I am constantly amused by those people who claim there is some vast "conspiracy" in this country when it comes to banks, balance sheets, and fraudulent lending and accounting.
There is no conspiracy.
It is, in fact, "in your face" fraud.
The FDIC does us the courtesy of explaining it virtually every Friday night, right on their web page.
I am simply going to take last night's bank closures, which numbered four. One of them has no "deposit insurance fund" estimated loss available, because they didn't find someone to take the assets - they're just mailing checks. But the other three do.
- Waterford Bank, Germantown MD: $155.6 million in assets, $156.4 in insured deposits. They were "underwater" by $800,000, right? Wrong: Estimated loss, $51 million. That is, the assets of $155.6 million were overvalued by approximately 30% at the time of seizure.
- Bank of Illinois, Normal IL: $211.7 million in assets, $198.5 million in deposits. They were "underwater" by $13.2 million (which is why they were seized), right? Wrong: Estimated loss $53.7 million. That is, the the assets of $211.7 million were overvalued by more than 25% at the time of seizure.
- Sun American Bank, Boca Raton FL: $535.7 million in assets (so they claimed anyway), $443.5 million in total deposits. Heh, why did you seize them - they have more assets than liabilities? Oh wait: Estimated loss: $103.8 million, so the actual assets are worth $443.5 - $103.8, or $339.7 million. That is, the assets of $535.7 million were overvalued by a whopping 37% at the time of seizure.
This isn't new, by the way. In August of 2009 I went through Colonial Bank's failure based on BB&T's presentation to its shareholders on the "merger" - and gift it was given by the FDIC. It too showed that Colonial had been carrying assets on their books at a ridiculous 37% above where BB&T ultimately marked them as a whole.
Folks, your bank is being assessed deposit insurance premiums to pay for these losses. You are paying these losses through increased fees and interest expense on your credit cards and all other manner of borrowing.
You are paying for outrageous, pernicious and endemic balance sheet fraud.
There is no conspiracy. It is right under your nose. One of these three banks, based on their balance sheet, wasn't even underwater - it was "to the good" by nearly $100 million dollars.
The balance sheet was a flat, bald-faced lie.
You want to sit for this?
Why should you?
Now let's ask the inconvenient question:
Why should we believe they are not? You can go through more than a year's worth of FDIC bank seizure information and in essentially every single case you will find that overvaluations of somewhere from 20-50% have in fact occurred, yet not one indictment for book-cooking has issued.
So let's be generous and assume that the "big banks" are over-valuing their assets by 25% - the lower end of the range of what the FDIC says is, through actual experience, what's going on, and add it all up.
- Bank of America (BAC) shows $2.25 trillion in assets.
- Citibank (C) shows $1.89 trillion in assets.
- JP Morgan/Chase (JPM) shows $2.04 trillion in assets.
- And Wells Fargo (WFC) shows $1.31 trillion in assets.
This totals $7.49 trillion smackers.
The FDIC's experience with seizing banks thus far suggests quite strongly that all four of these entities are lying about these valuations, and that were they to be seized the loss embedded in them (and for which you, the taxpayer would be responsible) is somewhere between $1.49 and $2.99 trillion dollars.
Incidentally, neither the FDIC or Treasury happens to have either $1.49 or $2.99 trillion laying around, and it is highly questionable if they could raise it, should that become necessary.
Now of course neither you or I can prove this is correct. However, we can look at the FDIC's own published bank closing statements, and derive from them a pattern stretching back more than a year now that has disclosed that in essentially each and every case the banks in question have overvalued their assets by anywhere from 20-40%, and that as of the day of the seizure such an overvaluation was in fact a continuing and ongoing practice.
Back in the beginning of 2009 we had people argue that "mark to market" was invalid - that in fact the market-based pricing losses that were being claimed were ridiculous and would never happen. One of the claimants was the Federal Home Loan Bank of Seattle, which said that the $300 million in mark-to-market losses would not actually happen - that the real loss was only going to be $12 million dollars.
FHLB Seattle recently filed suit against the bundlers of this trash, claiming, surprise-surprise, that the real loss is not $12 million, not $300 million, but $311 million - on that bundle of trash alone. In all they are seeking $2 billion in damages.
We have now learned, a year into this "experiment" with mark-to-model promulgated at gunpoint by Congress that:
- The banks indeed have been lying about asset valuation and the proof comes in the form of the FDIC seizures, which in essentially case have documented massive and outrageous overvaluation of assets on bank balance sheets.
- The claimed "mark to model" losses, which were tiny compared to the market-price losses, were in fact fictions, to the point that the poster child of the "mark to model" argument is now suing the purveyors of the instruments supposedly not to be marked to the market for losses that exceed what the market-based loss was back in March of 2009.
If you wish to argue that the economy and banking system are recovering their health, you must deal with this. If indeed large bank balance sheets are concealing a deficiency of somewhere between $1.5 and $3 trillion in losses not only will the economy and lending environment not recover it can't as the large banks all know the truth.
I believe this is why those very same banks are hoarding cash. I believe they know that at some point in the future - a point not under their control - the truth may come out and if it does an instantaneous run would occur - not just on their bank, but on all banks. Such an event could be defended against only with a huge cash hoard - a hoard that, if they lend out said cash, would not be available to them.
The Federal Reserve knows this too. I believe this is why there is nearly $1 trillion of "excess reserves" sitting at The Fed, up from nearly zero prior to the crisis - it is these large banks' "backstop" against a potential run should the truth of their balance sheets reach public conscience.
The political and regulatory bottom line is simple: As I have repeatedly maintained for nearly three years, we now have the facts from our own government agencies, most particularly the FDIC: The banks have been and still are cooking their books in a manner that intentionally overstates their asset valuations - an act that is exactly identical to that which brought down ENRON.
Something to think about on this fine weekend.