Yesterday 5 more banks were closed by the FDIC.
Nothing too surprising there as the FDIC has been closing 4-6 banks a week of late, yet as I went through the press releases I was struck by how much the FDIC was projecting to lose on each takeover.
There are some very worrying signs about the health of the banking sector in the numbers.
Let's start with the 5 closures yesterday.
#85 to be closed this year, a small one, First Bank of Kansas City, Kansas City, Missouri
As of June 30, 2009, First Bank of Kansas City had total assets of $16 million and total deposits of approximately $15 million. ...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $6 million.
#86 InBank, Oak Forest, Illinois
As of August 3, 2009, InBank had total assets of $212 million and total deposits of approximately $199 million. ...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $66 million. .
#87 Vantus Bank, Sioux City, Iowa
As of August 28, 2009, Vantus Bank had total assets of $458 million and total deposits of approximately $368 million. ...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $168 million.
#88 Platinum Community Bank, Rolling Meadows, Illinois
Platinum Community Bank, as of August 29, 2009, had total assets of $345.6 million and total deposits of $305.0 million.
The FDIC estimates the cost of the failure to its Deposit Insurance Fund to be approximately $114.3 million.
#89 First State Bank, Flagstaff, Arizona
As of July 24, 2009, First State Bank had total assets of $105 million and total deposits of approximately $95 million. ...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $47 million.
A bit about banking:
Before we get more into the numbers let's stop to go over how, in very simple terms, a bank operates. It has some capital and then it takes in deposits from depositors and then lends this money out in loans. Because it pays less on deposits than it gets from loans it should make a profit, as long as, and this is the important part, the people with the loans pay the money they borrowed back.
Let's go back to failure #89 for a closer look.
On July 24th the bank had assets (likely mostly loans) of $105 million and deposits of $95 million, implying capital of $10 million. Based on those numbers you would think that the situation should be okay. Once the loans get repaid the depositors can be repaid with $10 million left over. BUT....
Apparently the TRUE value of the assets was less than their face value.... a lot less. We can get a rough idea as to how bad by using the FDIC estimate of the cost to them of making the depositors whole.
Depositors needed to be repaid $95 million, but the FDIC said it will lose $47 million on the closure. So it must be estimating receiving only $48 million from the loans ($95 million minus $47 million).
So assets that had a "value" of $105 million on July 24th, in reality will only fetch a real world "value" of $48 million. Or put another way .. they were only worth 46 cents on the dollar!
Note: the approach I take is necessarily an approximation and does ignore other costs that the FDIC will incur in closing the banks (because they don't tell us), making the numbers look somewhat worse than they may in fact be. Then again indications are that FDIC estimates of losses at the time of closure may also be a bit optimistic based on the results of closures to date.
Going back through the other closures we have:
#84 = 56 cents on the dollar
#85 = 63 cents on the dollar
#86 = 44 cents on the dollar
#88 = 55 cents on the dollar
#89 = 46 cents on the dollar
Pretty stunning numbers!
Remember the way banks work, if even 5% of their loans don't get repaid they are likely in trouble, 10% would be pretty much guaranteed trouble. What we are seeing here is roughly 50% of the loans being worthless.
This is interesting for 2 reasons:
- It shows that at least some banks are in pretty bad shape, and
- Look how bad the situation has to be before the FDIC shuts a bank down. You really have to wonder how many banks are technically bankrupt, without even being on the FDIC list if the FDIC is only closing banks with this serious amount of damage.
Pretend and extend:
In the current economic and political environment everything possible is being done to avoid a crisis of confidence in the banking system. As a result banks have been given extreme latitude in deciding how much their assets are worth (so called - mark to fantasy). Note they are allowed to say how much something is worth on their books (kind of cute, eh?).
What this has done is create a climate where "extend and pretend" has become common. What this means is that instead of recognizing a loan as being bad, the bank will extend additional credit and "pretend" that everything is all right.
We are hearing anecdotal evidence of this in the housing market where even after homeowners have stopped paying their mortgage, they are not being foreclosed upon. If the bank forecloses it has to project a loss whereas if it merely extends the mortgage then everything looks fine from the outside.
Wrap-up:
In this warped banking environment it is very hard to get a fix on how bad the banking situation is right now. I see the FDIC data each week as a way to get some insight into the true value of bank balance sheets ... and the picture is NOT pretty. That and the fact that banks have to be this far gone before they are shut down is also deeply troubling (an FDIC version of extend and pretend?).
It could be that this past week was just a bad batch ... but we will have to wait and see. Over the last few weeks most of the closures have had numbers in the 60-70 cents on the dollar range, so better than last weeks lot, but not stellar.
There are a number of predictions out there on bank closures with numbers running from 200-500 before this is done. It is increasingly likely that the FDIC will have to tap its line with the Treasury in order to meet all of its obligations.
Update/Additional stuff:
And the banks, at least the investment ones, don't seem to have learned anything from the crisis. The NYTtonight has an article on how Wall Street is looking to "package up" life insurance policies like they did subprime mortgages. I kid you not.
After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.
The bankers plan to buy "life settlements," life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to "securitize" these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.
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Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them.