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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.

Regulatory Capture Defined: Sheila Bair

Posted by Karl Denninger

Gee, It Took The Senate THREE YEARS? (WaMu)

Posted by Karl Denninger

In a pair of articles that outline exactly how outrageously corrupt our government’s so-called “regulators” really are, The WSJ points to the Senate investigation on Washington Mutual:

WASHINGTON–Officials at the failed banking operations of Washington Mutual Inc. securitized substantial volumes of risky, fraudulent loans in the run-up to the financial meltdown despite repeated internal warning signs, according to a Senate probe.

Got that?  Not just dangerous loans, fraudulent loans.

The subcommittee has obtained documents showing that “at a critical point Washington Mutual included loans in its securities because they were likely to suffer a high rate of default, and they failed to disclose that to the buyers,” Sen. Levin said. “They also allowed loans that had been identified as fraudulent to be sold to buyers, again without alerting buyers when the fraud was discovered.”

Got that again?  The bank intentionally included defective loans in securities it sold to investors.

What started my publication of The Market Ticker was my own investigation of Washington Mutual and other lenders after the Asian “blip” in 2007.  On April 18th, 2007 I wrote the following:

This is the same sort of crap that sunk Lucent and Enron – booking “income” that is not in fact spendable, as it has an impairment associated with it (the LTV is INCREASED by this negative amortization) AND it is not CASH!
 
There is a legitimate argument to be made for booking this as a net increase in the bank’s assets, offset with a loss reserve due to the increase in LTV on the property (this is the most likely part of the principle to be unrecoverable in the event of a default.) In effect this is a capital asset that is drawn down in value over some period of time – up to 30 years for most mortgages.

But now the bank has elected to pay 55 cents of dividend, yet the single largest contributor to their “86 cents of net income” this last quarter was in fact capitalized interest that cannot be spent!

Washington Mutual made these loans because the negative amortization allowed them to book “earnings” that did not and never would actually occur. 

That was the essence of what was going on and it was why they didn’t give a damn whether the loans performed or not – until they blew (and even beyond, if they didn’t foreclose!) they were booking “earnings” that in fact were bogus.

It was and is all about legalized scams that our government has repeatedly refused to put a stop to.  In the 1990s we had hundreds of companies releasing “pro forma” earnings that bore no reasonable relationship to actual operating results, using EBIDTA for their numbers when “B, I, D, T and A” were, added together, double their reported “earnings” and in fact the firm was burning cash like a Weimar Republic family trying to keep warm.  This of course was destined to and did detonate in a chain-reaction set of failures from 2000-2003 that we called “The Tech Crash.”

Supposedly Sarbanes-Oxley put a stop to this crap after ENRON, which was the mother and father of all hinky accounting deals.  Well, unless you also count Winstar, Lucent and MCI, all three of which were doing similar “creative” things with their books.  The first and last were deferring the recognition of build-out costs for their networks through what amounted to Option ARM loans on the hardware they needed!  When they couldn’t pay and blew up Lucent was nearly bankrupted as a consequence (particularly by their relationship with Winstar.)

How bad was the fraud problem?  The WSJ says:

Some of the worst problems occurred in high-volume loan offices in the California cities of Montebello and Downey. A year-long internal investigation found fraud rates of 58% and 83% in those offices. The results were reported to the bank’s head of home loans.

Not only was nothing done then by the bank, but nothing was done by the regulators.  The government did and still does willfully and intentionally look the other way, and not one indictment has issued among any of these banksters.

Let’s remember folks that without the “free credit” games the housing bubble would have never inflated.  Without the “free money” hairdressers couldn’t buy $500,000 houses.  But The Obama Administration is hellbent and determined to continue the “free money” meme with bailouts and handouts to everyone to buy cars, houses, and sate the Obama’s gonna pay my mortgage! crowd.

Geithner is crowing about the government’s “success” once again:

America is close to turning the page on this economic crisis. While far too many Americans are still out of work and face deep economic hardship, we have now reported three quarters of positive growth and the beginnings of job creation.

Liar.

In fact, I’ll go further: You rat bastard. 

