I am always amazed at the cavalier attitude of regulators who are public servants. when Penn Square Bank was closed in the 1980’s, I knew a lady who had a Certificate of Deposit (CD) in the amount of $240,000 with the bank. The bank was seized by the FDIC on Friday. On Monday, she stood in line with other depositors and waited for her money. That day she was handed a check from the FDIC for $100,000 and told that she would receive some portion of the remainder in the future. Finally, she received about $30,000 having a loss of $110,000. That money was hard earned, saved money for it was going to be her retirement. She learned a valuable lesson- don’t assume that the government is going to fully protect your money.
Senior Bank Officers and Directors knew the bank was failing yet they failed their fiduciary capacity to protect depositors. If you or I did this, we would be residing in an orange jumpsuit now. The regulators also knew of the impending failure. They create confidential “watch lists” to monitor these banks losing money. Fraud is intentional deception resulting in injury to another person.
For the week ending April 30th:
This week’s losses were notable They were the largest in any single week since the failure of IndyMac Bank on July 11, 2008. IndyMac had assets of about $32 billion and deposits of $19 billion. Its failure cost the FDIC an estimated $8 billion.
The seven banks that failed this week had combined assets of about $25.8 billion and deposits of $19.6 billion. These failures cost the FDIC an estimated $7.33 billion. Prior to this week, the FDIC’s estimated losses from 57 bank failures in 2010 stood at about $8.6 billion. This week’s failures practically doubled that figure, to $15.93 billion.
According to an AP article, the FDIC’s deposit insurance fund “fell into the red last year, hitting a $20.9 billion deficit as of [Dec. 31, 2009].” With this year’s losses, the fund’s deficit has grown to at least $36.8 billion. In addition, the FDIC has a huge exposure for worse-than-expected losses on some $165 billion of assets taken over by acquiring banks. See: http://finance.yahoo.com/news/Banks-closed-in-Puerto-Rico-apf-1507617949.html?x=0&sec=topStories&pos=main&asset=&ccode
That wipes out the $45 billion the FDIC announced it was going to raise by requiring banks to pre-pay premiums for the period, 2010 through 2012. Obligations of the FDIC will soon become obligations of the U.S. taxpayer, adding further to the federal deficits.
FASB Valuations
Each of the FDIC’s press releases provides vital information about the true market value of the failed banks’ assets versus the values assigned them by bank management. This gives some insight into the extent of over-valuations across the banking sector in the wake of the Financial Accounting Standards Board (“FASB”) having suspended fair value accounting rules last year. The FASB’s compromise in the area of valuations has given bank management far too much leeway to value assets at levels far beyond what they could fetch in the open market, resulting in banks’ balance sheets becoming increasingly less reliable indicators of their true financial health.
Bank Closure Details:
Westernbank Puerto Rico of Mayaguez, Puerto Rico, had stated assets of $11.94 billion and deposits of $8.62 billion. On paper, it was an extremely healthy bank; yet the FDIC’s loss estimate for its closure is $3.31 billion. Based on that estimate, the real market value of its assets is only $5.31 billion. Bank management had over-valued these assets by 125%.
R-G Premier Bank of Puerto Rico of Hato Rey, Puerto Rico, had stated assets of $5.92 billion and deposits of $4.25 billion. The FDIC’s loss estimate for its closure is $1.23 billion. Based on that estimate, the real market value of its assets is $3.02 billion, and had been over-valued by 96%.
Frontier Bank of Everett, WA, had stated assets of $3.5 billion and deposits of $3.13 billion. Its loss estimate is $1.37 billion. Based on that estimate, its assets are really worth $1.76 billion, and had been over-valued by 99%.
Eurobank of San Juan, Puerto Rico had stated assets of $2.56 billion and deposits of $1.97 billion. Its loss estimate is $744 million. Based on that estimate, its assets are really worth $1.226 billion, and had been over-valued by 109%.
CF Bankcorp of Port Huron, MI, had stated assets of $1.65 billion and deposits of $1.43 billion. Its loss estimate is $615 million. Based on that estimate, its assets are really worth $815 million, and had been over-valued by 102%.
These bank failures are being reported free of any allegations of fraud or even negligence on the part of bank management. Absent any such allegations, it stands to reason that these over-valuations, ranging from 96% to 125%, are considered to be in line with reasonable accounting practices sanctioned by the FASB at the time it suspended fair value requirements.
Do you think that this is an isolated practice among these banks? Be vigilant! It looks like they’ll be cutting down a forest to supply enough money to cover all of the losses. Oh, by the way, there are banks being closed every week.