Below is a note from one of his "CIGAs" named Richard. Richard has been following the internal math of the bank closures for some time now. He continues to quantify the size and scope of the deception brought about by the FASB capitulation of March 2009. It is extremely important that you understand what is happening. Please take the time to read what is below then consider what the implications are for the entire banking system, not just the TBTFs, and the US economy as a whole.
The following analysis covers the 38 banks closed by the FDIC between August 6, 2010, and November 12, 2010. So far this year, the FDIC has closed 146 banks. So far in this crisis, since 2007, it has closed 311 banks.
Collectively, the 38 banks had stated assets of $13.78 billion and deposits of $11.97 billion. The FDIC’s estimated cost of closing all 38 banks was $2.72 billion, about 23% of deposits. That brings the FDIC’s total estimated losses for 2010 up to $21.6 billion.
Loss Share Remains The Rule
In the overwhelming majority of cases (30 closings out of 38), resolution of the failures was accomplished by way of the FDIC entering into loss share agreements covering a high percentage of the assets taken over by the successor banks. In connection with these 30 closings, the FDIC entered into new loss-share agreements covering an additional $8.2 billion in assets.
That brings the total face value of assets covered by FDIC loss share agreements up to about $189 billion. As we have discussed in the past, these loss share agreements typically guarantee at least 80% of the value of assets over a period of eight to ten years.
This is another form of quantitative easing being practiced by the federal government. FDIC loss share agreements place an artificial floor under the value of bank assets. This forestalls the day of reckoning when banks are forced to own up to the decimated condition of their balance sheets.
Failures Show Dramatic Overvaluations
One of the more valuable bits of information we can glean from FDIC bank failure announcements is the extent to which management of the failed banks exaggerated the value of the banks’ assets. These exaggerations were made legal in early 2009 when the Financial Accounting Standards Board repealed fair value accounting requirements.
Taking the 38 failed banks as a whole, they had declared assets of $13.78 billion and deposits of $11.97 billion. The FDIC estimated the closings cost $2.72 billion, meaning the banks’ assets were really only worth $9.25 billion. Overall, bank management overvalued assets by $4.53 billion, around 49%.
Specific examples were far worse:
Maritime Savings Bank of West Allis, Wisconsin, had stated assets of $350.5 million and deposits of $248.1 million. The FDIC estimated its closing cost $83.6 million. Based on that estimate, the bank’s assets were really only worth $164.5 million, and had been overvalued by 113%.
ShoreBank of Chicago, Illinois, had stated assets of $2.16 billion and deposits of $1.54 billion. The FDIC estimated its closing cost about $370 million. Based on that estimate, the bank’s assets were really only worth about $1.17 billion, and had been overvalued by 84%.
Premier Bank of Jefferson City, Missouri, had stated assets of $1.18 billion and deposits of $1.03 billion. The FDIC estimated its closing cost $407 million. Based on that estimate, the bank’s assets were really only worth $623 million, and had been overvalued by 84%.
K Bank of Randallstown, Maryland, had stated assets of $538.3 million and deposits of $500.1 million. The FDIC estimated its closing cost $198.4 million. Based on that estimate, the bank’s assets were really only worth $301.7 million, and had been overvalued by 78%.
Finally, Horizon Bank of Bradenton, Florida, had stated assets of $187.8 million and deposits of $164.6 million. The FDIC estimated its closing cost $58.9 million. Based on that estimate, the bank’s assets were really only worth $105.7 million, and had been overvalued by 78%.
Pace of Bank Closings Artificially Slow
The FDIC’s closure of 38 banks over three months is by no means an insignificant number. However, in the context of the FDIC’s overhang of troubled banks, it suggests the pace of bank closings is being kept artificially low.
As of April 2010, there were about 425 banks operating under serious FDIC enforcement orders that called into question the banks’ solvency. Since then, upwards of 25 new banks have come under such orders each month.
Therefore, closing 13 banks a month has done nothing to reduce the backlog of troubled banks operating in the Country. That backlog could only have grown.
Most likely, the pace of bank closings had been held back artificially by the need to keep up appearances for the benefit of the mid-term elections. With those now behind us, I would expect the pace of bank closings to accelerate considerably.
CIGA Richard B.
CIGA Richard B.