FDIC Dissembling Again
Courtesy of Karl Denninger at The Market Ticker
The Litany of Lies has once again appeared from a government agency:
"While challenges remain, evidence is building that the U.S. economy is starting to grow again," said FDIC Chairman Sheila Bair.
Bullshit. The economy is not growing; capacity utilization is not expanding, hours worked have no durable upward trend, job loss is continuing and consumer spending and borrowing are both contracting. This is a flat lie.
Chairman Bair went on to say, "The FDIC was created specifically for times such as these. No matter how challenging the environment, the FDIC has ample resources to continue protecting depositors as we have for the last 75 years. No insured depositor has ever lost a penny of insured deposits…and no one ever will."
Alan Greenspan disagreed in 2003 that "The FDIC was created specifically for times such as these." Indeed, it was his opinion that The FDIC in many ways CREATED times such as these!
The benefits of deposit insurance, as significant as they are, have not come without a cost. The very process that has ended deposit runs has made insured depositors largely indifferent to the risks taken by their depository institutions, just as it did with depositors in the 1980s with regard to insolvent, risky thrift institutions. The result has been a weakening of the market discipline that insured depositors would otherwise have imposed on institutions. Relieved of that discipline, depositories naturally feel less cautious about taking on more risk than they would otherwise assume. No other type of private financial institution is able to attract funds from the public without regard to the risks it takes with its creditors’ resources. This incentive to take excessive risks at the expense of the insurer, and potentially the taxpayer, is the so-called moral hazard problem of deposit insurance.
Of course you wouldn’t expect Sheila Bair to admit to this little problem…..
"Deteriorating loan quality is having the greatest impact on industry earnings as insured institutions continue to set aside reserves to cover loan losses," Chairman Bair noted. "Of all the major earnings components, the amount that insured institutions added to their reserves for loan losses was, by far, the largest drag on industry earnings compared to a year ago."
And yet its not enough. The failures this year have shown repeatedly that banks have been chronically under-reserving and claiming "values" for assets that are the work of either pure magical thinking or outright fraud – take your pick. The outcome is the same – hideous losses to the FDIC’s DIF that should not take place and hundreds if not thousands of banks that, while operating today, are in fact insolvent and remaining open only due to hiding the true "value" of their so-called "assets."
The number of institutions on the FDIC’s "Problem List" rose. At the end of June, there were 416 insured institutions on the "Problem List," up from 305 on March 31. This is the largest number of institutions on the list since June 30, 1994, when there were 434 institutions on the list. Total assets of "problem" institutions increased during the quarter from $220.0 billion to $299.8 billion, the highest level since December 31, 1993.
According to Chris Whalen the number is more than four times your claimed number. I believe Chris. Readers may believe whatever they would like, but given the FDIC’s record of refusing to close clearly-insolvent banks, including those who declare negative Tier 1 ratios in public filings, I wouldn’t believe anything that comes out of the FDIC.
Additions to the contingent loss reserve during the second quarter caused the fund balance to decline from $13.0 billion to $10.4 billion.
And yet the true losses keep turning out to be much higher than estimated. Worse, these balances reflect only cash paid out, not estimates – which of course are not realized losses until the so-called "resolution" is complete and contingent liabilities are either realized or extinguished.
