Dear CIGAs,
What is clear here is the egregious OVERVALUATION of the assets of financial entities thanks to the capitulation of the FASB that allows banks and other financial entities to pick the value of their assets. This is a public disgrace that the public has no idea about. In these cases the overstatement was between 37% and above 100%. This is outrageous beyond outrageous.
The FDIC has accepted loss guarantees up to 95% of assets going out as long as 10 years. The same people who brought this crisis to you are buying these banks with the long term FDIC guarantees.
Dear Jim,
Over the past two Fridays, 3/12 – 3/19/10, the FDIC announced the closings of 10 more banks, bringing this year’s total to 37. Collectively, the 10 banks had reported assets of about $4.4 billion and deposits of about $4.1 billion.
The closings will cost the FDIC an estimated $1.47 billion, approximately 36% of the value of the deposits. Based on the FDIC’s loss estimates, the actual market value of the 10 banks’ assets is only about $2.634 billion and had been over-stated by about 67%.
The closings of several of the largest banks stand out. Typically throughout this crisis, the largest banks have generated the largest losses proportionally.
Advanta Bank Corp. of Draper, Utah, had reported assets of $1.6 billion and deposits of $1.5 billion. The FDIC’s loss projection is $635.6 million, about 42% of deposits. Based on that estimate, the bank’s assets are really only worth about $864.4 million and had been over-stated by 85%.
Appalachian Community Bank of Ellijay, Georgia, had reported assets of $1.01 billion and deposits of $917.6 million. The FDIC’s loss projection is $419.3 million, about 46% of deposits. Based on that estimate, the bank’s assets are really only worth about $498.3 million and had been over-stated by 103%.
The third largest bank closed, Park Avenue Bank of New York, NY, provides a useful contrast in that its costs are in the range of what the FDIC would traditionally have considered a fairly successful bank closure. It had reported assets of $520.1 million and deposits of $494.5 million. The FDIC’s loss projection is $50.7 million, about 10% of deposits. By that estimate, the market value of its assets is $443.8 million, and had been over-stated by about 17%.
An over-valuation of 17% is a lot more defensible than one of 85% or 103%. It’s nice to see that some banks haven’t marked their assets up to pure fantasy valuations. However, failures as well contained as Park Avenue Bank have been few and far between.
In addition, it is important to note that the loss for Park Avenue Bank, and for eight of the other banks closed over the past two weeks, could likely end up being more than presently estimated because the FDIC entered into loss-share agreements with respect to at least two-thirds of the value of the assets taken over by the successor banks. In Park Avenue’s case, the FDIC had to enter into a loss-share transaction with respect to $379.8 million of those assets.
The FDIC provides a great deal of information regarding the specifics of these loss share agreements in a release entitled, “Loss-Share Questions and Answers” that can be found at:
http://www.fdic.gov/bank/individual/failed/lossshare/index.html.
Broadly speaking, the FDIC has agreed to reimburse between 80% and 95% of any losses the acquiring banks incur on the assets beyond specific estimates agreed to at the time of the takeover. For commercial assets, the agreements typically run for eight years and for single family mortgages, they run for 10 years.
That is a huge amount of risk to assume and a very long period over which to assume it. As I will discuss in a separate article to follow, the FDIC has in effect been forced to enter into these loss share agreements because without them, the acquiring banks were refusing to take over any substantial amount of the failed banks’ assets.
The FDIC includes an estimate of what it believes it will have to pay out under each loss share agreement when it makes its loss projection for the bank failure in question. Still, the manner in which these loss share agreements have been structured makes it clear that the parties believe the greater risk is that the assets will lose more value more than expected.
In total, the FDIC took on an additional $2.1 billion in assets under loss share agreements in connection with the bank closings over this past two weeks. Since the beginning of this crisis, it has entered into agreements with a total of about $136.5 billion in assets under loss share.
Respectfully yours,
CIGA Richard B.
Japanese Yen
CIGA Eric
Volume continues to shrink as the Yen marks time on support. This is quietly bullish. The Yen is building up "cause" for the third tap of overhead resistance. This is classical "three taps and out" action.
Japanese Yen ETF (FXY) 
