed and US Treasury to (have to) step in and pay CASH for them in the bailouts of 2008, and again in 2009, and again in 2010 and yet again 2011 via the Fed’s QE trifecta to the tune of over $20 Trillion dollars.

The interactive portion is about to begin:

Is it any surprise that the assets backing the commercial paper were ________? You may have guessed it – MBS.

Is it any surprise that the Fed created a new category to track ABCP in_______? You would be correct if you guessed 2006; just two swift months after Ben Bernanke was appointed chairman of the Federal Reserve by President Bush.

Is it just a random coincidence that almost $17 Trillion of Mortgage Securities were created by TBTF banks from 2001 to 2008?

What was that word I asked you to remember?

Oh, right it was OFF.

When TBTF banks’ CEOs, executives or prop traders got their year end bonus check did we hear reports that anyone said it was OFF (or that it was too much)?  Nope.

Yet even the erudite, indeed veritable student of the Great Depression, Chairman of the Federal Reserve, Ben Bernanke in October 2007 was unaware of (just a few days after the stock market peaked at 14,087 as measured by the Dow Jones Industrial Average) what the TBTF Banks were really up to when he entertained the NY Economic Club.  See “One year, One Trillion Dollars; the education of Ben Bernanke 2007 to 2008…” Fiduciary in thought and action: One year, one Trillion dollars; the education of Ben Bernanke from 2007 – 2008…(since there appeared no news report that any of the luminaries of the NY Economic Club questioned Mr Bernanke we assume they all understood and agreed with his distinguishing point.  I only wonder was that before or after they might have cashed a bonus check based on…LEVERAGE.)

Yup and we paid for it then and continue to pay their salaries, benefits like paid vacations, health care (non-taxable) even now – silly us.

The top 12 reasons + one

TBTF banks, before 2008 created a hidden, secret “market” for MBS:

1. As stated above TBTF banks changed from financial intermediaries into speculators via their proprietary (for the house only) trading desks;
2. Hiding (the FDIC used the word “concealed”) trillions of MBS off balance sheet;
3. Allowing their own internal prop traders to value #2  (legal under the SEC’s 2004 Consolidated Supervised Entity (CSE) program) despite the fact few if any, of #2 had EVER seen the light of any “market” trade as one between arms-length parties;
4. Why? To maximize same prop traders’, managers’ and CEOs’ cash bonus checks;
5. All based on the assumption (almost a religious belief) that national median home prices had NEVER gone down – true, as you may recall;
6. BUT the past was under a 60 times house finance, prudently underwritten leverage regime (20% down payments, verified job, income, assets and 12 times bank balance sheet leverage);
7. TBTF Banks’ single handedly created 3,000 times leverage on house prices, the underlying collateral of any MBS, CDO, etc.;
8. 3,000 times leverage is the product of Zero down loans; 100 times leverage for the borrower and 30 or more times TBTF bank on and off balance sheet leverage;
9. Mr Bass testified to the FCIC in January 2010 that TBTF banks’ leverage at the end of 2007 – yes end
   of 2007 (see page 13) shows almost all TBTF Banks were over 30 times, Citigroup at 68 times leverage; meant an adverse swing (in the value of the underlying collateral or obligations) of as little as 1.5% wiped them out completely – insolvent;
10. And we know that leverage worsened in 2008…and we know from Goldman Sach’s 2007 to 2008 collateral call dispute with AIG that MBS valuation marks (not even CDO’s) were south of 90;
11. It’s not about Fannie or Freddie either; they were downstream of information from the TBTF banks – again TBTF banks held trillions of MBS, in secret OFF balance sheet; I’m not saying it was necessarily illegal but it was fraudulent; as it was knowing, willful and intentional fraud upon the other side to the mortgage – the borrowers. And it only went on as long as it did – BECAUSE they were hidden;
12. And we know it’s not about CRA as home ownership peaked in 2004 nor can we blame it on the variant of “homeownership for all” as just a few too many houses were not primary residences but 2nd, 3rd, 4th and 5th homes and condos – each time the loan was approved (ultimately) by TBTF banks;
13. Last, 3,000 times leverage on home prices represents a 50 fold increase over the 60 times historical norm; more importantly shows that TBTF Banks’ violated requirements of their banking charters; i.e. to operate according to “safety and soundness”.

*Except borrowers who falsified their loan apps.

How could EVERY American mortgage borrower ALL have made the same mistake?

1)  Every mortgage loan was (ultimately) approved by?

2)  Every mortgage loan was securitized by?

3)  Massive amounts of securitized loans were held for speculation by?

4) Thousands of off balance sheet and or off shore entities were created by?

5)  Massive amounts of #3 were held off balance sheet by?

6)  The 2004 SEC CSE program was lobbied for by?

7)  Models, not markets were used to value off balance sheet holdings by?

8)  Hundreds of billions of customers’ money market funds  were diverted to affiliated banks known as industrial loan companies by certain?

9)  Massive dollar amounts of leverage were employed by?

10) Massive (greatly increased by hidden leverage) bonus checks were paid by?

11)  Assets held off balance sheet were not timely, fair valued by?

12)  Massive amounts of Fed and US Treasury aid were received by?

13)  LSD used by?

* TBTF Banks on LSD indeed; massive amounts of Leverage, Swaps and Derivatives.

