Hoh hoh hoh! We're finally seeing some recognition of what I've been talking about for the last two years!
Aug. 14 (Bloomberg) -- More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a banks equity and threaten its survival.
And Bloomberg appears to have recognized the key problem with these banks (all of which should have been shut over a year ago):
Excluding the stress-test list, banks with nonperformers above 5 percent had combined deposits of $193 billion, according to Bloomberg data. Thats almost 15 times the size of the FDICs deposit insurance fund at the end of the first quarter.
Yeah, that's a problem.
But the real problem is regulatory malfeasance. See, the purpose of the Tier Capital Ratio is to permit the government (FDIC) to come in via the OTS or OCC before the regulatory capital cushion is entirely depleted, and if the law is actually followed and people actually do their jobs, there is no loss to the depository insurance fund.
That is, so long as a bank's assets can be sold (in total) for more than its liabilities (deposits) there is no loss. The bank may go bust from a standpoint of being a "going concern" but there is no hit to the taxpayer, no hit to the depository fund and no problem (other than for the shareholders of the bank involved.)
But when you allow banks to lie for two years for the explicit purpose of "trying to earn their way through the cycle" you hitch your argument to the view that the real issue is one of consumer confidence, not excessive debt and loose lending.
Only a fool would have argued that given what we know of the lending environment from 2003-2007, yet that is exactly the argument that Bernanke, Paulson, Geithner, Bair and others have made through this entire mess!
President Obama should have closed all banks for a week when he first came into office, sent in the examiners, and allowed those with non-performing loan bases of 2% or less to re-open. He should have set forth a 2% non-accrual standard and stuck by it - hit that, you're closed. Period.
But that would have run dimensionally contrary to the viewpoint that we must "enhance lending" to get out of this recession - a foolhardy perspective when the reason you're in recession in the first place is that too many people made too many loans to too many people who had no money to pay them back!
Now we're stuck - we appear to have "avoided" a Depression, but we have in fact done no such thing. We have instead played "extend and pretend" writ large on the taxpayer's back, and yet the default rate continues to explode higher because we have refused to force these institutions to disgorge their bad assets.
In reality the root of this problem lies with lax (or absent) regulation over the last ten years in the banking sector, where "fog a mirror" loans were available for virtually any purpose.
As a consequence of our government's refusal to face this problem head-on in 2007 and 2008 (despite many calling for it, myself included) we are nowhere near the end of this crisis, despite rallies in the stock market. Indeed, I remain convinced that recognition of reality will come fast and hard in the next year or so as these "not too big to fail" firms blow up one by one, forcing regulators to come in and close them, and finally, asset valuations are forced down to a realm that comports with reality.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions.
NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES.
The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.
Looking for "The Best of Market Ticker"? Check out Ticker Classics.
Market charts, when present, used with permission of TD Ameritrade/ThinkOrSwim Inc. Neither TD Ameritrade or ThinkOrSwim have reviewed, approved or disapproved any content herein.
The Market Ticker content may be reproduced or excerpted online for non-commercial purposes provided full attribution is given and the original article source is linked to. Please contact Karl Denninger for reprint permission in other media or for commercial use.
Submissions or tips on matters of economic or political interest may be sent "over the transom" to The Editor at any time. To be considered for publication your submission must include full and correct contact information and be related to an economic or political matter of the day. All submissions become the property of The Market Ticker.