DOOMSDAY SCENARIO - WHAT IS HAPPENING TO OUR BANKS
[WORK IN PROGRESS]; the following is from a solicitation, obviously to generate business, but the facts and opinions about the future have merit and should be evaluated.
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Subject: Bank Failures in Slow Motion
The Daily Reckoning U.S. Edition
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The Daily Reckoning | Monday, November 1, 2010
* US investors express an optimism born of delusion,
* Why haven't there been more bank failures so far?
* Plus Bill Bonner on the looming retirement disaster and more...
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My editing notes. Did you ever wonder why with the US economy being
so bad, how it is that the banking system seems to be perking along
comfortably. Well look below and see the subterfuge that is going on and
unseen by you. Then look and see the article in the IMF journal to see
what Washington has really done to you.
The Daily Reckoning Presents
Bank Failures in Slow Motion
Douglas
French
[Speech given at The Economic Recovery: Washington's Big Lie, the
Supporters Summit for the Ludwig von Mises Institute, October 8, 2010.]
Every Friday evening a few more banks are closed - seized by the
various state banking regulators and handed over to the Federal
Deposit Insurance Corporation (FDIC) for liquidation. This all
happens rather quietly, barely making the news. We're told these bank
failures are no big deal. No reason to panic. The names of the banks
change over the weekend and many customers don't notice the
difference.
We've only had 294 failures this cycle, but it is a big deal: adjusted
to current dollars, the Depression banking crisis was $100 billion,
the S&L crisis was $923 billion, and the current crisis is nearly $8
trillion.
So while FDIC chairwoman Sheila Bair said the current crisis would be
"nothing compared with previous cycles, such as the savings-and-loan
days," it's actually much bigger, because the financial sector had grown
to be nearly half the economy by 2006 - as measured by the earnings of
the S&P 500.
But the question is; why haven't there been more bank failures? In 2008,
there were 25 failures, last year there were 140, and so far this year 129
have been seized on Friday nights. The greatest real-estate bubble in
history has popped - first residential and now commercial - and we only
have 294 failures?
It takes easy credit to make a real-estate bubble and it was America's
commercial banks that provided most of it. It's estimated that "half the
community banks in America remain overleveraged to commercial real
estate, and the possible losses that remain are about $1.5 trillion,"
according to bank-stock analyst Richard Suttmeier.
The Moody's Commercial Property Price Index (CPPI) has fallen
43.2 percent since its peak in October 2007. Raw-land and
residential-lot values have fallen even further. Almost 3,000 of the
7,830 banks in the United States are loaded with real-estate loans where
the collateral value has fallen over 40 percent, and yet less than 300
banks have failed?
We all know what's happened to the residential-property market, but to
illustrate how bad the situation is for the commercial market, over 8
percent of commercial mortgages that have been packaged into
bonds are delinquent; more than $51.5 billion of such loans are at
least 60 days late on payments compared with $22 billion a year
ago.
If anything the commercial property market would seem to be getting
worse. Losses on loans packaged into US commercial-mortgage-backed
securities totaled $501 million in August - more than double the $245
million in April, and over 10 times the $41 million in losses of a year ago.
Past-due loans and leases at the nation's banks and S&Ls increased 16.2
percent from second quarter 2009 to the second quarter of this year.
Restructured loans and leases increased nearly 54 percent.
The delinquency numbers are bad anyway you look at it. So, they must
be reflected in bank's profit numbers, right? Well, no. Second-quarter
earnings by the nation's banks were the highest in 3 years - nearly $22
billion.
Based on these numbers, FDIC chair Sheila Bair claims, "The banking
sector is gaining strength. Earnings have grown, and most asset quality
indicators are moving in the right direction, putting banks in a stronger
position to lend."
And bankers must figure the coast is clear: they are cutting their
provisions for bad debts. Yes, at a time when one out of four Americans
has a sub-600 FICO score, a quarter of all homeowners are underwater
on their mortgages, and commercial real estate is hitting the ditch, banks
are dipping into their loan-loss reserves to report profits.
To illustrate, bankers have cut their ratio of loans to reserve
coverage almost in half - that is the amount reserved divided by
noncurrent loans (90 days past due or more and loans on
nonaccrual). This ratio has declined from 120 percent in March of
2007 to 65.1 percent at June 30 of this year.
Banks added a total of $40.3 billion in provisions to their loan-loss
allowances in the second quarter: that is the smallest total since the first
quarter of 2008 and is $27.1 billion less than the industry's provisions in
the second quarter of 2009.
So, the banking industry made $21.6 billion in Q2 by not putting as
much away for loan losses.