A “Financial Crisis” approved, securitized one loan at time and brought to you by your friendly neighborhood TBTF Bank on LSD; one they prefer to still keep secret…

By the way, there was no need to create vast bodies of new laws except to require all securities and derivatives to trade on open, disclosed markets with independent clearing agents; just like stocks have traded on the NYSE for decades.

Chris McConnell AIFA®, Accredited Investment Fiduciary Analyst™ - is an expert on the securities industry and markets with over 28 years experience dealing with accounting, leverage and compensation issues.  He has an economics, accounting and fiduciary background.  McFid, BFD Expert™ since 2003.  To visit his website Fidiciary Forensics.

Author’s Note: 3,000 times leverage is an estimate as not all mortgages were zero down; just several million too many; not to mention “every app was approved” underwriting.  But we do know that 60 times leverage (on house price) was the norm for decades; also called safety and soundness; and we also know that TBTF banks’ leverage, assuming their year end 2007 marks were accurate, when the 2007 to 2008 Goldman AIG dispute timeline triangulated with Mr Blankfein’s 2010 testimony to the FCIC suggests otherwise, are understated – correct understated.  And we know that marks worsened (and caused leverage ratios to increase in 2008).  Again, the pressing need for CASH infusions from the Fed, UST in 2008/9, and kinder, gentler accounting treatment courtesy of the SEC/FASB

Discussion (registration required to post)

Well now Moody’s has gone and done it.

They just hit BAC, C and WFC with downgrades, saying that the government is “more likely” to allow a large bank to fail if they get in trouble.

This belies the truth, which is that the government doesn’t have the capacity to bail out a trillion-dollar boondoggle any more.  There’s no way to get another TARP through Congress and there’s no back-door way to fund it either.

So Moody’s is correct, in a round-about sort of fashion.  Let’s not conflate desire with capacity, eh?

The entire banking sector took an instant dive on that, with BAC now down more than 5% and Wells, which was up, back to even.

Bank of America’s insular, CEO-blowing board needs to do some firing in the executive suite.  May I suggest a Howitzer for the means of that “firing”?

Frankly I’m not sure it matters at this point.  Countrywide was a monstrous mistake, and a very expensive one on top of it. Tangelo should have been peeled in 2008 if not before rather than riding off into the sunset with a civil penalty that Bank of America paid a huge chunk of. Nobody seems to care much about the fact that all of these banks have been implicated in various schemes and frauds related to foreclosures – not that this is new, of course, in that they did the same thing on the way up with appraisals and similar, blacklisting honest appraisers and essentially demanding overvaluations to “support” their reckless lending.

Now let’s add to that: Nevada is apparently preparing to criminally charge some of these institutions.  That’s not sue, it’s prosecute.  We don’t yet know who the targets are but this will mark the first actual criminal indictments of note should they actually appear.  For my part I’m not going to believe it until I see it, considering how overdue such an action is in the context of anything even lightly-related to the concept of ”justice.”

Are we finally going to “Stop the looting and start prosecuting”?  Hope springs eternal.

Here’s the rub, when you get down to it:  Every one of these institutions should have been a zero in 2008 and the executives should have been brought up on indictments.  As such the alleged “value” in these firms is nothing more than government support for the same sort of business model as Full Tilt Poker is accused of – that is, claiming value in assets that does not in fact exist, relying on the belief that everyone will not show up and demand their money at the same time.  Proof of this is readily available every day in the market in that these firms are selling at a fraction of their claimed book value; if there was anyone who believed that the accounting was honest they’d instantly buy the firm in question as that would be fastest and most-certain money ever made in M&A.

That it hasn’t happened is all the proof you need that the accounting is absolute and utter crap.

Oh Mr. Buffett?  How’s your position in BAC working out?

Oh boy….

The European banks include French lenders Societe Generale , Credit Agricole and BNP Paribas .

“Apart from spot trading, all swaps and forwards trading (with the European banks) have been stopped,” one source who is familiar with the matter told Reuters.

The question is this: How much flow are we talking about here?

This is either a nothing or it’s a precursor to a really, really big…

Which is it?  I don’t know.  But the banks over in Europe this morning, especially BNP, are acting like it’s the “Big Bada-Boom” that’s inbound – right now.

The lack of transparency and demonstrated willingness to lie – including, in fact, European ministers openly stating that when things are bad you have to lie – is a huge problem.

There are many who claim that we can “ward off” crisis with the ECB and such stepping in to “save” people “as required.”  The fact of the matter is that we’re right back where we were in the 2007/08 mess when it became clear that lending people money who you know can’t pay you back is not a sustainable business model.

How long will we continue to play this game where we have 2% moves in the market in the space of hours or minutes and “contagion” continues to percolate while investor confidence is decimated?  Eventually this sort of volatility and the plethora of lies results in a bid collapse into one of those volatility spikes.

This is not how you get a market decline — it’s what generates crashes.

There is only one solution: The truth.  It involves acceptance of pain, which nobody is willing to do in the present tense, yet there is no way around it.  The longer we play “extend and pretend”, the more we lie and the longer the games go on the worse the situation becomes both here and abroad.

We in fact learned nothing from 2008 – we simply gave a bunch of whining children on Wall Street that had just smashed their fingers with a hammer a candy bar, and we didn’t even have the dollar to buy the candy with.

Here we go again:

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.

Right?

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.