Jim Sinclair’s Commentary
Analyst Richard B reviews the bank closing by the FDIC, the overvaluation, and the huge loss guarantees given to those that take over the busted institution.
Dear CIGAs,
The FDIC ended 2010 by closing 11 more banks between November 12, 2010, and December 17, 2010. That brought to 157 the total number of banks closed during 2010.
To put this in perspective, a total of 323 banks have been closed since late 2007. Three were closed in 2007, 11 in 2008, 140 in 2009 and 157 in 2010.
Collectively, these last 11 banks closed in 2010 had declared assets of $2.56 billion and deposits of $2.26 billion. The FDIC’s estimated cost of closing all 11 banks was $580 million, about 26% of deposits. The FDIC’s estimated losses for all of 2010 totalled $22.2 billion.
Loss Share and More Loss Share
In 9 out of 11 cases, resolution of the failures was accomplished by way of the FDIC entering into loss share agreements covering a high percentage of the assets taken over by the successor banks. In connection with these 11 closings, the FDIC entered into new loss-share agreements covering an additional $1.72 billion in assets.
That brings the total face value of assets covered by FDIC loss share agreements up to about $190.74 billion as of the end of 2010. During 2010, the FDIC increased the total value of assets under loss share by at least $69 billion.
Failures Continue to Show Dramatic Overvaluations
These last 11 failures of 2010 continue to evidence the extent to which management of the failed banks exaggerated the value of the banks’ assets. Viewed as a whole, the 11 banks had declared asset values of $2.56 billion and deposits of $2.26 billion. The FDIC estimated the closings cost 580 million, meaning the banks’ assets were really only worth $1.68 billion. Overall, bank management overvalued assets by $880 million, around 52%.
In two cases, the degree of asset overvaluation was particularly heinous, even judging by recent standards. In both these examples, management overstated the value of the banks’ assets by more than 100%.
Paramount Bank of Farmington Hills, Michigan, had stated assets of $252.7 million and deposits of $213.6 million. The FDIC estimated its closing cost $90.2 million. Based on that estimate, the bank’s assets were really only worth $123.4 million, and had been overvalued by 105%.
United Americas Bank, National Association, of Atlanta, Georgia, had stated assets of $242.3 million and deposits of $193.8 million. The FDIC estimated its closing cost $75.8 million. Based on that estimate, the bank’s assets were really only worth $118 million, and had been overvalued by 105%.
None of the executives responsible for overstating the value of these assets are being criminally prosecuted. There was barely any mention of these outrageous failures in the popular media.
There could be no greater testament to the Financial Accounting Standards Board (“FASB”)’s having turned banks’ financial statements into running jokes. The FASB has freed bank executives to place outrageously high values on banks’ worst, least liquid assets, with impunity.
Banks Being Closed Still A Drop In The Bucket
Finally, in spite of the fact that the FDIC closed more banks in 2010 than in any other year of this crisis, it is clear its backlog of troubled banks is growing. In its third quarter report released late November 2010, the FDIC indicated the number of institutions on its “Problem List” grew to 860 from 829 in the prior quarter.
Each month, dozens of new banks come under the most serious Federal Reserve and FDIC enforcement orders, placing their solvency seriously in doubt. Meanwhile, less than a dozen of the terminally ill are put out of their misery.
This leads to examples like Gulf State Community Bank of Carrabelle, Florida, whose failure was announced on November 19, 2010. The declared value of its assets ($112.1 million) actually ended up being less than the amount of its deposits ($112.2 billion), even though those assets were overvalued by at least 62%. Gulf State’s failure cost the FDIC an estimated $42.7 million, 38% of deposits.
This failure to deal with the problem in a timely and effective manner is Management of Perspective Economics, plain and simple. The problem is not going away; it is getting worse. Believing otherwise could be extremely hazardous to your financial health.
Respectfully yours,
CIGA Richard B
