Break down of Commercial Bank Credit
CIGA Eric
The real economy continues to stagnate. This is reflected by anemic loan growth of the influence business & commercial and real estate loan sectors. These two sectors represent over 50% of total bank credit within the US. Yet, despite this the lackluster participation within critical sectors, consumer and credit card loan growth has surged. Is this a reflection of desperation or foolishness? That will be answered in time.
Total Bank Credit Table: 
Source: federalreserve.gov
Dear CIGAs,
The salient point is the FDIC is making up a significant portion of the overvaluation of assets permitted by the FASB.
Who covers you and I if we overvalue our assets in a certified balance sheet? This simply is wrong.
Dear Jim,
The FDIC announced four more bank closings last Friday (5/14/10), bringing this year’s total up to 72. One of the banks that failed, Midwest Bank and Trust Company of Elmwood Park, Illinois, was fairly large, with stated assets of $3.17 billion and deposits of $2.42 billion. The other three were relatively small.
The FDIC estimates that Midwest’s failure will cost $216.4 million, about 9% of deposits. Based on that estimate, the bank’s assets were really only worth about $2.20 billion, and had been over-valued by 43%.
Furthermore, the FDIC had to enter into a loss share agreement with the acquiring bank covering $2.27 billion of the assets it took over from Midwest. That is about 69% of the stated value of Midwest’s assets.
Collectively, the remaining three banks had assets of approximately $341 million and deposits of $338 million. The FDIC’s total loss projection for all three was $85 million, which amounts to 25% deposits. Based on that projection, the banks’ assets (collectively) were really only worth about $253 million, and had been over-stated by about 35%.
The acquiring banks took over virtually all of the failed banks’ assets, and the FDIC agreed to enter into loss share agreements with them covering $263 million of those assets. That is about 77% of their stated value.
These are certainly not the worst statistics we’ve seen. However, they need to be considered in the context of the significant additional loss share obligations undertaken by the FDIC in connection with each bank closing.
Over at least the past year, in each case where the FDIC has accomplished a closing with the successor bank taking over the failed bank’s assets, it has ended up having to enter into a loss share agreement covering some 65-70% of the stated value of the failed bank’s assets. The total value of assets the FDIC now has guaranteed under loss share is about $168 billion.
This represents a huge potential loss to the U.S. taxpayer in the event the FDIC’s current loss projections prove to be overly optimistic, and the loss potential is growing each week. We can only imagine the total value of assets the FDIC will end up guaranteeing before the end of this crisis.
Respectfully yours,
CIGA Richard B.
Dear Jim,
I know you have a deep respect for Chairman Volcker.
It surprises me that he would make a public statement concerning the euro that was akin to pouring gas on the fire.
Sincerely,
CIGA Arlen
Dear Arlen,
Volcker would seek any advantage he could for the benefit of the US.
You must remember that his activities in the 80s totally slammed both South America and Africa when he ran overnight money to above 20% and 10 year to 14 7/8%. The developing nations all imploded based on what the Chairman deduced as an action in the best interest of the USA.
It very well might be seen as in the best interest of the USA to not have a euro to compete with.
Volcker has already stated that the present problem is the Sum of All Fears that can be cured only by doing politically impossible things. I do not believe he holds out much hope for that.
Exacerbating the euro problem might just speed this crisis along.
Regards,
Jim
