Last weekend with its team of accountants, lawyers, and Pinkerton guards well in tow the Federal Deposit Insurance Corporation (FDIC) shut down its 466th bank since the beginning of our Great Recession.
Now that the FDIC is ninety percent of the way done with its Great Recession cleanup with probably less than 50 more banks to shut down, I feel it is time to bring a few things to light that the Wall Street bankers and Washington, DC regulators have not made public.
This article is the first of a series of articles that I plan to write for Business Insider that will use the banks’ and the regulators’ own information to bring new insight to the debacle that we have been put through over the past five years.
In this introductory article I intend to present two graphic exhibits that should add new clarity to the Great Recession for financiers and laypersons alike. The first graphic exhibit will show what performance conditions actually result in the shutting down of a bank. The second graphic exhibit will then look at the history of those same performance conditions for the entire banking industry throughout our Great Recession.
All the information that I am displaying in the exhibits can be verified by going to my source, which is the FDIC’s on-line publicly accessible banking industry data base. Now let’s look at Exhibit 1
Exhibit 1
Exhibit 1 plots financial information relating to the 466 banks that the FDIC has shut down between September 2007 and December 2012. Each Quarter data point reflects the summary data for the banks that were shut down during that particular quarter. For example, the data point for September 2009 reflects summary performance conditions at the time of shutdown for the 50 banks that were closed by the FDIC during the quarter ending 09/30/2009. The data point for June 2012 accounts for the 15 banks closed during the quarter ending 06/30/2012.
The key to understanding Exhibit 1 and thus what causes a bank to be closed by the FDIC is not rocket science. The primary thing one needs to understand about banking viability is the relationship between bank Equity and overvalued assets.
Along those lines, the GREEN LINE (or middle line) of Exhibit 1 shows the Equity/Asset ratio for the banks closed down in each of the past 22 quarters. Note that overall bank Equity as a percent of Assets for the shutdown banks was 2.25%
The RED LINE plots the percentage of loan assets that are: (1) non-performing--more than 90 plus days delinquent or in the foreclosure process; and (2) the amount of property that has already been assigned over to the bank or what the bank calls real estate owned (REO) properties. Note that overall NPA+REO as a percent of Assets for the all the banks shut down was 14.19%
Although non-performing assets and real estate owned properties do still retain value, most of those assets will likely have to be written down (by 25, 50, even 100%—depending on things like location, time, property condition, etc.),
Now this is important if you are going to understand the future points that I intend to make. There are several subtle points to that can be made regarding Exhibit 1, but primarily note that in “each and every one” of the 22 quarters plotted that the ratio of the percentage of overstated assets (the RED LINE) substantially exceeds the percentage of Equity (the GREEN LINE). Or in other words the BLUE line which is the sum of the GREEN LINE less the RED line is always negative.
Okay, I understand what you are saying, Jim? But what’s your point—that simply makes common sense. If you don’t have enough Equity to cover the cost of writing off overvalued assets, of course, you are likely to fail and the FDIC should shut the bank down. What’s your point?
Let’s move on to Exhibit 2.
Exhibit 2
Exhibit 2 plots out the exact same equity and NPA+REO performance ratios as those that were plotted in Exhibit 1. The difference is that in Exhibit 2 we are plotting the summary ratios for the “entire active U.S. banking industry” at the end of each of the last twenty-one quarters--not those that had been closed. Note in the case of Exhibit 2 (unlike that of Exhibit 1) that:
- the amount of Equity (GREEN line) has always substantially exceeded that of NPA+REO (RED line); and
- adjusted Equity (Equity-bad assets/Assets—the BLUE LINE) which started out at 9.71% has always remained positive and reached its bottom point of 7.43% at the same time bad assets reached its peak over two and one-half years ago.
Okay again, Jim. But so what? Again I have to ask—what’s your point?
Well, my point is this.
Poor lending on home loans was the "singular" and only cause for the Great Recession. Derivatives, credit swaps, CDOs, etc.—may have been tools to the debacle, but in truth they have only been used as distractions and smoke screens by the ignorant players in the game. Anyone who knew anything about mortgage home loans and mortgage-backed securities (which excludes the top executives of the Big Banks, Fannie Mae, Freddie, Mac, their unheralded but supporting bean-counting accountants, rating agencies, Federal reserve economists, Congress) saw this thing coming.
The worst of our banking crisis is over. Total banking losses for the entire crisis will be recorded as falling in the $600-$650 billion range (which I explained and reported in an earlier Business Insider article over two years ago). And those losses have already been written off by the 7,181 currently operating U.S. banks.
And even though I have much disdain for the Wall Street Bankers who helped take us to the brink with their game-playing arrogance, I place the greatest blame, not at the banks, but at the hands of Fannie Mae, Freddie Mac, and the Federal Reserve. There is absolutely no excuse for those three federally-related entities not to have understood and stopped what was going on—and any one of the three could have. In the Feds case, they were simply ignorant. As far as Fannie and Freddie go, they in fact were the instigators of the entire mess. Not understanding this, only sets us up for another financial fiasco crisis in another 15 to 20 years.
But finally, my main point is this. If you really want to know who saved us from going over the brink, don’t look at the people who are now trying to claim credit for saving our hide, but instead, as I have said many, many times before—look toward those American homeowners who kept (and still are) making their monthly mortgage payments even though the people who helped cause the Great Recession kept telling them (and still tell them) that their houses were (or are) underwater.
It is those American homeowners who kept the percent of nonperforming assets (as plotted in Exhibit 2) from reaching levels that would have led us into an even greater Great Recession or even to a Great Depression—not TARP, not the Treasury, not financial reform, and not the Fed.
At least that is the viewpoint of this analyst--someone who was responsible for directing a team of hotshots that monitored the mortgage institutions responsible for securitizing a $600 billion portfolio of federally-insured mortgage loans and mortgage-backed securities for a twelve-year period between 1988-2000 covering an earlier smaller real estate crisis (i.e., the S&L crisis), and someone who thinks he knows at least a little about some things.
Now before signing off, in conclusion I feel that it is worth mentioning that the FDIC’s online database offers one the opportunity to view twenty-years of annual and ten-years of quarterly detailed financial information on every operating bank in the United States, allowing one the ability to look at every bank individually in the same manner as I have looked at the banks in composite manner in Exhibits 1 and 2.
But that is the subject for another day. Maybe on that day someone may use the FDIC data to look at the trending financials of the Big Four banks (Bank of America, JP Morgan/Chase, Citigroup, and Wells Fargo) that now account for 44.2% of total U.S. banking assets (up from 36.7% prior to the beginning of the Great Recession). In fact, maybe on that day someone may even raise the question as to why those same banks “too large to fail” felt they needed TARP funds in the fall of 2008 when they were reporting to the regulators a combined amount of Equity of $493 billion with only $75 billion in NPA and REO.
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