By the way, of the $21.6 billion in second-quarter profits, $19.9 billion
was earned by the 105 largest banks in the country. The other $1.7 billion
in profits was spread between the other 7,725 banks.
So the big banks are backing off on putting money in reserve and
booking big profits only months after being rescued by government
TARP moneys (by the way, 91 banks are behind on
making their TARP payments to the government).
More importantly, these banks were the primary beneficiaries of
accounting-rule changes in April of 2009 - amendments to FASB rules
157, 115, and 124, allowing banks greater discretion in determining
at what price to carry certain types of securities on their balance
sheets and recognition of other-than-temporary impairments.
"The new rules were sought by the American Bankers Association, and
not surprisingly will allow banks to increase their reported profits and
strengthen their balance sheets by allowing them to increase the
reported values of their toxic assets," according to James Kwak,
coauthor of 13 Bankers: The Wall Street Takeover and the next
Financial Meltdown.
So the banks get some accounting breaks and are aggressively reporting
profits at the expense of putting money in loan-loss reserves; still, why
haven't there been more failures?
Earlier this year, Elizabeth Warren and her Congressional Oversight Panel
did a report that indicated 2,988 banks were in trouble because of
real-estate concentration in their loan portfolios.
Ms. Warren noted that
* office vacancies had increased 25 percent since 2006-2007,
* apartment vacancy was up 35 percent,
* industrial was up 45 percent, and
* retail vacancy had increased 70 percent since 2006-2007.
The report said the recovery rate for
* defaulted real-estate loans was 63 percent last year.
* Land-loan recoveries were only 50 percent.
* Development-loan recoveries were even worse at 46 percent.
Another banking expert who sounded a warning signal about the banking
industry was bank analyst Chris Whalen, who, a year ago, estimated
the number of troubled banks to be 1,900. The FDIC itself said there
were 829 problem institutions on its top-secret radar by June 30, 2010 -
almost exactly double the 416 announced by the FDIC a year ago at
midyear.
In other words, problem loans are still causing problems. To be continued
tomorrow...
Regards,
Doug French,
for The Daily Reckoning
Joel's Note: Douglas French is president of the Mises Institute and
author of Early Speculative Bubbles & Increases in the Money
Supply. He received his master's degree in economics from the
University of Nevada, Las Vegas, under Murray Rothbard with Professor
Hans-Hermann Hoppe serving on his thesis committee. French teaches in
the Mises Academy. This article originally appeared in the Mises Daily.
Bill Bonner
US Debt Crisis: What NOT to Do When Your Country is Broke
Bill
Bonner
Reckoning from Baltimore, Maryland...
Another month gone by. Another month closer to bankruptcy.
Not you, dear reader.
We're talking about the US government.
But hold that thought...
Let's turn to the markets. Hmmm... Not much action. The Dow rose a
piddly 4 points on Friday. Gold went up $15. Not much to talk about
there...
Investors are waiting to see what happens next week. They're sitting on
the edge of their chairs. Will Ben Bernanke play it cool? Or will he want to
do something really big, bold, and bumbling?
We're not as curious as most investors. We doubt that he will want to go
too far in either direction. Most likely, he'll do what investors
expect...announcing more quantitative easing - money printing, in other
words - but being a little cagey about how much, and when.
So, let's turn back to the biggest bankruptcy of all time.
Many are the ways the facts are interpreted, distorted and bearded. But
the numbers keep going up.
The red numbers, that is.
The US press barely reports the story. They know Americans aren't
interested. In the US, people figure we'll muddle through...we'll work our
way out of debt...
Or, hey, maybe there will be a miracle! In the US, we believe in all sorts
of things that are miraculous...unbelievable...and preposterous.
Got too much debt? We'll fix it by giving you more debt!
People short of real money? We'll fix that by giving them make-
believe money.
Did the authorities miss the biggest financial blow up of all time? Did they
fail to stop the biggest Ponzi schemer in history - even after they were
tipped off? Did they completely "blow it" when it came to controlling the
bubble and the damage it caused?
Yes? Well, let's give them $10 trillion of the taxpayers' cash and credit
and see if they can do better the next time!
Fantasies, hallucinations, delusions - and don't forget the "war on
terror"...the first war on nobody in particular in history.
But let's get back to who owes what to whom. We're talking about the US
government. And Canada's Globe and Mail has the story:
The scary actual US government debt
Boston University economist Laurence Kotlikoff says US
government debt is not $13.5-trillion (US), which is 60 per cent
of current gross domestic product, as global investors and American
taxpayers think, but rather 14-fold higher: $200-trillion - 840
per cent of current GDP. "Let's get real," Prof. Kotlikoff says.
