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Archive for the ‘FDIC’ Category

The FDIC has a herculean challenge in confronting the too big to fail banks.  There is little doubt that having institutions that are too big is part of the reason for the current systemic crisis.  Yet through the last few years the solution has been to make these banks even bigger allowing their web to spread even further and deeper into the economy.  The FDIC has an insolvent Deposit Insurance Fund (DIF) backing up $13 trillion in banking assets.  And what the banks call assets is simply stunning.  Bank of America for example has $2.3 trillion in assets (or a larger amount than the annual GDP of California).  Yet 41 percent of the assets are backed by loans, predominately real estate loans.

Let us take a look at the breakdown of the $2.3 trillion:

Source:  Bank of America mid-year report

I’m not sure if the public realizes that banks can label loans as assets based on accounting rules.  This would be like calling your auto loan an asset but keep in mind an asset to you is likely a liability to a bank. How many loans are still priced at peak levels here?  Bank of America currently has a market cap of $132 billion.  Let us assume that the loan portfolio is overvalued by 15 percent.  That means we are talking about an overvaluation of $143 billion, enough to wipe out the current market cap.  The current structure of the system is to pretend that the assets in the too big to fail banks are still somehow worth more than what the market will pay.

It is interesting given the current foreclosure moratorium crisis to see where Bank of America dominates:

Bank of America is the number one deposit bank in California and Florida where the biggest bust of the housing market is taking place.  Bank of America has $817 billion in total deposits at their institutions:

Source:  FDIC

Here is where you can see why the pretend game is virtually the only way out at least from the perspective of the banking system.  How in the world will the FDIC insure $817 billion in deposits if they have an insolvent DIF?  Where will the money come from?  If you guessed the taxpayer you would be right.  So in essence the FDIC is merely the intermediary right now between the too big to fail banks and the taxpayer.  It is interesting that in the last few weeks bank failures have slowed down yet the troubled bank list keeps growing.

And Bank of America is only one of many of the too big to fail banks out there:

$7.4 trillion in deposits are in FDIC insured banks.  All this is being backed up by faith and confidence in the system.  This is similar to how banks claim their “assets” are worth more than what the current market will pay for them.

It becomes apparent why none of the too big to fail banks has been taken apart.  The current mechanism in place simply is unable to handle even one bank.  Yet this is absolutely necessary.  Otherwise, the banks will merely get bigger and we will have a bigger crisis down the road.  Nothing will be averted just by keeping the current system in place.  As we are seeing with the negligent work on foreclosure paperwork these banks are unable to gain the confidence of the public.  These are the same banks that charge billions of dollars in overdraft fees and sock customers with charges from every angle.

Yet it might appear that the calm on the FDIC front means something is starting to brew:

“Oct. 8 (Bloomberg) — The Federal Deposit Insurance Corp. has authorized lawsuits against more than 50 officers and directors of failed banks as the agency aims to recoup more than $1 billion in losses stemming from the credit crisis.

The lawsuits were authorized during closed sessions of the FDIC board and haven’t been made public. The agency, which has shuttered 294 lenders since the start of 2008, has held off court action while conducting settlement talks with executives whose actions may have led to bank collapses, Richard Osterman, the FDIC’s acting general counsel, said in an interview.

“We’re ready to go,” Osterman said. “We could walk into court tomorrow and file the lawsuits.”

Time to get some of the money that was made by the banks during the crisis and regain some of those ill gotten profits.  These banks were bailed out by the taxpayer and have done nothing but enrich their bottom line while the middle class has been dismantled over the last decade.  It seems like the public is finally wising up to the key culprit of the crisis here.

My Budget360

The FDIC has only brought one case to date against executives of failed banks. Supposedly more charges are coming.

Bloomberg reports FDIC May Seek $1 Billion From Failed-Bank Executives

The Federal Deposit Insurance Corp. has authorized lawsuits against more than 50 officers and directors of failed banks as the agency aims to recoup more than $1 billion in losses stemming from the credit crisis.

