Tag: banks

Yesterday the FDIC shut down six banks with around $4.2 billion in assets between them. But I thought one thing was a bit peculiar with regards to the seizure of Superior Bank in Birmingham, Alabama.

“As of December 31, 2010, Superior Bank had approximately $3.0 billion in total assets and $2.7 billion in total deposits. … The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $259.6 million.”

It seems as if the bigger the bank is, the smaller the cost to the FDIC reported. In this case, the losses were only 8.7 percent, much lower than the 22.5 percent average for bank closures in 2010 and 2011. This would appear to suggest that the losses are being disguised in the assets being acquired by the new bank, which in this case is “Superior Bank, N.A., Birmingham, Alabama, a newly-chartered bank subsidiary of Community Bancorp LLC, Houston, Texas”.

I’ve also noticed that both the numbers of banks seized and percent of estimated bad assets appear to be shrinking. The 34 banks seized so far in 2011 averaged about 34.4 percent bad assets versus 42.1 percent for the 157 banks seized in 2010 and 41.1 percent for the 140 seized in 2009. This would appear to indicate a material improvement, although it is a fairly modest one considering that the fair financial winds of government spending and quantitative easing appear to be drawing to a close.

Best line: “Just because Max sounds bonkers doesn’t mean he is.”

From the speech entitled Financial Reform: Post Crisis? by Thomas Hoenig, president of the Federal Reserve Bank of Kansas City

In the United States, we observe with each crisis and market collapse that policymakers consistently intervene to protect an ever broader group of creditors and investors from loss. This includes the LDC debt crisis, the failure of Continental Illinois, and the thrift industry and stock market collapses of the 1980s. These previous public interventions, though, pale in comparison to what was done recently. Market participants and large financial institutions have little reason to doubt that they will be bailed out again.

Let me offer just one staggering example. When Gramm-Leach-Bliley was passed in 1999, the five largest U.S. banking organizations controlled $2.3 trillion in assets, or about 38 percent of all banking industry assets. Currently, Bank of America by itself and in spite of its need for government support during the crisis has the same level of assets – $2.3 trillion – as the top five did in 1999 and the top five now have 52 percent of all banking industry assets. What clearer sign could we find that market discipline no longer exists?

Past actions and this growth have given our largest organizations significant competitive advantages over other financial institutions. For example, creditors and uninsured depositors at too-big-to-fail organizations believe that there is almost no chance that they will have to take a loss. This idea is formally acknowledged by the credit rating agencies when they give these organizations separate “support” and “standalone” ratings, which explicitly factor in the government support they likely will receive. The difference in these two ratings thus provides one measure of the funding advantages that too-big-to-fail organizations have over others.

Haldane estimated that this funding advantage amounted to about $250 billion in 2009 for 28 of the largest banks in the world. At the Federal Reserve Bank of Kansas City, we estimated the ratings and funding advantage for the five largest U.S. banking organizations during this crisis. In June 2009, these organizations had senior, long-term bank debt that was rated four notches higher on average than it would have been based on just the actual condition of the banks, with one bank given an eight notch upgrade for being too big to fail. Looking at the yield curve, this four-notch advantage translates into more than a 160 basis point savings for debt with two years to maturity and over 360 basis points at seven years to maturity.

In a competitive marketplace, where just a few basis points make a difference, these funding advantages are huge and represent a highly distorting influence within financial markets. I’ll name three. They don’t have to sell creditors on the strength of their condition. They have significant advantages in competing for funds. And, they have significant incentives to take on more risk, hold less capital, and book more assets.

Of course, the salient fact that Hoenig leaves out of the equation is that between 40 and 45% of those trillions in big bank assets are worthless, according to my calculations. Which is why more government support will almost certainly be required in order to keep the “too big to fail” banks from failing.

The Fed’s Hoenig calls for the recognition of reality:

Big banks like Bank of America Corp and Citigroup Inc should be reclassified as government-sponsored entities and have their activities restricted, a senior Fed official said on Tuesday. The 2008 bank bailouts at the height of the financial crisis and other implicit guarantees effectively make the largest U.S. banks government-guaranteed enterprises, like mortgage finance companies Fannie Mae and Freddie Mac, said Kansas City Fed President Thomas Hoenig.

“That’s what they are,” Hoenig said at the National Association of Attorneys General 2011 conference. He said these lenders should be restricted to commercial banking activities, advocating a policy that existed for decades barring banks from engaging in investment banking activities.

“You’re a public utility, for crying out loud,” he said.

While I would prefer to see the big banks broken up, their assets marked to market, and their bankrupt elements closed down, Hoenig’s plan is a reasonable compromise. Of course, there is little chance of it happening, since limiting the government-guaranteed banks to commercial banking activities would eliminate their ability to continue their financial rapine.

As for BOA CEO Moynihan’s claim that customers want the big banks to continue combining commercial and investment activities, I think he has badly misread the public mood. Most Americans would just as soon see the bastard bankster’s head on a stake.

The truth about the Fed’s “salvation” of the financial systemforeign banks and corporations finally comes out:

U.S. Federal Reserve Chairman Ben S. Bernanke’s two-year fight to shield crisis-squeezed banks from the stigma of revealing their public loans protected a lender to local governments in Belgium, a Japanese fishing-cooperative financier and a company part-owned by the Central Bank of Libya.

