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Discussion in 'Politics, Religion, Social Issues' started by flopticalcube, Mar 19, 2010.
Wow, one bank per day.
About $20B left in the kitty. A couple more medium sized bank failures and FDIC will need to go to the Treasury with their cap in hand.
It is sad the FDIC has been bailed out multiple times yet the credit union equivalent of it has never had to be bailed out.
Then again credit unions do not fail as often. Makes you wonder what they are doing different.
Most credit unions I've dealt with are VERY conservative with their lending practices. More conservative lending means fewer bad loans, meaning no cashflow problems.
Not trying to rub salt in the wounds, but.... those boring Canadian banks must be very prudent. Not a single one has failed. Since the Big Depression 80 years ago. Sometimes, especially when you are dealing with people's life savings, it's better to be prudent rather than trying to make just as much money as you can by taking risks. The current situation in the US means that more and more regional bank chains are being bought by the Canadian banks. Hmmmmm.
I wonder if credit unions have been subject to the same draconian, community reinvestment act strong-arming that forced banks to give unsustainable loans to people who really should not be approved for a loan or get approved for way too much than they can afford.
The Canadian banks are doing it right. They require much more down to get the loan and have not let entitlement legislation ruin their banking system as we did with unsustainable entitlement programs such as the Community Reinvestment Act, among others.
We should be ashamed we let this happen. Just because people want something does not mean they are entitled to it. How about work for it?! Now there's a good idea.
except my CU was placed under conservatorship or whatever and later had to merge with another CU about 3 years ago
Clearly you haven't been paying attention to the "entitlement" mindset that is slowly taking over this country. People don't want equal opportunities any more, they want equal outcomes.
The FDIC getting bailed out is the fault of the banks doing bad business deals and the FDIC is not the responsible party for the laws that the banks need to abide by. They are just the group that insures your deposits. The FDIC has a very smart lady running the shop but the big boys have been known to ignore the FDIC and have been proven quite wrong over the last 2 years or so.
Also, the FDIC's money comes from payments the banks make, not sure of all the details but they were some talks earlier this year I think about all the banks having to make (extra?) payments in advance to help get their fund levels up.
As to the credit unions, they are generally member owned in such a way that they aren't really for profit in the same way banks are so they are operating under a different set of goals/rules/etc. Banks have also been getting themselves in trouble (ie Citi) for trying to be one stop shops and getting involved in hedge funds & currency trading etc which can be extremely risky when your bet is wrong.
Well, generally credit unions aren't making all the other risky business decisions as well as risky loans, everyone in home lending is getting nailed pretty hard this time around because of the massive depreciation in the value of homes from all the foreclosures etc, about the only way to avoid some of it was to just not be lending money to people in any area of the country that wasn't seeing 10-40% depreciation. Even if you played all your cards correctly all the other lenders throwing cash at anyone who asked for it would have blownthe value of housing in most regions for you.
Plenty of talk now about younger generations say 13-to early 20s who have seen the blow up and may not believe that buying a house is the best investment, which might continue to hurt the market for a lot longer yet.
As to the loans themselves, the Federal Government back in the Clinton days or maybe even earlier was pushing home ownership as a big thing, well lots more people did buy houses, but if you want a significant increase in the amount of people buying homes you have to ease the credit restrictions imposed on said buyers. Just by asking everyone to have 15-20% up front removes massive amounts of people from the potential market. By the time some families spend years and years saving up $20-30k they might well be in their 50s and have no hope of ever paying the loan off as their earned income potential is going to start going down soon if it hasn't already.
I think the intent of some of the government initiatives were valid, the way they were executed and the way in which lenders took advantage of the regulations made the mess we see more likely to have occured at some point in time, it was just a matter of how big a mess we were going to be in.
Never mind the borrowers who either should not have borrowed more than they could afford or getting into a mortgage they should not have entered into at all.
Just because somebody wants something does not mean they are entitled to it nor are able to maintain it.
In a way we could call it "social natural selection".
Apart from Barings bank which went bankrupt in the early 1990's no British bank had needed a bailout since 1896 when Barings was bailed out before.