The lawsuits were authorized during closed sessions of the FDIC board and haven’t been made public. The agency, which has shuttered 294 lenders since the start of 2008, has held off court action while conducting settlement talks with executives whose actions may have led to bank collapses, Richard Osterman, the FDIC’s acting general counsel, said in an interview.

“We’re ready to go,” Osterman said. “We could walk into court tomorrow and file the lawsuits.”

The FDIC, which reviews losses for every bank failure, has brought only one case against officers or directors tied to recent collapses — a suit filed in July seeking $300 million in damages from four executives of IndyMac Bancorp Inc.

The FDIC “brings suits only where they are believed to be sound on the merits and likely to be cost-effective,” according to an agency policy statement that dates from the savings-and- loan crisis of the 1980s. That requires considerations of whether an individual, if sued, has the means to pay or an insurance policy to cover all or part of the claim.

“It doesn’t make sense to file a lawsuit if at the end of the day you have a low chance of recovery,” Osterman said.

“It’s in both our interest and theirs to try and settle this matter before it gets into the court and we get into expensive litigation,” he said.

Political Stunt to Placate the Public

I see this as little more than a political stunt to placate the public. These cases are unlikely to go to trial, on purpose, and not for the reason the FDIC says.

The FDIC does not want to rattle the banking system, so they won’t. Instead they will settle most if not all of these cases for peanuts.

To make it look legit, the FDIC might pursue a couple of scapegoat cases, IndyMac being one of them, but don’t expect anything more.

Criminal Fraud

“In the IndyMac case, executives are accused of granting loans that were unlikely to be repaid while seeking to benefit from the bank’s compensation structure.”

Excuse me but why isn’t this criminal fraud?
Why isn’t the SEC involved?

I believe all the executives from Dick Fuld on down are guilty of fraud. Indeed, there is a huge list of those who should be prosecuted for fraud.

Running List of Needed Criminal Investigations

It’s time to update my rolling list of who should be criminally indicted and why.

April 29, 2010: Barofsky Threatens Criminal Charges in AIG Coverup, Goldman Sachs Abacus Deal, TARP Insider Trading; New York Fed Implicated

April 16, 2010: Rant of the Day: No Ethics, No Fiduciary Responsibility, No Separation of Duty; Complete Ethics Overhaul Needed

March 2, 2010: Geithner’s Illegal Money-Laundering Scheme Exposed; Harry Markopolos Says “Don’t Trust Your Government”

January 31, 2010: 77 Fraud, Money Laundering, Insider Trading, and Tax Evasion Investigations Underway Regarding TARP

January 28, 2010: Secret Deals Involving No One; AIG Coverup Conspiracy Unravels

January 26, 2010: Questions Geithner Cannot Escape

January 07, 2010: Time To Indict Geithner For Securities Fraud

October 20, 2009: Bernanke Guilty of Coercion and Market Manipulation

July 17, 2009: Paulson Admits Coercion; Where are the Indictments?

June 26, 2009: Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America “Turd in the Punchbowl”

April 24, 2009: Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis

We can safely add IndyMac and countless other bank executives to the list.

Token Search for Low-Profile Scapegoats Continues

To date, in spite of the myriad of possible targets, and even some threats from Barofsky and others, we have seen no real action. So why should we expect this to be any different?

At best, all we are likely to see is a token search for a couple of relatively low-profile scapegoats, and those will be settled out of court for peanuts, with bank executives laughing all the way.

Addendum:

In response to the post, Janet Tavakoli pinged me with a one line comment: “Angelo, Angelo, Angelo…Lloyd, Lloyd, Lloyd….Jamie, Jamie, Jamie”

Without a Doubt

In case you do not recognize the above by first name, here they are…

Angelo Mozilo – Former CEO Countrywide Financial
Lloyd Blankfein – CEO of Goldman Sachs
Jamie Dimon – CEO of JPMorgan Chase

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

It was interesting to see the spin regarding the FDIC quarterly report this week.  The report was largely a reflection of the way we now categorize profits in the banking system.  Banks made a nice amount of profit through trading securities (on bailout leverage) while at the same time cutting back the amount of capital available to the American public.  The number of institutions decreased by 104 but interestingly enough, the number of employees grew in this sector.  Why?  The too big to fail banks are simply getting bigger and stepping in where other smaller banks have failed.  The amount of assets held at the 7,830 institutions is a stunning $13.2 trillion and who really knows if it is even that amount.  To a bank, a loan is an asset and with mark to market suspended they can value these things at absurd bubble level prices.

