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Archive for the ‘Federal Deposit Insurance Corporation’ Category

Banking in darkness – FDIC system insures over $7 trillion in deposits with a dwindling insurance fund.  Americans are offered close to zero percent interest rates to stuff their money into this banking vortex.

The American banking system is based on pure faith.  Usually when the topic comes up in conversation I will ask someone if they know what backs the green cash in their wallet.  One of the common responses is “there is gold in Fort Knox” or another typical response is that it is backed by U.S. assets.  Unfortunately both of these answers are incorrect.  In fact all of our money deposited in the banking system is backed by the pure faith in our U.S. government.  Now for decades this implicit belief was fine because we actually were a creditor and exporter nation.  We also had a higher savings rate.  Today we have a system where we continually spend more than we produce and expect this dynamic to somehow function long term as if we found an endless well of Kool-Aid.  The Federal Deposit Insurance Corporation (FDIC) insures each individual account up to $250,000.  Given that one in three Americans has zero dollars to their name and most others have a sum nowhere close to this amount, many go forward with an unstated faith in the system.  However the FDIC Deposit Insurance Fund is largely running on fumes.  This shouldn’t be such a big issue aside from the fact that the American banking system has over $7 trillion in deposits.

FDIC Fund taking hits

Source:   The Tree of Liberty

The interesting thing to note is that bank failures have slowed down yet the FDIC is actually benefitting from the Federal Reserve’s massive quantitative easing adventure.  Banks have been allowed to step up to the plate and borrow from the Fed at ridiculously low rates to remedy their own appalling balance sheets.  Yet little of this has helped working and middle class Americans.  It is also worth mentioning that the banks with the ugliest balance sheets are the too big to fail and we have already been told that they will not fail even if we have to increase the Fed balance sheet to $2.7 trillion in a colorful trail mix of junk loans.  These banks have grown over the problematic decade:

Bank of American and JP Morgan Chase each have $2 trillion worth of assets each.  Most of the troubled balance sheets are situated in a handful of banks even though collectively the U.S. has over 7,500 banks.  The top 10 virtually dominate the $13 trillion in total assets:

Now you have to draw your own conclusions here.  The biggest banks with the worst balance sheets have a mandate that they will not fail.  What this means is the cost of the bailouts is being supported by the public via low savings rates and also hidden inflation:

Keep in mind the above rate is for larger accounts.  Most working and middle class Americans simply have enough in their banking account to pay the monthly bills and maybe fill up their car with low octane $4 a gallon fuel.  As food and energy costs rise a larger portion of monthly income is being devoted to these items thanks to the Federal Reserve bailing out these too big to fail banks.  This is ultimately the cost of not letting bad banks fail and allowing good banks to grow.  The cost indirectly shows up and is spread across the mainland of America.

Even in light of the pathetically low savings rate, many Americans have increased their savings rate because access to debt has been slowed down:

Of course increasing your savings rate from zero makes anything look significant.  Two main drivers for the above trend; first, Americans are being pushed to save because access to debt via home equity or credit cards is being shut off and second, many simply do not trust the casino that is known as Wall Street.  You know things are bad when big time Vegas gamblers state publicly that they don’t trust Wall Street.  This push is being reflected above and the increase has occurred at a time when many of the big banks are simply offering a place similar to your mattress to store your money and a rate of interest that is slightly above zero (also similar to your mattress).

The employment picture and banking implications

The good news is that we have added jobs in the last few months. The bad news is these jobs are reflecting the new world of low wage capitalism.  In other words we have lost many good paying higher wage jobs and have replaced them with lower paying jobs.  All this is happening while the cost of many items is rising.  So you can do the math here; less pay and rising expenses.  This calculus is not good for the American worker.  If anything it is showing that our economy is adjusting to this new reality where bailed out banks can pay CEOs 800 times the median household income for actually driving our economy into the ground.  I think as Americans we rally around innovative companies that produce a good and reward those that provide a service.  Yet most of the large payouts are going to Wall Street investment banks that are nothing more than swindlers and snake oil salesmen trying to siphon off economic rents from the productive economy.  Reward production and economic growth, not scandalous cronies that exist only because they have mastered the art of graft.

