Jim Sinclair’s Commentary

This is a sin, a disgrace, a moral capitulation to abhorrent financial demons. FASB, the supposed watchdogs of the auditing profession, have allowed financial institutions to value their paper at whatever they wish. Here is an overvaluation of 59% and nobody gives a damn.

Key West Bank of Key West receives the cojones award for overstating by 97%.

If this was China every CEO and CFO of these companies would be put to death and their family money and possessions taken by the state.

Dear Jim,

Last Friday, 3/36/10, the FDIC announced the closings of four more banks, bringing this year’s total up to 41. Collectively, the four banks had reported assets of about $1.24 billion and deposits of about $1.1 billion.

The closings will cost the FDIC an estimated $320 million, 29% of the value of the deposits. Based on the FDIC’s loss estimates, the actual market value of the four banks’ assets is only about $782 million and had been over-stated by about 59%.

The worst in terms of over-valuation was the smallest of the four banks, Key West Bank of Key West, Florida. It had reported assets of 88 million and deposits of 67.7 million. The estimated cost to the FDIC is $23.1 million. Based on that estimate, Key West’s assets are only worth $44.6 million and had been over-stated by 97%.

Not surprisingly, the FDIC had to enter into a loss-share agreement on $75.8 million of Key West’s assets in order to induce to acquiring bank to take them over. That means the parties concluded only 14% of Key West’s assets were of sufficiently good quality that they could be accurately priced as of the time of the takeover.

Overall, the FDIC had to enter into loss-share transactions covering $871 million of the assets taken over by the acquiring banks.  That is about 70% of the stated value of the assets taken over, and about 111% of their estimated market value.

The largest of the four, Desert Hills Bank of Phoenix, AZ, had reported assets of $496.6 million and deposits of 426.5 million. The FDIC’s loss projection is $106.7 million, about 25% of deposits. Based on that estimate, the bank’s assets are really only worth about $319.8 million and had been over-stated by 55%.

The value of the remaining two banks’ reported assets had been over-stated by 48% and 65%. Therefore, of the four banks closed this week, the most realistically valued one over-stated its assets by 48%, and the least realistically valued one over-stated them by 97%.

As more of these fantasy valuations are revealed each week, it is amazing to observe how little attention is paid to them. Not too long ago, this would have been presumptive evidence of criminal fraud. Now, it is business as usual.

Respectfully yours,
CIGA Richard B.