Are We in a Banking Depression Without Knowing It?

Oct. 1.10 | About: Financial Select (XLF)

An economic depression is held by some as meaning a decline in real GDP exceeding 10% or a recession lasting two or more years, usually brought on by a banking or financial crisis. I am far from an economist, but I do believe that anything that comes close to mirroring the experiences of the Great Depression can, and probably should constitute a depression. Then again, as I have stated, I am far from an economist and those words are not even remotely authoritarian. Alas, when I look at the condition of our banking industry and superimpose those observations against what the mainstream media, our regulators and corporate officers tout, there is a significant and material disconnect. Ever since the banking lobby has succeeded in putting the kibosh on the mark to market rules, it appears any semblance of reality in bank valuations have simply flown the coop, and yet to return.

I am still quite bearish on the banking industry, and here are two charts to explain why…

From Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture: This interesting chart featured in Bloomberg is a picture worth a thousand words… (Click to enlarge)

fasb_mark_to_market_chart.pngClick to enlarge

Now that we know what sparked that big rally last year, let’s take a glimpse at the fundamentals that the stocks rallied on… and this one pretty much says it all!

I am sure there are those who may say that I am being alarmist in stating that things may be worst than the previous depression, at least in terms of banking. I will attempt to make the argument that it is indeed possible (if not probable), but it will not be easy since back then we didn’t have ZIRP, $100s of billions of MBS purchases, nationalized multi-trillion dollar mortgage machines that were designed to operate at a loss to support policy and consequently distort the market, perverse tax incentives to tempt buyers into an obviously tumbling market, securitization that popularized the OPM method of no underwriting, NINJA loans, 125 LTV no doc loans, AltA loans sold to the general populace, the recission of mark to market rules (the list can go on for awhile) and a plethora of other things congealing to mask the true extent of the damage done. Banks have been, without a doubt, attempting to hide the extent of thier inventory and valuation issues. See Anecdotal Evidence That Banks Are Hiding Depressed High End Real Estate, as excerpted…

Why Aare Banks Hiding High End Residential Real Estate? Courtesy of the Real Estate Channel:

  • Without the FTB tax credit, the housing market is receiving artificial demand and price support from the FHA loan guarantees and banks sitting on mortgages of homes once valued at $300,000
  • Banks in areas that were severely damaged by the downturn in domestic real estate (Cook County, Illinois, Miami-Dade County, Florida, Orange County, California) have significant inventories of homes worth more than $300,000 that they will not put on the market, even after foreclosures lasting more than 2 years

Believe it or not, things actually look a bit worse as you start to drill down into the housing-backed loans, but that will be a post for another time. In case you think banking has really gotten that much better, we will soon get to see if some sharp facts can burst your bubble.

Disclosure: None