Let us look at some key details in the report:

Source:  FDIC

First, you’ll notice that the amount of assets backed did decrease by over $100 billion.  If the economy is supposedly growing, you would expect this number to increase as well.  Next, you will see the incredible amount of commercial real estate and industrial loans (this is the bailout that is currently occurring but the government and banks don’t want you to know about).  How can an industry that has lost 104 institutions add employees?  Simple, when you have the U.S. Treasury and Federal Reserve bankrolling your finances you have more capital.  Over 95 percent of all mortgages made this year are backed by the Federal government so why do we even need banks serving as middlemen here to skim additional profits?  Why not let the public borrow directly from the government for say a 30 year fixed mortgage?  The underwriting is already computerized and IRS data is already in the government’s hands (heck, at least you’ll know the government will check this as opposed to the no-doc fraud of the too big to fail banks).  Either way, the report is more of a reflection of banks not realizing losses and pretending all is well.

The big 4 banks control a large amount of banking assets in the system:

So even though we have nearly 8,000 banks, the bulk of the assets sit with a small number of banks.  I’m not sure why the report was spun as being good especially when the Deposit Insurance Fund (DIF), the fund that backs the assets of the banks is actually in the red for $15 billion:

This is the fourth consecutive quarter of it being in the red yet it is perceived as being good.  Keep in mind that this also has to do with programs like HAMP and also CRE delays because banks are basically ignoring bad loans with these stop-gap measures so this helped here.  After all, if you didn’t have to recognize the actual value of an asset then you can still claim the inflated price and boost your assets.  For those that were pushed into HAMP, banks were able to shift toxic loans onto the taxpayer bill.  As we now know, over 50 percent of these loans re-default so instead of them going bad on the bank’s books, they will now go bad and the taxpayer will have to cover the entire bill.  The FDIC report title should have included “shell game” somewhere.

Banks also are making a tremendous amount of money through their security divisions:

Banks have increased their securities gains by 345 percent in the last year.  Charge-offs are up because in the real economy, middle class Americans are having a tough time paying bills with such a weak economy.  Banks continue to speculate on Wall Street and make money with taxpayer leverage.

Solutions?

We all accept that banking is a necessary part of the economy.  Yet no other industry has the ability to pause accounting rules to suit its needs or has such control over the government.  There is a deep need to separate commercial and investment banking.  Since the Great Depression, we have seemed to avoid falling into another major economic calamity for over 60 years.  Yet as time went on, regulators were thinned out and regulations were stripped away.  Each crisis progressively got bigger.  So today, we now have a crisis that is the largest since the Great Depression but banks have learned well from that time.  They have learned how to mitigate public anger by pumping out propaganda (i.e., if you don’t bail us out we won’t make loans etc) and at the same time have consolidated power in the hands of a few banks.

Commercial banking should be treated as a utility.  We all need banking and banks wouldn’t survive without the government.  So there is a social contract here.  Liken this to water, electric, or any strictly governed industry.  This component should include mortgages (95 percent are already government backed), debit cards, checking, savings, and credit cards.  Since these industries are protected by government and taxpayer money, they should be incredibly over regulated and have a strong enforcement branch protecting consumers.  People will point to Fannie Mae and Freddie Mac as big failures.  Well who was doing the gate keeping?  The banks.  After all, you can’t go to the corner to get a Fannie Mae checking account.  But all the big banks including BofA, JP Morgan, Wells Fargo, and Citi currently pump out mortgages that are backed by the government.  We seemed to do well for many decades when banks made these loans but under strict underwriting (i.e., big down payments, income verification, etc).