Obviously since the 1990's we haven't done that well with Northern Rock, LLoyds and HBOS since then but still, its not impossible to last a long time without a bailout.
Looks like bailouts to me.
But the British banking system was the very essence of prudence until Nick Leeson came along. Actually "Big Bang" was the real start of things, in my mind.
Are you really promoting social Darwinism? WTF
But wait... I thought Timmy Geithner had this whole bank thing under control? Baracky mentioned that in SOTU... even praised Timmy for it.... can we anticipate a plan of plausible deniability by Obama administration when these banks continue to fail or will they fall back on the tried and true "inherited problem beyond our control" ?
Learn about how the US financial system works before commenting. Nothing to do with the Treasury or the administration. Everything to do with lax lending practices and insufficient funds in the insurance pool under FDIC.
"Over the past two Fridays, 3/12 3/19/10, the FDIC announced the closings of 10 more banks, bringing this years total to 37. Collectively, the 10 banks had reported assets of about $4.4 billion and deposits of about $4.1 billion.
The closings will cost the FDIC an estimated $1.47 billion, approximately 36% of the value of the deposits. Based on the FDICs loss estimates, the actual market value of the 10 banks assets is only about $2.634 billion and had been over-stated by about 67%.
The closings of several of the largest banks stand out. Typically throughout this crisis, the largest banks have generated the largest losses proportionally.
Advanta Bank Corp. of Draper, Utah, had reported assets of $1.6 billion and deposits of $1.5 billion. The FDICs loss projection is $635.6 million, about 42% of deposits. Based on that estimate, the banks assets are really only worth about $864.4 million and had been over-stated by 85%.
Appalachian Community Bank of Ellijay, Georgia, had reported assets of $1.01 billion and deposits of $917.6 million. The FDICs loss projection is $419.3 million, about 46% of deposits. Based on that estimate, the banks assets are really only worth about $498.3 million and had been over-stated by 103%.
In addition, it is important to note that the loss for Park Avenue Bank, and for eight of the other banks closed over the past two weeks, could likely end up being more than presently estimated because the FDIC entered into loss-share agreements with respect to at least two-thirds of the value of the assets taken over by the successor banks. In Park Avenues case, the FDIC had to enter into a loss-share transaction with respect to $379.8 million of those assets.
The FDIC provides a great deal of information regarding the specifics of these loss share agreements in a release entitled, Loss-Share Questions and Answers that can be found at:
Broadly speaking, the FDIC has agreed to reimburse between 80% and 95% of any losses the acquiring banks incur on the assets beyond specific estimates agreed to at the time of the takeover. For commercial assets, the agreements typically run for eight years and for single family mortgages, they run for 10 years.
That is a huge amount of risk to assume and a very long period over which to assume it. As I will discuss in a separate article to follow, the FDIC has in effect been forced to enter into these loss share agreements because without them, the acquiring banks were refusing to take over any substantial amount of the failed banks assets.
The FDIC includes an estimate of what it believes it will have to pay out under each loss share agreement when it makes its loss projection for the bank failure in question. Still, the manner in which these loss share agreements have been structured makes it clear that the parties believe the greater risk is that the assets will lose more value more than expected.
In total, the FDIC took on an additional $2.1 billion in assets under loss share agreements in connection with the bank closings over this past two weeks. Since the beginning of this crisis, it has entered into agreements with a total of about $136.5 billion in assets under loss share.
"What is clear here is the egregious OVERVALUATION of the assets of financial entities thanks to the capitulation of the FASB that allows banks and other financial entities to pick the value of their assets. This is a public disgrace that the public has no idea about. In these cases the overstatement was between 37% and above 100%. This is outrageous beyond outrageous.
The FDIC has accepted loss guarantees up to 95% of assets going out as long as 10 years. The same people who brought this crisis to you are buying these banks with the long term FDIC guarantees."
I'm glad someone else brought this up instead of me. I hate being the guy who brings up the same topics over and over again.