"The US is bankrupt."
Writing in the September issue of Finance and Development, a journal of
the International Monetary Fund, Prof. Kotlikoff says the IMF itself has
quietly confirmed that the US is in terrible fiscal trouble - far worse than
the Washington-based lender of last resort has previously acknowledged.
"The US fiscal gap is huge," the IMF asserted in a June report.
"Closing the fiscal gap requires a permanent
annual fiscal adjustment equal to about 14 per
cent of US GDP."
This sum is equal to all current US federal taxes combined. The
consequences of the IMF's fiscal fix, a doubling of federal taxes in
perpetuity, would be appalling - and possibly worse than appalling.
Prof. Kotlikoff says: "The IMF is saying that, to close this
fiscal gap [by taxation], would require an
immediate and permanent doubling of our
personal income taxes, our corporate taxes and
all other federal taxes.
"America's fiscal gap is enormous - so massive
that closing it appears impossible without
immediate and radical reforms to its health care,
tax and Social Security systems - as well as
military and other discretionary spending cuts."
He cites earlier calculations by the Congressional Budget Office (CBO) that
concluded that the United States would need to increase tax revenue by
12 percentage points of GDP to bring revenue into line with spending
commitments. But the CBO calculations assumed that the growth of
government programs (including Medicare) would be cut by one-third in
the short term and by two-thirds in the long term. This assumption, Prof.
Kotlikoff notes, is politically implausible - if not politically impossible.
One way or another, the fiscal gap must be closed. If not, the country's
spending will forever exceed its revenue growth, and no one's real debt
can increase faster than his real income forever.
Prof. Kotlikoff uses "fiscal gap," not the accumulation of deficits, to define
public debt. The fiscal gap is the difference between a government's
projected revenue (expressed in today's dollar value) and its projected
spending (also expressed in today's dollar value). By this measure, the
United States is in worse shape than Greece.
Prof. Kotlikoff is a noted economist. He is a research associate at the US
National Bureau of Economic Research. He is a former senior economist
with then-president Ronald Reagan's Council of Economic Advisers.
He says the US cannot end its fiscal crisis by increasing taxes. He opposes
further stimulus spending because it will simply increase the debt. But he
does suggest reforms that would help - most of which would require a
significant withering away of the state. He proposes that the government
give every person an annual voucher for health care, provided that the
total cost not exceed 10 per cent of GDP. (US health care now consumes
16 per cent of GDP.) He suggests the replacement of all
current federal taxes with a single consumption
tax of 18 per cent. He calls for government-sponsored personal
retirement accounts, with the government making contributions only for
the poor, the unemployed and people with disabilities.
Without drastic reform, Prof. Kotlikoff says, the
only alternative would be a massive printing of
money by the US Treasury - and hyperinflation.
Wait a minute, says our old friend Jim Davidson. Professor Kotlikoff is
wrong. He "unaccountably overstates the solvency of the US," he says.
Jim makes a good point. It's not total GDP output that supports the
government. It's just the private sector part. The government part is a
cost...not a source of financing. The total fiscal gap - unfunded
government obligations - is over $200 trillion. It's about 14 times GDP.
But compared to the real output of the private
sector, it's 20 times as great.
If this were a more traditional debt burden, it would have to be financed.
Interest rates are at a 60-year low. But they could easily be
back up at 5% in short order. At that rate, it
would take 100% of private sector output just to
keep up with it.
Professor Kotlikoff is right. The US is already broke. Busted. Bankrupt. It
cannot possibly honor its commitments. One way or another, it must
default on them.
But how? That's what we're going to find out.
And more thoughts...
"Retirement Disaster Ahead," says The Wall Street Journal.
Yep. Too many retirees. Too little money.
They're counting on Social Security. But as we see above, government is
going to have a hard time honoring its commitments.
The other thing that is happening is that some basic costs - namely food
and energy - are going up, even as the consumer price index stays flat.
Why are food and energy becoming more expensive? Because the
foreigners are buying food and energy. And there are a lot of
them. Foreigners, that is.
And why is that bad news? Where does that leave the typical US
retiree? Without increases in the CPI the US government doesn't
adjust Social Security payments to the upside. Meanwhile, the real
cost of being retired - food, fuel...along with everything else - goes
up.
Most likely, the strain of trying to support so many retired people
will destroy the modern welfare state model. As in Argentina, old
folks will find that they don't get from the government what they
were promised. They'll have to figure out how to make do on their
own.
Our advice: don't grow old. Don't retire. Don't get sick. Don't trust
the feds. And don't sell your gold.
Regards,
Bill Bonner,
for The Daily Reckoning
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