Colonial Bank Failure Highlights the Problem

Aug.23.09 | About: Colonial BancGroup, (CNB)

The bankruptcy of Colonial Bank (CNB) was the largest bank-bankruptcy in the U.S. since several large, U.S. financial institutions collapsed last year – with the most recent being Washington Mutual, last fall. However, there is one huge difference between the mega-bankruptcies of last year and the collapse of Colonial Bank a week ago.

During the large bank-failures of 2008, the acquiring institutions wrote-down the “assets” on the books of these banks by an average of 18% - according to a Bloomberg article. However, when BB&T Corp purchased Colonial, it immediately wrote-down Colonial's assets by 37%, double the amount of discounting done last year.

What has changed between now and then? The legitimizing of fraudulent accounting, when the supposed “watch-dog” of U.S. accounting, the Financial Accountability Standards Board brought in new “mark-to-fantasy” accounting rules in the U.S. this spring ( see “FASB strong-armed into mark-to-fantasy accounting”).

As the Bloomberg article points out, all U.S. bankers lie about the value of their assets – specifically the quantum of their future losses. The more they underestimate future losses, the less they put aside as “loan-loss reserves”. The less they put aside as reserves, the bigger they can pretend the bank's profits were. The larger the phony “profits”, the more they can give themselves as “performance bonuses”.

This is not a new phenomena. In fact, U.S. bank-lying was found to have severely aggravated their last “banking crisis” in the 1990's through also consistently under-estimating/under-reporting the deterioration of their “assets”.

Given this context, it makes it even more obvious how utterly ludicrous and irresponsible it was for the U.S.'s accounting “cop” to create new rules to greatly facilitate lying about assets. If you want a heroin-addict to stop using heroin, then you shouldn't hand that person a jumbo-pack of syringes. Clearly this politically-motivated change in U.S. accounting rules had nothing to do with “more accurate” accounting – which was the false pretext of the banksters, and the media propaganda-machine which serves them.

The changes had two, and only two goals: allowing the weaker, Wall Street fraud-factories like Citigroup and AIG to pretend to be solvent, while for the slightly stronger members of the U.S. financial crime syndicate it was a “green light” to loot the same corporate treasuries which had just been stuffed full of U.S. taxpayer dollars.

As I have observed previously, the “performance bonuses” which Wall Street hands out are rewarding one aspect of their performance: the ability of these career-criminals to lie. As Bloomberg wrote, the bigger the lies, the bigger the bonuses.

Not surprisingly, bank-fraud rose by double-digits last year in the United States. However, what is a truly remarkable feat for this cast of compulsive liars is that despite the fact there were millions fewer mortgages financed last year, mortgage-fraud jumped 23% from 2007. It takes a truly dedicated group of criminals to achieve that sort of year-over-year gain in a collapsing market.

However, the significance of this new level of lying in the U.S. financial sector goes beyond stealing all of the money from their own corporations – and calling it “performance bonuses” (Goldman Sachs is set to hand out more than 100% of its “profits” as “performance bonuses” this year). It once again raises the issue of bank-solvency for the sector, as a whole, and once again illustrates that the Geithner “stress tests” were nothing but a ludicrous sham.

If the lies which the management of Colonial Bank were telling concerning their “assets” were twice as large as the average magnitude of bank-lying last year, then what does this tell us about the “stress-tested”, Wall Street fraud-factories? Having just finished scamming investors and institutions all over the world for trillions of dollars (leaving many of them in financial ruin), is there the slightest doubt that these champion-liars would be engaging in much greater falsification in their accounting than Colonial Bank?

The difference in the U.S. now from a year ago is that every single category of bank loans are experiencing much higher rates of defaults and much higher rates of delinquencies than a year ago, yet in the fantasy-world of Wall Street accounting, suddenly almost all these banks are “profitable” again?

Previously, critics of the new “mark-to-fantasy” accounting rules in the U.S., had to rely upon only overwhelming logic to discredit the claims of “profitability” from these professional liars. However, Colonial Bank provides us with the much sought-after “smoking gun”.

As I wrote less than a week ago in “U.S. Banking crisis just BEGINNING”, with all categories of delinquencies near or at all-time records, and with a huge spike in mortgage-resets about to kick-in over the next two years, there was never a possibility that the U.S. financial crime syndicate had miraculously returned to “profitability”.

Indeed, as I wrote less than a month ago (“Credit-risk spike means continued collapse for U.S. economy”), credit-reporting agency, TransUnion, recently released a report showing that its “credit risk” index just hit a new, all-time record in July. Much like loan delinquencies are a highly accurate indicator for future defaults, the soaring reading in “credit risk” is a highly accurate indicator of a pending rise in delinquencies.

Thus, despite the constant stream of delusional hype which emanates from the U.S. propaganda-machine, there has never been the slightest doubt that the only possible direction for the U.S. financial sector (and the economy, as a whole) is down.

Throughout this decade, the Wall Street banksters plundered more than $100 BILLION in fantasy “profits” from their global Ponzi-scheme – and then needed roughly twenty times that amount in government hand-outs to avoid a sector-wide collapse last fall. Then, as soon as that crisis (temporarily) passed, they began to immediately loot the taxpayer hand-outs, as well. At the same time, all of these fraud-factories have slashed their dividends to shareholders, adding to the massive losses of these investors from the melt-down in share prices.

One might think that these shareholders might be getting tired of being financially “raped” by these banksters. However, as I pointed out in “Explaining U.S. Market Psychology”, more than 50% of the shares of these fraud-factories are held by the wealthiest 1% of the U.S. population. These ultra-wealthy aristocrats are more out of touch with the real world than was Marie Antoinette – when she offered the starving French masses “cake”, just days before they chopped off her head.

While this is unlikely to occur in the United States (given the acute shortage of guillotines), it might be time for the Wall Street banksters to take heed of history.

They may own the politicians. They may own the regulators. And they may simply own most of America. However, they don't own the billion or so guns currently in the possession of an increasingly angry American population.

Massive economic suffering and a billion guns is a very dangerous mix!

Disclosure: I hold no position in BB&T Corp (NYSE:BBT), Goldman Sachs (NYSE:GS), AIG (NYSE:AIG) or Citigroup (NYSE:C)