Every time I hear someone talk about our economic "recovery" and think about the weekly bank closings, I have to laugh or else it would just be too sad. Our economy is the weakest it has ever been. Much weaker than in 2008. Every bailout, quantitative easement, increase in our trade imbalance, and every other decision made in the name of "stimulating" our economy has in fact weakened it.
Oh give me a break. FAS 157 doesn't allow valuation off assets and liabilities at whatever number banks see fit. First off, FAS 157 specifies fair market value and there are many factors taken into account when valuing these assets and liabilities, even thinly traded assets. Secondly, all these banks are audited and as such any judgment used by the bank in valuing these assets and liabilities is reviewed by independent auditors; the assumptions banks make have to hold up in the auditors judgment. Third, the market knows this method is used and as such discounts these facts into the value of the corporations' stocks.
I love how people make this as simple as "oh, banks can use whatever value they want for these assets and liabilities." That is simply not the case. Determining the value of these assets and liabilities is still a complex task that accountants and auditors with years of experience sometimes struggle with.
Like it or not, some investments have been valued in a similar fashion for quite a while. See FAS 115 and available for sale and trading securities. This isn't something terribly new, the rules have just changed somewhat to better reflect the value of thinly traded assets and liabilities.
"The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value accounting rules" on April 2. "Changes to fair-value, or mark-to-market accounting, approved by FASB today allow companies to use significant judgment in gauging prices of some investments on their books, including mortgage-backed securities."
If the accounting standards are so good, why are these failing banks overvaluing their assets by so much?
I never said they didn't get to use judgment, however, its still double checked by auditors and the auditors have to agree with that judgment. Additionally, there are guidelines that are used when coming up with those prices (if fact, IIRC, there are three levels or qualities of information used to value these assets and liabilities); if the market for an asset is thin, the valuation is supposed to reflect fair market value for that asset in an orderly market (clearly an orderly market isn't considered to be in existence for many of the assets banks are valuing).
Mark to Market
This isn't some simple process where banks just say, "oh, the asset is worth $x" with nothing to support it. The process of coming up with those values reflects a lot of factors and is not as simple as those articles make it out to be. Is there judgment on the part of the banks? Yes, of course, but accounting in large reflects a hell of a lot of judgment on the part of companies, executives, accountants, auditors, etc.
Well you can overvalue or undervalue your assets all you want and still fail as a bank. Banks fail due to liquidity and cash flow problems, not the over valuation of non-cash assets that have a thin market. The FDIC is taking over banks because they can't return depositors deposits, not because of how they're reporting their investments.
Blame the banks for poor investment and lending practices, not the FASB for its accounting rules (which were largely the result of government pressure).
For the record, I'm not a huge fan of FAS 157-c (I believe we're on c now, I think d is still proposed), largely because I feel that it doesn't provide quality information for non-professional investors who don't understand anything about accounting practices. I do feel that it was a necessary evil in this case, however. The FASB bowing to government pressure is also something I don't like. There is a reason accountants have an independent rule issuing body and, IMO, its mostly because politicians and the government have little clue about anything related to accounting, economics, or finance.
Looks like 2009 to me, which is after the 1990's .
You mean you guys don't use a different calendar across the pond? I always figured since s equals z and color manages to be spelled with a u in it, everything else was different over there. I just figured 1990's was the British equivalent of late 2000's here in America.
Nice explanation. I hear the argument for relaxing standards during "thin markets" but I don't like it-at least not in this case because I think the real value of toxic assets and underwater mortgages are probably lower than current market values. That's just my own suspicion. It's been about a year-how long can they claim it is a thin market? Eventually, we'll just have to admit losses. Aren't they admitting them when they fall, like with these 7 banks this week?
I don't doubt banks are overvaluing slightly. The problem I see is that the assets' values are still dropping and the banks are chasing them down. It will be interesting to see if a bank that purchases these assets from a failed institution then itself fails due to the assets continuing under-performance. At any rate, these things are years or even decades in the making and at least a few years in the unfolding so it should be a big year for failures (but I'm not sure if we'll reach 300).