Busted: Bankers and The Global Economy

June 5, 2008

U.S. Banking Pressures Continue Unabated

Uncertainties in today’s economic environment continue to pose significant challenges for the banking industry, households and bank regulators. Banks continue to experience increased pressure on earnings resulting from a deterioration in credit quality noted first in higher-risk nontraditional mortgage loans and now evident in other sectors. Construction and development loans have continued to deteriorate in quality and threaten to destabilize lending.

Many American citizens know that economic life is tough. The FDIC recognizes that economic weakness combined with rising food and energy costs have increased risks to banking because of the suffering consumer/home buyer. The FDIC anticipates a rise in the number of problem institutions over the next few quarters, but so far the number of under-capitalized institutions remains well below levels seen during previous economic downturns.

This news is not entirely surprising considering that the Federal Reserve put a new floor into the banking system with banking auctions (TAF) and with the rescue of Wall Street. The actions of Federal Reserve have allowed the beleaguered U.S. banking system to tread water, but little more so far. As a result, bank failures have been very limited.

Because of difficulties arising from problems in the housing sector, financial markets and the overall economy, the FDIC fears that the insurance fund could suffer losses that are significantly high than projections. Bankers have cleverly learned to mask many of their debts with an increasingly complex system. For example, brokered deposits are a recent complexity in recent bank failures that have cost the FDIC dearly in the effort to maintain consumer confidence.

The FDIC has re-evaluated the banking system in the last year in order to restructure risk and the cost of required insurance to banks. Problem banks are many and the FDIC is zealously protecting the banking community from public knowledge and individual scrutiny.

Interestingly, the FDIC has admitted to developing projections of expected failures and is hiring new staff to coordinate with those projections. Like other government agencies, they expect to hire private contractors and the perils that third-party hiring brings to the mix. In the face of significant risks from economic conditions, the fallout from recent unsustainable mortgage lending practices and disruptions in the credit/capital markets, the FDIC insists that most banks are well capitalized.

On a similar note, the Federal Reserve Board announced approval of Bank of America Corporation to acquire Countrywide Financial Corporation and some non-banking subsidiaries. The Federal Reserve has admitted that it is still learning about the increased complexity in financial products and markets.

Reflecting deterioration in the mortgage industry, nonperforming assets more than doubled over the past year from $37 billion to $81 billion. This number is notoriously small considering the huge wealth within the industry and yet threatens to destabilize the country by the admission of many experts. The shows the severity of the bad management and gambles for profitability of the last 8 years or so.

The Federal Reserve admits that they and bankers have failed dismally at determining actual risk. They claim that lessons have been learned, but have failed to gain a complete understanding of what the actual breakdowns are and how to deal successfully with the result.

With all the finger-pointing, could outright graft and fraud be so outrageous that it looks like ignorance? Could this scenario be the real answer for U.S. bankers, Wall Street and their institutions? As Bugs Bunny often said, “Eh-h, could be doc.”

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2 Comments

  1. Thank you for the Great Information Blog!

    Comment by uohaa — June 6, 2008 @ 10:31 pm

  2. The FDIC came out with it’s plan to prevent about 1.5 million home mortgage foreclosures by promising to share any losses with mortgage companies that agree to refinance certain home loans. This is a really good plan guys and will help alot of homeowners who have income (ei, working) stay in their home. It will slow down the tide of foreclosures and help the market absorb the REOs that exist right now and get them sold.

    Their program will be applied to the estimated 1.4 million non-GSE mortgage loans that were 60 days or more past due as of June 2008, plus an additional 3 million non-GSE loans that are projected to become delinquent by year-end 2009. Of this total of approximately 4.4 million problem loans, we expect that about 50% can be modified, resulting in some 2.2 million loan modifications under the plan.

    That means 50% of those who do not qualify to get modified. They will need our help! So make sure you continue to help those who do not have the income to stay in their home. The government could help by better regulating foreclosure rescue scammers and by allowing homeowners to sell their houses with the new buyer assuming the old loan or a workout loan.

    This also means our window to buy REOs at unbelievable prices will not be here forever as the flow of new REOs will be slowing down and our house market will stabilize once this excess inventory is absorbed.

    Comment by Alexis McGee — November 14, 2008 @ 6:17 pm


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