The latest moves by the increasingly controversial (and cash-strapped) Federal Deposit Insurance Corp, which seized three more failed US banks on Friday, reinforce a weekend suggestion in Casey’s Daily Dispatch, a financial newsletter by CaseyResearch, to take a closer look at a recent column by Bloomberg’s Jonathan Weil.
(Just a quick aside, here, as FT Alphaville recently reported, Weil is not the favoured FDIC commentator among some analysts.)
In an October 1 column, Weil noted “a stunning omission” from the US government’s latest list of ‘problem’ banks, which ran to 416 lenders, a 15-year high, as of June 30. One outfit not on the list was Georgian Bank, the second-largest Atlanta-based bank, which supposedly had plenty of capital but failed on September 25.
Continues Weil:
Georgian’s clean-up will be unusually costly. The book value of Georgian’s assets was $2bn as of July 24, about the same as the bank’s deposit liabilities, according to a FDIC press release. The FDIC estimates the collapse will cost its insurance fund $892m or 45 percent of the bank’s assets. That percentage was almost double the average for this year’s 95 US bank failures, and it was the highest among the 10 largest ones.
The cost of Georgian’s failure confirms that the bank’s asset values were too optimistic, points out Weil, adding: “It also helps explain why the FDIC, led by chairman Sheila Bair, is resorting to extraordinary measures to replenish its battered insurance fund”.
As Casey’s points out:
What this latest failure reveals is that (a) whatever methodology the regulators are using in their bank reviews, it is disastrously flawed; (b) without mark-to-market accounting, the nature and scale of what actually lurks in the loan portfolios of banks is unknown and unknowable.
Further, (c) the percentage loss suffered should send shudders down the spine of any reasonable observer; the stuff Georgian Bank was holding on its books wasn’t just bad, it was radioactive toxic. There’s more, including (d) the FDIC is now bankrupt, and the $46bn it hopes to raise by having its member banks pony up their dues for three years in advance is not likely to last out 2010. Then what? I’ll tell you what… all further bills will be forwarded straight on to US taxpayers.
And finally, (e) if this bank, previously considered untroubled by the FDIC, can keel over from a heart attack (perhaps from working 80-hour weeks, supported by gallons of strong coffee?), how many other institutions are in the same position?
“Wish we knew”, concludes Casey’s. “Unfortunately, due to the dumping of mark-to-market accounting standards, we have no idea. And, apparently, neither does the FDIC.”
One thing is for sure, the FDIC’s loss estimates are rising — fast. Just weeks ago it revised up its estimated cost of bank failures between 2009 and 2013 to about $100bn, from an estimate of $70bn made in May. Most of the failures are expected this year and next. Friday’s seizures brings the number to 98 so far this year.
And they say the financial crisis is over?
Related links:
FDIC, the ‘D’ stands for… FT Alphaville
Bringing it back (on balance sheet) – FT Alphaville
FDIC, the ‘F’ stands for… – FT Alphaville
FDIC insurance, inspected – FT Alphaville