by Jim Sinclair in the category Jim's Mailbox | Print This Post | Email This Post
Dear CIGAs,
Over the past six weeks, between June 3, 2011, and July 15, 2011, the FDIC closed 11 more banks. All together, these 11 banks had reported assets of $3.17 billion and deposits of $2.95 billion. Their failures cost the FDIC an estimated $906 million, about 31% of the value of the insured deposits.
The most compelling facts surrounding these failures continue to be:
(1) The details of each closing show the failed banks’ assets were being valued at levels that greatly exceeded what they could actually fetch in the open market. This is further evidence that in light of the Financial Accounting Standards Board (“FASB”)’s having abandoned fair value requirements, banks’ balance sheets have become a very poor indicator of what the institutions’ assets are really worth.
(2) With respect to almost all of the larger closings, the FDIC is being forced to enter into loss-sharing agreements in order to induce the acquiring banks to take over the failed banks’ assets. This implies the acquiring banks do not believe the failed banks’ assets are worth even the steeply discounted value the FDIC is assigning them.
(3) The closings are costing the FDIC a very high percentage of the failed banks’ insured deposits. This indicates that despite regulatory efforts, banks are in terrible shape by the time they are finally shut down.
Asset Over-Valuations Predominate
On paper, the 11 banks that failed over the past six weeks had assets of $3.17 billion. However, the FDIC’s announcements indicate it will likely cost $906 million to protect the 11 banks’ $2.95 billion in deposits.
By that estimate, the 11 failed banks’ assets were actually only worth $2.04 billion. Overall, bank management had over-stated the value of the failed banks’ assets by $1.13 billion, or 55%.
Specific examples show much worse over-valuations. Mountain Heritage Bank of Clayton, Georgia, which failed on June 24, 2011, had stated assets of $103.7 million and deposits of $89.6 million. Its closing cost an estimated $41.4 million. By that estimate, Mountain Heritage’s assets were really only worth $48.2 million, and had been over-stated by $55.5 million, or 115%.
Colorado Capital Bank of Castle Rock, Colorado, which failed on July 8, 2011, had stated assets of $717.5 million and deposits of $672.8 million. Its closing cost an estimated $283.8 million. By that estimate, Colorado Capital’s assets were really only worth $389 million, and had been over-stated by $328.5 million, or 84%.
Loss-Sharing The Rule in Takeovers
Out of the 11 bank failures resolved, seven involved the FDIC entering into loss-sharing agreements with the successor banks covering a large percentage of the value of the assets taken over. These seven represented all but one of the failed banks with assets over $100 million.
The seven banks whose failures were resolved by way of FDIC loss-sharing agreements had, collectively, stated assets of $2.71 billion. The acquiring banks took over $2.63 billion of those assets, and the FDIC entered into loss-sharing agreements covering $2.04 billion.
That amounts to the FDIC guaranteeing the value of 78% of the assets the acquiring banks took over. Put another way, the acquiring banks only had enough confidence in 22% of the failed banks’ assets to take them over absent the FDIC’s guarantee of future value.
Resolution Costs Imply Banks in Worse Shape Now
Since February of 2007, the FDIC has overseen the closings of 380 banks. All together, those banks had reported deposits of about $475 billion, and the FDIC has estimated the cost of protecting those deposits to be about $78 billion. That amounts to an average cost of about 16% of deposits so far in this crisis.
Yet, in the case of the last 11 closings, the cost of protecting $2.95 billion in deposits was an estimated $906 million. That amounts to almost 31% of deposits on average.
Similarly, as I have noted repeatedly over the past year, the pace at which the FDIC is closing banks has not been keeping pace with that of banks newly becoming subject to serious FDIC enforcement orders that seriously call into question their viability.
Therefore, while the rate of bank closings has slowed considerably over the past 12 to 18 months, both the cost of those closings and the pace of new enforcement actions suggest there has not been any improvement in the overall health of the banking sector. In fact, the number of troubled banks is probably the highest now that it has been at any point in this crisis. Absent an unlikely, significant improvement in economic conditions, the cost of future failures will almost certainly be much higher than is currently being projected.
jsmineset |