The clearest picture of this new economic divide shows up in the average per capita income:

Source:  Social Security Administration

I find it amazing that few realize that half of all workers make on average $25,000 a year or less.  That is, one out of two working Americans makes the equivalent of one Ford car per year (or half a year of tuition at a private university).  There is something seriously awry with our banking system because it does not support the greater good of our economy.  As things stand we will live in a casino like environment were massive bubbles will appear in random sectors like housing, technology, energy, commodities, and higher education simply because we allow this symbiotic relationship between Wall Street and our government to persist.  The real scandal is happening there and this is what will bring the end to the middle class.

So what do we need to do?  What needs to be called for is the splitting up between Wall Street investment banking and regular deposit institutions.  How is it possible that we have a FDIC with nearly no money in their insurance fund backing up $7 trillion in deposits?  Not only is that hard to believe but these banks have over $13 trillion in assets while massively speculating in global stock markets.  If these institutions want to gamble with their own money so be it but expect them to fail.  Working and middle class Americans need to rally around the nucleus of the problem and demand real substantive change.  The Federal Reserve cannot balloon its balance sheet to $2.7 trillion and impact our money supply without allowing for a deep and thorough audit.  If change does not occur we are going to end up with a Wal-Mart and McJob economy with people moonlighting at questionable for profit institutions that teach you a hard lesson in student loan debt all the while banks count their profits after booting out millions of Americans via foreclosure thanks to taxpayer bailouts.  With this kind of system you might as well bank with the lights out.

My Budget360

WASHINGTON (TheStreet) – The Federal Deposit Insurance Corp. says that many mortgage servicers have “lax foreclosure documentation, ineffective controls over foreclosure procedures, and deficient loss mitigation procedures and controls”

In its “Special Foreclosure Edition” of its Supervisory Insights issued Wednesday, the FDIC added that many players are failing to commit the necessary resources to handle “the rapidly growing volume of mortgage loans in default or at risk of default.”

..

The deficiencies in foreclosure procedures highlighted by the FDIC included “inadequate organization and staffing” of loan servicing staffs, the signing and notarization of documents by staff members who didn’t review the materials, and the failure to “conform to state legal requirements.” Examiners also found that with sloppy recordkeeping, the large servicers were “undercharging fees as frequently as overcharging them.”

The FDIC said the foreclosure processing deficiencies led to “widespread unsafe or unsound operational practices, including missing documents, execution of documents by unauthorized persons, failure to notarize documents in accordance with local law, inaccurate affidavits, and affidavits signed by persons lacking sufficient knowledge of the underlying mortgage loan transaction.”

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The regulators also reviewed Lender Processing Services (LPS_), which provides foreclosure document services to loan servicers and Mortgage Electronic Registration Systems, or MERS, which “acts as the nominee of original lenders on mortgages and the lenders’ successors,” and executed consent orders against both, based on “unsafe and unsound practices” that exposed the mortgage servicers to “unacceptable operational, compliance, legal, and reputational risks.”

..

Finally, the FDIC reminded lenders making foreclosure filings to have possession of the original note and either a recorded mortgage or recorded assignment of mortgage before initiation the foreclosure process, and that “lost-note affidavits should be used only after a good faith effort to locate the note.”

– Written by Philip van Doorn in Jupiter, Fla. for TheStreet

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Update: 4ClosureFraud has a related article and formal FDIC Report: http://4closurefraud.org/2011/05/04/fdic-report/

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Findings from FDIC Examinations of State Non-member Banks

People psychologically are programmed to believe in financial realities that benefit their own cause even if they have no merit in empirical data.  Many also forget that banks, especially the investment kind have a notorious track record of running amok when allowed to.  The FDIC and US banking is a perfect example of a system built on nothing more than faith.  Currently the FDIC insures individual deposit accounts up to $250,000.  Given that most average Americans only have $2,000 saved up this is rarely an issue.  However, FDIC insured banks have $5.4 trillion through insured deposits yet have a deposit insurance fund (DIF) that is in the negative to the tune of $8 billion.  Is this a Ponzi scheme you ask?  Not exactly but it shows that the entire financial edifice that we call US banking is built on largely a foundation of sand being held together by pure psychological confidence.  Just look at this chart below; as insured deposits grow the insurance fund actually dwindles:

