Jim’s Mailbox

Posted at 11:06 PM (CST) by & filed under Jim's Mailbox.

Dear CIGAs,

The following is a summary of key statistics gathered from FDIC press releases regarding bank failures during 2011. The numbers are as follows:

Total Bank Failures:      92
Combined Assets:        $35.97 billion
Combined Deposits:     $32.06 billion
Total Estimated Cost:   $ 7.18 billion (approx. 22% of deposits).

Loss Sharing Remains Prevalent

Throughout 2011, the FDIC continued to enter into loss sharing agreements as a means of resolving the majority of failures involving larger institutions, and continued to agree to share losses on a high percentage of the assets taken over.

Of the 92 failures in 2011, 58 were resolved by way of the FDIC entering into loss sharing agreements with the acquiring banks.

The total asset value of the 58 failures resolved by way of loss sharing was $27.13 billion, approximately $468 million per bank on average.

The total asset value of the 34 failures resolved without loss sharing was $8.84 billion, approximately $276 million per bank on average.

In the 58 resolutions in which the FDIC employed loss sharing, the acquiring banks took on $26.82 billion of the failed banks assets and the FDIC agreed to share losses on $18 billion, approximately 67% of the value of the assets taken over.  That means the FDIC continues to take on the lions’ share of the risk that the failed banks’ hardest-to-value assets will turn out to be worth less over time than originally estimated.

The total value of assets under FDIC loss sharing agreements since 2008 is now approximately $202 billion.

Failures Continue To Show Dramatic Asset Overvaluations

The FDIC’s press releases regarding each bank failure provide a means to approximate the extent to which bank management has overstated the value of the failed bank’s assets. Combining the statistics from many different failures over time, we can get a sense of what has become the “permissible” level of overvaluation in the wake of the Financial Accounting Standards Board (“FASB”) having rolled back fair value requirements in April 2009.

The level of FASB-blessed overvaluation is determined by comparing the asset values reported by management to the actual, present market value of a given bank’s assets. In the case of banks that have just failed, a realistic estimate of the actual, present market value of their assets can be obtained by subtracting the FDIC’s estimated cost of protecting depositors from the amount of deposits reported at the time of the failure.

For all of 2011, the FDIC estimated it would cost $7.18 billion to protect the combined $32.06 billion in deposits at the 92 failed banks. That means the FDIC estimated the market value of all the failed banks’ assets to be about $24.88 billion. Comparing this number to the reported asset values, the indication is that bank management overstated asset values by $11.09 billion, or 45%.

There is every reason to believe that over-valuations of this degree prevail throughout the banking sector and are not limited to this group of failed institutions. Almost all of the banks that failed in 2011 had been under close scrutiny by their federal regulators for a significant amount of time prior to their failures. It is reasonable to infer that under such close scrutiny, bank management would not have been emboldened to value assets more than permissible under current FASB standards.

If we assume that overvaluations of even half this level – say 20% — prevail throughout the banking sector, there is barely a single institution that would remain solvent were its assets valued at market. This is one more reason to believe what we read constantly on this site, that QE to infinity is the only option for Western Central Banks and there will be no end to the flood of liquidity any time in the foreseeable future.

Sincerely yours,
CIGA Richard Belfanti

Dear Jim,

I thought you might be interested in my article published by Forbes today.

Also, I understand from Elizabeth Currier that the Committee for Monetary Research and Education has invited you to speak at the next dinner in New York on May 17th. I am on the board of that organization and, of course, it would be a great honor to have you participate.

Dear Dan,

I will be there.


Warren Buffett May Know Value, But He Doesn’t Know What Money Is
By Daniel Oliver Jr.

Warren Buffett may be able to spot value, but the poor man has no idea what money is. In his latest screed against gold, Buffett compares the metal of kings to tulips: an asset to be bought either for decorative value or in the hope it can be sold again to a greater fool at a higher price. Gold has little industrial use and does not procreate: “if you own one ounce of gold for an eternity, you will still own one ounce at its end.”

Buffett is correct that an once of gold will never increase nor diminish in size, but he ignores the fact that its value has been steadily increasing for at least 200 years.

According to the Historical Statistics of the United States, in 1800 an ounce of gold bought 11 bushels of wheat. In 1998, even as gold probed a generational low, an ounce purchased 85 bushels. Gold’s purchasing power in terms of copper went from 36 pounds per ounce to 365 pounds during the same time period, and it rose 5.3 times against cotton. Since 1998, gold has continued to rise, tripling against the CRB Commodities Index. Not bad for an inanimate metal the best use of which, according to Buffett, is to be fondled.



Jump the Creek for Silver

I agree with Jim, silver more a game than monetary solution, but it’s still one heck of a game.

Paper silver keeps chewing through resistance (swing highs) on increasing volume. The absorption of supply, i.e. the breach of resistance on increasing volume, illustrates what Richard Wyckoff described as a technical sign of strength (SOS). The 9/22/11 gap from 36.22 to 38.34 represents one of the last point of supply for silver before the test of $50. Silver’s trading action in and around the gap will help establish a time frame for the retest.

Silver ETF (SLV)