The other part should be the investment banking component.  If banks want to leverage their own capital in the stock market and operate like hedge funds, so be it.  But absolutely no bailouts no matter what.  The example that is currently set is basically that if you become too big, the government will bail you out no matter what.  And why do you think the number of smaller banks are disappearing all the while bigger banks are growing?  This is the current reward system.  Until this changes, you can rest assured another gigantic bailout is around the corner.  After all, no one saw the flash crash day in May coming and we still have no explanation for it.  Dose that instill confidence in the banking system or even our capital markets?

My Budget 360

By the end of the recession, there will be approximately 1,000 bank failures.  Does this sound extreme?  It should but the numbers don’t cover the entire story.  Since 2008 the number of bank failures has reached 269 and this doesn’t include consolidations done through the FDIC where bigger banks ate up smaller banks before they officially failed.  Last week, 7 banks failed.  At that pace, we are looking at 364 bank failures per year and the actual number of closings per week has consistently gone up.  The FDIC is in a precarious situation.  The Deposit Insurance Fund (DIF) is technically speaking, broke.  They have added additional cash reserves by front loading premiums on surviving banks but this can only stunt the financial bleeding for so long.  The problems in the banking system run deep and many of the smaller regional banks are failing because of commercial real estate loans going bad.

Here is the actual weekly trend of bank failures:

Source: FDIC

The trend is unmistakable.  The worse offending states are as follows:

Georgia:          40

Illinois:                        34

Florida:           34

California:       27

These four states make up 50 percent of all bank failures since the crisis started.  The current policy and momentum seems to be with banks ignoring balance sheet problems until they are no longer able to hide the dirt.  The too big to fail banks have already been chosen by the government and the rest will need to deal with the new economic landscape.  The FDIC, the seal of confidence and strength dates back to the Great Depression:

It is a game of confidence that we have increased the actual amount of deposit insurance to $250,000 from $100,000 at a time when the actual insurance fund is negative.  You would think that something this problematic will cause for a sense of urgency but the government is giving the FDIC until 2020 to get this fixed:

“WASHINGTON (MNI) – With the passage of the Dodd-Frank Act, the Federal Deposit Insurance Corp. will now have until the end of September 2020 to bring its reserve ratio to the statutory minimum of 1.35%, rather that 1.15%.

This is more than the eight years provided under the current Restoration Plan that would have given the FDIC only until the end of 2016 to bring its reserve ratio to 1.15%, an FDIC spokesman told Market News International Wednesday.

The latest projections presented at a Board meeting in June, indicated agency did not expect to meet that deadline.”

While the government gives the FDIC until 2020 to get their house in order, this is how the deposit insurance fund is looking:

This is the third consecutive quarter in the absolute red.  The banking system is starting to look like an imploding ponzi scheme and Wall Street is capitalizing on this vulnerability.  How?  If you were a big time investor would you invest in a too big to fail bank that may be performing poorly but has full government support or a smaller well run bank that has no support at all?  The incentive is not necessarily with the best performing and that is usually a staple of a well run capitalist system.  We are not operating in a capitalist system but a corporate oligarchy based on political connections between Wall Street and D.C.  This kind of system has been prevalent for decades now and crosses both political parties.

As the FDIC digs deeper into a hole, the number of problem institutions grows:

Keep in mind that the above list also fails to catch many of banks that do fail.  It isn’t exhaustive.  So even just looking at the above, we already have the 1,000 banks that will fail.  And the problem of course is how the current banking system is structured.  We have close to 8,000 FDIC insured banks but in reality, a very few control the bulk of the assets:

The top 4 banks of Bank of America, JP Morgan Chase, Wells Fargo, and Citibank make up 55 percent of all banking assets.  Then there is another tier of roughly 100 banks that eats up another 20 to 25 percent of assets.  So you have some 7,800 banks basically fighting for the remaining scraps.  The FDIC is in deep trouble going forward and this means we are in deep trouble.  The taxpayer is on the hook for the bill.  The U.S. Treasury already extended a lifeline of $500 billion to the FDIC “in case” they need the money.  Looking at the above data do you think they are going to use that lifeline?  It is only a matter of time.