Source: FDIC

How is this even possible you may ask?  Well at a very basic level we have fractional reserve banking.  In the US banks have a 12 to 1 leverage ratio.  This number is derived by assets divided by net worth.  Yet banks have the benefit of calling over priced real estate loans “assets” even though all of us fully understand that much of what they have on the books is cooked at bubble level prices.  Banks are hoping the public is naïve enough to allow this game to go on for long enough where time and the Federal Reserve can inflate away the debt at the expense of the middle class.  Inflation is not the answer and we have many ruined economies throughout the old chapters of history to serve as testimony.  The FDIC backs more bread and butter banks but the top investment banks that were the largest beneficiaries of taxpayer bailouts have some of the most outrageous leverage:

Only two of the five now stand (Goldman Sachs and Morgan Stanley) as standalone investment banks.  Merrill Lynch is now part of Bank of America while Bear Stearns and Lehman Brothers are both gone.  Yet we are not better off because what has occurred is the too big to fail have become even bigger.  Take for example the number of FDIC banks:

In 1992 over 12,000 banks and savings institutions were backed by the FDIC.  Today that number is slightly above 7,700 yet total assets are even larger on a percentage basis.  More and more banks fail but where tiny regional banks go down another too big to fail bank takes over and sets up shop.  You’ve probably seen this in your own neighborhood.  These are the same banks that created most of the toxic debt that infected the financial system to begin with.  Now we are allowing them to setup shop all around the country.  The FDIC is backing over $5 trillion in deposits purely on faith.  Let us assume there is a bank run.  Who will be there to bailout the FDIC?  The US Treasury and Federal Reserve but since the nation is in the hole to the tune of $14 trillion in national debt this would only dilute the currency even further.  In the end you would get paid back but with deflated dollars.  This is why inflation is never really a solid option out of economic malaise.  Otherwise we should just print and send $1 million to each American household.

Debt problems continue to plague the economy:

Source:  Federal Reserve

This is stunning data.  Nearly 14 percent of all credit card accounts are 90 days or more delinquent.  Given that there is $850 billion in this market alone, this is cause for concern.  The next biggest delinquent category by percent of all loans isn’t mortgages but student loan debt.  We’ve discussed the higher education bubble and here you are seeing the end results.  Ultimately what the above shows is a country that fueled its last decade largely on massive amounts of debt.  That debt is now due and many people are unable to pay.  Keep in mind what this signifies.  We aren’t talking about paying off the entire balance.  You have people unable to make the $200 payment on their $7,000 credit card debt.  Or you have people unable to pay the $1,500 mortgage on their $175,000 home.  This debt is actually an asset to the banking system.  Does the above chart make you feel confident that the value of banking assets is increasing overall?

Look at the total debt outstanding:

Source:  Federal Reserve

Currently US households have $11.4 trillion in debt outstanding.  This is off from the $12.5 trillion peak in Q3 of 2008.  The big difference is also the amount of equity Americans have in their home.  That $11.4 trillion in debt seems more painful when overall US housing has fallen by over 30 percent and has chopped into the biggest asset of average Americans.  Home prices are down by 30 percent while overall debt levels are down by 8.8 percent.  That is simply unsustainable and that is why banks keep failing on a weekly basis.  But the banks that have the most fantasy in their balance sheets, the too big to fail continue to eat away at taxpayer money through the hidden cost of quantitative easing and the destruction of the US dollar.  These aren’t speculative notions but just look at where your financial life is today versus where it was over a decade ago.

As people struggle with extremely high unemployment many are jumping into the higher education bubble and getting into massive debt:

Many of these graduates will have no savings with FDIC insured banks but will owe the government and banks money they don’t have.  How will they pay this off?  The high delinquency rate is telling us they can’t.  In the end you need a sustainable economy but right now the FDIC is merely the Wizard of Oz.  We are pretending that over $5 trillion in deposits is actually backed by some “lock box” fund somewhere.  It isn’t.  It is simply faith in a system that has largely failed the middle class.  As we see protests around the world when will Americans protest against this banking system that has led them down this path of debt servitude?  Is robbing your financial future or your kid’s financial future not enough to call for serious reforms in the system?  Let us just keep pretending that the $13 trillion in “assets” at FDIC insured institutions is really worth that and keep going on with our business.  Just like everyone believed real estate was actually worth what it was at the peak just because it inflated balance sheets all around the country.

My Budget 360

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