Why?  Because Geithner acknowledges what happened:

The true cost of this crisis, however, will always be measured by the millions of lost jobs, the trillions in lost savings and the thousands of failed businesses. No future generation should have to pay such a price.

These lost jobs, lost savings and thousands of failed businesses were not an accident, they were not “unforeseeable” and they were not “unavoidable” or “part of a business cycle.”

Read the above again: Six to eight out of ten loans made out of that WaMu office were fraudulent.

Fraud is supposed to result in criminal charges and prison time. 

Yet no indictments have issued, none of these banksters have gone to prison, and not only have the people responsible not been prosecuted they’ve gotten rich off their scams and kept the damn money that they stole!

That is welcome news. The best way to protect American families who take out a mortgage or a car loan or who save to put their kids through college is through an independent, accountable agency that can set and enforce clear rules of the road across the financial marketplace.

The best way to protect American families is to prosecute fraudulent conduct and put the scammers in prison where they belong.  These people don’t care about fines, just as Pfizer didn’t – they pled guilty to the same felony twice, treating it as “a cost of doing business” as it was about one percent of their market cap.

The only deterrent available is to start throwing the scammers in prison.  All of them.  We can start with the people at WaMu and Lehman, then go down the list and for each and every firm that cooked its balance sheet, nailing them under SarBox as well.  While we’re at it jail every bank executive involved in crooked derivatives deals with municipal and state governments, starting with Jefferson County in Alabama.

Transparency will lower costs for users of derivatives, such as industrial or agriculture companies, allowing them to more effectively manage their risk. It will enable regulators to more effectively monitor risks of all significant derivatives players and financial institutions, and prevent fraud, manipulation and abuse. And by bringing standardized derivatives into central clearing houses and trading facilities, the Senate bill would reduce the risk that the derivatives market will again threaten the entire financial system.

You’re a liar Geithner. 

Fraud is already against the law.  But just as with “Prompt Corrective Action”, which contains a plethora of “Shalls” and very few “Mays”, along with the black-letter law in The Federal Reserve Act that mandates that The Fed (and its minions) buy only US sovereign-backed instruments, laws are only important if they are enforced.

In each and every one of these so-called “laws”, including the bill in The Senate (and House version) to allegedly reform the financial system, all are lacking the essence of a law: an “or else.”

That is, none contain criminal penalties for violators, including and especially government actors who refuse to follow their strictures and none also contain a private cause of action for the citizens of this nation to allow we, the people, to bring suits and presentments as a means to compel enforcement.

WaMu was demonstrably and inevitably headed to insolvency in 2007, as I pointed out at the time – they were paying dividends out of non-existent cash.  You can’t do that forever without blowing up, no matter how much you start with.  Yet federal regulators refused to step in and put a stop to it.

Over 100 banks have failed thus far.  The FDIC continues to record insane loss rates on the alleged “assets” they are holding, proof positive that these institutions are “cooking their books” and holding so-called “assets” at dramatically above their actual values.  Yet nobody has gone to jail or even been indicted for certifying a balance sheet that is later proved to be dramatically off actual valuations.

Investors lost literal trillions as a consequence of these scams and schemes, but there is nobody sitting in prison right now for running them.  Even when outright bribery is involved, as occurred in Jefferson County, Alabama, the state officials go to prison (as they should) but the bank executives involved in the schemes aren’t even indicted!

The Senate bill is strong. It would create an independent agency to better protect American families across the financial marketplace. It would protect against “too big to fail.” And it would bring the derivatives market out of the dark. As the bill moves to the floor, we will fight any attempt to weaken it. The American people have suffered through too much to enact reform that does too little.

You’re lying and hiding behind more Washington obfuscation, Turbo Timmy.

The laws necessary to put a stop to this crap – by throwing the fraudsters in prison – are already on the books.  You cannot solve a problem like this with more laws when the laws that already exist are not enforced because you have an executive that is in the pocket of the scammers, and thus the Attorney General and his legion of prosecutors refuse to empanel Grand Juries and bring indictments.

America is sick and tired of the scams and schemes Turbo Timmy.  We’re also fully awake, our pocket has been picked, and we’re pissed.

November is coming, and we vote.

On Sheila Bair’s Lies

Posted by Karl Denninger