We Need RTC-II - NOW

Props to Calculated Risk on the break here and the WSJ for its description:

Colonial faced loan losses that were too big to absorb. In doing the deal, BB&T is marking down Colonial loans and real-estate collateral by 37%, a number that reflects a large amount of estimated losses. The biggest mark is on construction loans; BB&T is cutting their value by 67%.

Thirty-seven percent markdowns from where they were being carried by Colonial?

Folks, this is outrageous.  Here is the BB&T Presentation on the "merger" and its salient terms:

Let's go through it.  Its a good deal for BB&T, as one would expect (someone had to be basically bribed to take this trash -and boy, was it trash!)

As you can see from the above the entire covered portfolio, some $14 billion in assets, could be charged off (that is worth zero!) and BB&T would eat nothing.  The FDIC would eat it all.  The original mark recognizes $5 billion, so they're buying at a discount at that number.  Nice eh?

What's better though are the marks:

This is an absolute outrage.  How in the hell does a bank get to the point where its construction loans have a real markdown of 67% from par (!), its commercial property loans have a write-down of more than 30% from par, home equity is impaired by 21% and other mortgage loans are impaired by 18%, or 37% on a blended basis, radically exceeding the bank's capitalization, and yet this institution was not seized MONTHS AGO.

Remember, according to The FDIC, Colonial did not (yet) have a negative Tier Capital Ratio, unlike Guaranty and Corus, both of which do!  The carnage there has to be at least as bad.

I have been repeatedly asked for hard proof that banks are intentionally misrepresenting asset quality.  I have repeatedly pointed to the loss figures from the FDIC, which is hard proof that this has been going on.

Now we have a presentation from an acquiring bank, BB&T, that puts it in stark relief - the "assets" this institution was holding had to be marked down some thirty-seven percent in order to reach market value.

Regions Financial and others have filed 10Qs that make clear their "internal" market prices are vastly different than their "carrying price", or claimed valuation. 

But the real test is not what some bank claims assets are worth - it is what they turn out to be worth when exposed to the light of day. 

This same story continues: Regulatory agencies that have looked the other way and allowed massive, pernicious and pervasive control fraud and overstatement of valuations continue to create huge losses for the FDIC and the system as a whole. 

What's worse is that the financial and credit intermediation system REFUSES TO CLEAR as a direct consequence of the outrageously high "claimed" marks compared to reality, making trading of these assets or posting of them as collateral impossible. 

Credit intermediation CANNOT NORMALIZE until this is STOPPED.

If regulators, including OTS, OCC and The Fed along with the FDIC will not do their jobs then Congress MUST step in and do whatever is necessary, including appointment of special prosecutors empowered to start bringing indictments or appointment of an RTC-II to clean up this mess.

This has not been done because the "industry insiders" claim that it would be "too disruptive." 

Indeed it would be: To them.  It would result in a huge number of banks, including some of the so-called "captains of industry", being immediately closed and even more indictments.  It would probably result in death threats being made against the RTC-II administrators, as William Black famously had made against him during the S&L crisis.  It would result in the end of the practice of carrying loans at grossly-inflated "values" that have no realistic potential to be realized, and bring market discipline back into the market.

But this clearing of the system is necessary.  Post-RTC-II we would also have a credit system that had cleared, where assets traded as a routine matter of course, where the credit function in our monetary system worked once again up and down the line - in small banks, mid-size banks and the largest of banks.  Where the valuations and assets being proffered as collateral were known good and trust was restored in the market.

We cannot have a durable economic recovery until these control frauds are stopped, the persons responsible flushed from both management and regulatory roles, and the firms that this renders insolvent are closed.  Credit intermediation must be restored to normal functioning, and it cannot happen until and unless the fraud currently being given safe harbor in our financial system is flushed out and eradicated.