My Budget360

Last Friday seven more banks failed bringing the total bank failures to 103.

U.S. bank failures this year have surpassed a bleak milestone of 100 as regulators shut down banks in Georgia, Florida, South Carolina, Kansas, Nevada, Minnesota and Oregon.

The seven bank seizures announced Friday bring to 103 the failures so far in 2010. The pace of bank closures this year is well ahead of that of 2009, which saw a total of 140 banks shuttered amid the recession and mounting loan defaults. That was the highest annual tally since 1992, at the height of the savings and loan crisis.

The number of banks on the FDIC’s confidential “problem” list jumped to 775 in the first quarter, from 702 three months earlier, even as the industry as a whole had its best quarter in two years.

More Failures Coming

The FDIC is now deep in the red and the situation is getting worse every week. The situation would be even worse were it not for widespread “extend and pretend” tactics that keep woefully insolvent banks in business.

FDIC Shell Game To Hide Bad Assets

To address the situation, the FDIC is going to start selling U.S.-guaranteed FDIC senior certificates. However, it has no Congressional authority to do so according to former thrift regulator William Black.

Unlimited Taxpayer Bailout

Black claims an “unlimited taxpayer bailout” of the FDIC is on the way.

Barrons discusses the situation in Uncle Sam Rides Again: Banking on a Bailout?

BEFORE THE FINANCIAL CRISIS is unwound, the Federal Deposit Insurance Corp. expects to have taken over some 300 failed banks. The rapid closures have drained the agency’s cash reserves.

The FDIC must sell assets to continue the closings. It has about $37 billion of bad-bank assets to sell, but the stockpile would bring only 10 to 50 cents on the dollar.

Enter the FDIC’s Securitization Pilot Program, the sale of U.S.-guaranteed FDIC senior certificates. This enables the FDIC to push much of the losses off its books, thanks to the U.S. guarantee of principal and interest. The program starts with a $500 million issue.

“They aren’t really selling the bad assets. They’re selling the equivalent of a Treasury bond without congressional approval,” says William Black, a former thrift regulator. “It hides the economic substance of what’s really happening—an unlimited taxpayer bailout.”

The FDIC contests the characterization, saying it doesn’t expect a claim on the guarantee because of an equity cushion to absorb the losses, and the use of only performing mortgages in the pools. The agency says a lot of resources stand between it and the taxpayer.

Foot in the Door Ploy

Notice how the $500 million start gets the FDIC foot in the taxpayer’s door. At some point Congress will probably grant authority to the FDIC just as the Fed got unlimited funding for Fannie Mae.

President Obama and the Democrats are making matters worse by permanently upping the FDIC limit to 250,000 in the financial reform legislation that just passed.

Moral Hazards

FDIC is a moral hazard. Many banks that failed were able to stay in business because of taxpayer deposits at above market rates. For example, no one in their right mind would have had deposits at Corus Bank, a bank with many troubled loans to Florida and Nevada condo developers.

Corus bank would have failed long before it did, without the FDIC guarantee. Not only was the bank able to attract funding by offering above market rates, Corus contributed to the enormous property bubble in Florida and other places.

Instead of preventing risky bank practices in the first place, or upping the insurance rate on risky bank practices to cover excessive risk, the FDIC is about to get an unlimited taxpayer sponsored bailout by selling U.S.-guaranteed FDIC senior certificates, even though it has no authority to do so.

FDIC Legacy

As a result of the inept policy decisions by the FDIC, instead of having small bank failures widely spread out over time, we have had concentrated bank failures in a short period of time.

Taxpayers will be the ones to pay the price. This is the legacy of FDIC and its failed moral hazard policies.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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FDIC next government trillion dollar bailout? Since January of 2000 to October of 2007 we had 27 bank failures. From January 2008 to May 2010 the FDIC has closed down 237 banks. Why 1,000 bank failures will occur before the Great Recession is over.