Dexia SA (DEXB), based in Brussels and Paris, borrowed as much as $33.5 billion through its New York branch from the Fed’s “discount window” lending program, according to Fed documents released yesterday in response to a Freedom of Information Act request. Dublin-based Depfa Bank Plc, taken over in 2007 by a German real-estate lender later seized by the German government, drew $24.5 billion.

The biggest borrowers from the 97-year-old discount window as the program reached its crisis-era peak were foreign banks, accounting for at least 70 percent of the $110.7 billion borrowed during the week in October 2008 when use of the program surged to a record.

Bernanke, Paulson, and the various officials and the Federal Reserve and U.S. Treasury deserve prosecution for theft, at the very minimum. It was always obvious that they were milking the American taxpayer for someone’s benefit, but it can’t even be pretended that it was in the U.S. national interest anymore. The Federal Reserve isn’t a central bank, it is quite simply the greatest financial rapist in the history of mankind.

Pronounced by a TARP executive:

[T]he country was assured that regulatory reform would address the threat to our financial system posed by large banks that have become effectively guaranteed by the government no matter how reckless their behavior. This promise also appears likely to go unfulfilled. The biggest banks are 20 percent larger than they were before the crisis and control a larger part of our economy than ever. They reasonably assume that the government will rescue them again, if necessary. Indeed, credit rating agencies incorporate future government bailouts into their assessments of the largest banks, exaggerating market distortions that provide them with an unfair advantage over smaller institutions, which continue to struggle.

Worse, Treasury apparently has chosen to ignore rather than support real efforts at reform, such as those advocated by Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, to simplify or shrink the most complex financial institutions. In the final analysis, it has been Treasury’s broken promises that have turned TARP — which was instrumental in saving the financial system at a relatively modest cost to taxpayers — into a program commonly viewed as little more than a giveaway to Wall Street executives.

Commonly viewed? A giveaway is all it ever was. Of course the banks were “saved” by it, the buggy whip industry could have been saved by having sufficient government billions funneled into it too. The problem is that because nothing of any significance has been changed, the financial meltdown of 2008 will be repeated and sooner than any of the mainstream economists believe possible.

As housing prices continue to fall – which you may recall I correctly anticipated at the beginning of the year – there will be an ever-increasing divergence between what the banks have on their books and the actual value of those assets. The fiction cannot be maintained indefinitely, but it is impossible to know what will be the spark that will set the gasoline-soaked wooden wreckage of the financial system alight.

But it is incorrect to say that the banking bailout went wrong. The banking bailout was wrong from the start.

Revised Q4 2010 GDP is reported at 3.1 percent. Which sounds pretty good, until you take a look at the fine print. Imports were actually negative, which is not a sign of consumer strength, but that wasn’t the real indicator of the problem being hidden by the government statistics:

Real gross domestic purchases — purchases by U.S. residents of goods and services wherever produced — decreased 0.2 percent in the fourth quarter, in contrast to an increase of 4.2 percent in the third…. domestic profits of financial corporations increased and profits of nonfinancial corporations decreased. The decrease in nonfinancial corporations reflected decreases in all industries shown, except for small increases in some detailed manufacturing industries. The largest decrease was in wholesale trade.

In other words, the financial parasites are continuing their vampiric depredations on a weakening host. The productive companies are making less money, and the financials that supposedly make things more efficient – and therefore profitable – for them are profiting at their expense. In other words, the banks have learned nothing post-2008, except that they can expect to be permitted to break the law and fail with impunity. So, they are continuing to strangle the capitalist goose that lays the golden egg, with the express written consent of the U.S. government.

Britain’s banksters are upset that their central banker isn’t running interference for them ala Mr. Bernanke:

Bankers, businessmen and economists joined together to dismiss the bulk of the Bank of England Governor’s comments, with some even questioning whether he should remain in his post.

One senior banking source, at one of the UK’s top five banks, went so far as to brand Mr King “an embittered old man with no appreciation of reality”.

The anger follows an interview the Governor gave to The Daily Telegraph yesterday, in which Mr King said that the finance industry needs urgent reform and that there is a risk of a second banking crisis.

I know I’m surprised that the banks don’t see a second financial crisis coming. Why should they, when they didn’t see the first one until it arrived either? Meanwhile, in other news, one of Britain’s biggest banks just announced that it is moving to Hong Kong. What a smart decision was made by the British government in twice offering HSBC, which collected $3.5 billion from the U.S. Treasury’s bailout of AIG, in twice offering to bailout HSBC in the last three years. It’s probably fortunate for the U.K. that HSBC didn’t accept either offer.

Wall Street isn’t even pretending to be connected to the actual economy anymore:

Fresh from Wall Street’s alchemy labs: Credit derivatives tied to General Motors Co. debt. The rub is, no such debt exists. Banks and hedge funds are trading credit-default swaps, which make payments to holders of General Motors bonds in the event of a default. But GM canceled $40 billion of debt in bankruptcy and has pledged to cut its remaining $4.6 billion bank loan to the bone this year.

In other words, Wall Street investing doesn’t even rise to the level of gambling anymore. It’s as if the bookies of Las Vegas decided to start taking bets on imaginary football teams instead of NFL teams during the upcoming lockout.

“Hey, I know you bet the farm on the Minneapolis Norsemen to cover the spread against the Wisconsin Puckers, but wouldn’t you know it, the Puckers won, 111-85… oh, wait, football. That is to say, 27-10.”

This can’t help but bring to mind the obvious question of what percentage of GDP happens to be imaginary.