Jim Sinclair’s Commentary
Here is some continued evidence of the worrisome trends in this week’s bank closings. Courtesy of CIGA Richard B.
Dear Jim,
Yesterday’s bank closings (three total) evidence a continuation of the worrisome trends we have been seeing over the past several months. These are:
(1) It is costing the FDIC a great deal more than it has historically to protect depositors in the failed banks.
(2) In other words, these banks are in much worse shape financially than they have been historically by the time the FDIC gets around to closing them.
(3) The fair market value of the assets held by these banks is turning out to be dramatically lower than the value at which they are being carried on the banks’ balance sheets. This most likely reflects unrealistic valuations assigned by bank management in the wake of the Financial Accounting Standards Board (“FASB”) having suspended fair value accounting rules this year.
(4) The acquiring banks have so little confidence in the value of the assets they are purchasing that they are requiring the FDIC to enter into loss sharing agreements with respect to the vast majority of these assets. Another explanation for this may be that the FDIC prefers to share downside risk rather than accept the amounts the acquiring banks are willing to pay for these assets absent the loss sharing.
The largest of the banks closed this week, Solutions Bank of Overland Park, Kansas, is another example of a bank that on paper appeared to be very well capitalized. It claimed to have assets of $511.1 million against deposits of $421.3 million. Yet the FDIC’s estimate of the cost to close it is $122.1 million, about 29% of deposits. This implies the FDIC and the acquiring bank concluded the fair market value of Solution Bank’s assets was about $299.2 million, only 58.5% of the value claimed.
The acquiring bank purchased essentially all of the assets of Solutions Bank, but the FDIC had to enter into a loss sharing agreement with respect to $411.3 million of these assets. This implies the acquiring bank was only confident in the value of about $99.8 million – approximately 19.5%.
An emerging concern is that the magnitude of the loss sharing agreements the FDIC is entering into is substantially increasing the risk that its cost of closing these banks will be far more than originally projected. For example, there was an article posted on JSMineset yesterday reporting that the closing of Colonial Bankgroup, Inc., was likely going to cost the FDIC $5.8 billion – more than twice its original estimate of $2.8 billion. The FDIC is not specifying the precise terms of the loss sharing agreements it is entering into with acquiring banks. Depending on the terms, the FDIC’s downside risk may be significantly more than 50%.
The second largest of the banks closed this week, Republic Federal Bank of Miami, Florida, on paper had assets of $433 million against deposits of $352.7 million. Yet the estimated cost to the FDIC in this case is $122.6 million – about 34.8% of deposits. Percentage-wise, this is one of the costliest closings so far.
This implies that the FDIC and the acquiring bank valued Republic Federal’s assets at about $230.1 million – only about 53% of the value claimed. In this case the acquiring bank was only willing to purchase $267.1 million of Republic Federal’s claimed assets of $433 million, and it required that the FDIC enter into a loss-sharing agreement with respect to $210.4 million. This indicates the acquiring bank had confidence in the value of only $56.7 million of Republic Federal’s purported assets – about 13.1%.
The third bank, Valley Capital Bank, N.A. of Mesa, Arizona, was relatively small, and its closing illustrates a phenomenon seen several times recently. It is the only one of the three that appeared insolvent on paper. It had stated assets of $40.3 million against deposits of $41.3 million. Yet the FDIC’s estimated cost of closing it was only $7.4 million – about 17.9% of deposits. This is the least costly percentage-wise of the three.
This provides additional evidence that banks that appear on paper to be the healthiest may in fact be in far worse shape than banks that appear weaker. Once again, the problem appears to stem from the FASB’s suspension of fair value accounting requirements this year with respect to banks’ least liquid assets.
This gives bank management far too much leeway to value assets at levels far beyond what they could fetch in the open market, resulting in banks’ balance sheets becoming increasingly less reliable indicators of their true financial health.
Respectfully yours,
CIGA Richard B.
Hi Jim,
The Senate is about to raise the debt ceiling higher by another 2 trillion dollars or so. I guess someone feels the need to blame China. Perhaps it is due to the belief that China will feel terribly guilty for their economic policies and buy our debt as a way of making amends?
Best,
CIGA Bernie
Harry Reid demands that China fix its economic policies
Fri, 12/11/2009 – 7:28pm
The U.S.-China relationship is a carefully calibrated dance, especially in this the first year of the Obama administration. That’s why one has to wonder what prompted Senate Majority Leader Harry Reid to write a scathing letter to Chinese President Hu Jintao calling on China to move faster to reform its economic policies.
In the letter, sent to Chinese and U.S. officials Wednesday, Reid lashes out at China on two issues, its still-inflexible currency and its failure to do more to protect intellectual property rights.
"There is widespread agreement that China’s currency policy is a major source of imbalance in our relationship– indeed, in the global economy. The de facto peg is set at a level that for many years has not reflected economic reality," Reid wrote. "Your currency policy is not in the long-term interest of China: it creates inflationary pressure, promotes over-investment, and feeds asset bubbles within China. In short, it is one of the most serious economic problems in the world today."
Jim,
A cup and handle formation is nearly complete on the TSX Capped Gold. The recent touch of all-time highs suggests that it is only a matter of time. TA, like geology, is matter of time and pressure. The time is right, and the pressure is building.
This suggests a couple of things:
- The dollar will roll over soon
- The gold correction, while violent, will be short.
- Those expect an equity collapse could be in for a surprise. That is, of course, something does not break the weak dollar rising equities relationship.
- Minor head and shoulder break means the June neckline of the large HS pattern is pulling very hard. IMO this is market bares the most attention.
CIGA Eric
Click charts to enlarge