Posted by mybudget360

The Federal Deposit Insurance Corporation (FDIC) will be the next billion and possibly trillion dollar government bailout.  We have the FDIC that insures over 8,000 banks with an insurance fund that is in the negative.  From 2000 to October of 2007 only 27 banks were closed down by the FDIC.  Nearly eight full years and 27 banks were shut down in the face of epic gambling from the banking industry.  Since the recession started, the FDIC has closed down 237 banks with more to come.  Without a doubt, given the enormous amount of bad debt and commercial real estate loans we will have 1,000 bank failures by the time this recession is over.  Is this so hard to envision?  In April, 17 banks were closed and so far in May, 15 banks have seen their doors shut.  The rate of bank failures is increasing.

Why will this happen?  Because there are at least 763 more banks that are full to toxic waste in the U.S.:

Even the FDIC has 700 banks on their troubled institution list.  Keep in mind failures like WaMu and IndyMac which cost billions of dollars weren’t even on the initial list.  The issue at hand is you have 4 banks that dominate 55 percent of all banking assets:

We already know that the government is unwilling to break up these banks in an orderly fashion.  But the other 8,000 banks don’t have this guarantee.  In fact, if you look at this from a corrupt banking perspective, a giant amount of bank failures is good for these few gigantic banks.  Customers will have less banking options and will have to rely on a tiny group of banks that run like monopolies.  This will provide a fertile ground for anti-competitive practices and will result in unfriendly consumer products in the end.  We’ve already seen that.  These bailouts simply help to consolidate power and transfer wealth to a select few in the economy.

Then on the other hand, you have the FDIC spending millions if not billions each week closing down banks.  We are told that the FDIC is completely solvent.  But at this rate it will be broke rather soon (the DIF is already negative although they have a bit more in cash reserves by front-running premiums for years to come).  Don’t think this will happen?  Here is irony for you; the FDIC which insures banks needs insurance from the U.S. Treasury:

“(FDIC) Chairman Bair distinguished the DIF’s reserves from the FDIC’s cash resources, which included $22 billion of cash and U.S. Treasury securities held as of June 30, as well as the ability to borrow up to $500 billion from the Treasury. “A decline in the fund balance does not diminish our ability to protect insured depositors,” Chairman Bair concluded.”

You know exactly where this is heading.  Why put that $500 billion figure out there?  Why not $20 billion or $50 billion?  If we’ve learned any lesson with Fannie Mae and Freddie Mac or AIG is that Wall Street will raid the taxpayer for every penny they have and use supposed government entities to dump their junk onto the public.

Consider the two giant GSEs for a moment.  You hear Wall Street berate these companies but banks would have zero mortgage market if it wasn’t for them.  Wall Street investment banking is a giant group of crony welfare capitalist that is anti-competitive and has perverted the current economy.  I read current articles on how some people are surprised of the current market volatility.  What do you expect?  27 months of the worst recession since the Great Depression and no fundamental change has happened in the way Wall Street conducts business.

The DIF at the FDIC is in the red:

“(FDIC) The Deposit Insurance Fund (DIF) balance improved for the first time in two years. The DIF balance – the net worth of the fund – increased slightly to negative $20.7 billion, from negative $20.9 billion (unaudited) on December 31, 2009. The fund balance reflects a $40.7 billion contingent loss reserve that has been set aside to cover estimated losses. Just as banks reserve for loan losses, the FDIC has to set aside reserves for anticipated closings. Combining the fund balance with this contingent loss reserve shows total DIF reserves of $20 billion. Total insured deposits increased by 1.3 percent ($70.0 billion) during the first quarter.”

This is the latest press release for Q1 of 2010.  It has gotten worse.  In one week in Q2 the FDIC had to pay out roughly $7 billion on 7 bank failures in one week.  You know where this is going and everything has become one giant bailout.

FDIC insured institutions have assets of $13 trillion.  We have $3 trillion in commercial real estate loans and many banks are valuing these loans at optimistic day prices that were up to $6 trillion at their peak.  Just with CRE we will see at least $1 trillion in losses.

Gear up for another taxpayer bailout although the U.S. Treasury and Federal Reserve don’t even have the money for that.