Stress Tests’ “Cover” Only Indicates Bad News
The media and the Administration are already out there spinning the results of the stress tests. I wouldn’t be surprised if they say that all banks “passed.” But the real suckers would be those who invest in this “bump” in the market before another drop this summer. The banks are still not viable and many are being propped up by distortions in their books and “funny money.” If the results were great in the first place, the government would not have delayed the release of the reports. I wonder if the politicians on Capitol Hill really think we are that dumb!? Roubini, a noted economist and known as Dr. Doom, has been correct on most of his statements about the markets and about banks – he says the following:
The spin machine about the banks’ stress test is already in full motion. Some banking regulators have already served up–to The New York Times–their spin that all 19 banks that are subject to the stress test will pass it. In other words, not one will fail.
But let’s look at the actual data. The macro data for the first quarter on the three variables used in the stress tests–growth rate, unemployment rate and home-price depreciation–are already worse than those in the U.S. government baseline scenario for 2009. They are, in fact, even worse than those for the stressed scenario for 2009.
The government used assumptions for the macro variables in 2009 and 2010 that are so optimistic that the actual data for 2009 are already worse than the adverse scenario. As for some crucial variables, such as the unemployment rate–key to proper estimates of default and recovery rates for residential mortgages, commercial mortgages, credit cards, auto loans, student loans and other banks loans–the current trend shows that by the end of 2009 the unemployment rate will be higher than the average unemployment rate assumed in the more adverse scenario for 2010, not for 2009. Put plainly, the results of the stress test–even before they are published–are not worth the paper on which they are written.
Let us look at how the stress tests are done. According to the U.S. government, there are two scenarios: a more optimistic “baseline scenario” for 2009 and 2010 for the three macro variables (gross domestic product, unemployment and home prices); and a more pessimistic “alternative adverse scenario.”
The baseline scenario assumes–based on the average of the forecasts by the consensus of macro forecasters at the time when the stress tests were announced–that GDP growth will be -2.1% in 2009 and 2% in 2010; that the unemployment rate will average 8.4% in 2009 and 8.8% in 2010; and that home prices will fall 14% in 2009 and 4% in 2010. In the alternative adverse scenario, GDP growth is assumed to be -3.3% in 2009 and 0.5% in 2010; the unemployment rate is assumed to average 8.9% in 2009 and 10.3% in 2010; and home prices are assumed to fall 20% in 2009 and 7% in 2010.
The description provided by the government of the stress test also shows graphs–but not actual figures–for the quarterly behavior of the three macro variables in 2009 and 2010 for both scenarios. Based on these quarterly graphs, in the first quarter of 2009 the unemployment rate would approximately average 7.7% in the baseline scenario and 7.8% in the adverse scenario; the GDP growth rate would be -1.9% in the baseline scenario and -2.1 in the adverse scenario; and home prices would fall 4% in the baseline scenario and by 7% in the adverse scenario.
How do these scenarios actually stack against actual figures for the first quarter of 2009, with current consensus forecasts and with current likely paths for these macro variables?
Read the rest of the bad news at Forbes…
Friday Night Bank Seizures
Despite some decent profit reportings for the first quarter for some larger financial institutions, there are still a lot of small banks that are facing hardships and are being seized, sometimes in the middle of the night, by the FDIC. Below are just two of the latest:
Bank regulators closed American Sterling Bank bank on Friday, the 24th U.S. bank to fail this year as the struggling economy and falling home prices take their toll on financial institutions.
The Federal Deposit Insurance Corp said Missouri-based American Sterling had $181 million in assets and $171.9 million in deposits. The failure is expected to cost the FDIC deposit insurance fund an estimated $42 million.
The Missouri offices of American Sterling will reopen on Saturday, and the offices in California and Arizona will reopen on Monday as branches of Metcalf Bank, which is assuming all the deposits of American Sterling.
Customers can access their money over the weekend by check, teller machine or debit card, the FDIC said.
Bank regulators closed Great Basin Bank of Nevada on Friday, the 25th U.S. bank to fail this year as the struggling economy and falling home prices take their toll on financial institutions.
The Federal Deposit Insurance Corp said Great Basin had assets of $270.9 million and $221.4 million in deposits. The failure is expected to cost the FDIC deposit insurance fund an estimated $42 million.
Nevada State Bank agreed to assume the insured deposits of Great Basin, whose five branches will reopen on Monday as branches of Nevada State Bank.
For a more in depth look at aspects of the FDIC see Biggest Bank Failure of 2009.
Biggest Bank Failure of 2009 [Cost of $670 Million - FDIC]
New Frontier Bank, one of Colorado state’s biggest banks, was closed down by state regulators, the Federal Deposit Insurance Corporation said in a statement.
Based in Greeley, Colorado, New Frontier had, as of March 24, total assets of two billion dollars and and total deposits of about 1.5 billion, the FDIC said.
It was the 23rd bank closed to business since January. Until New Frontier, the biggest bank failure this year had been California’s Merced Bank, with 1.7 billion in assets.
Unable to have a rival bank take charge of New Frontier’s credits and deposits, the FDIC said it “created the Deposit Insurance National Bank of Greeley (DINB), which will remain open for approximately 30 days to allow depositors time to open accounts at other insured institutions.”
New Frontier’s failure will cost the FDIC around 670 million dollars.
After suffering no bank failures at all in 2005 and 2006, the US banking system saw three banks going under in 2007, followed by 25 in 2008 and 23 so far this year.
Now the question is – what will this news do to the markets on Monday and what does the cash on hand at the FDIC look like these days?
In February, 2006, George w. Bush signed into law the FDIRA, the Federal Deposit Insurance Reform Act which merged the old Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) together under one fund called the Deposit Insurance Fund (DIF). Having the funds separate created much of the turmoil in the 80’s with the savings and Loan (S&L) crisis.
A March 2008 memorandum to the FDIC Board of Directors shows a 2007 year-end Deposit Insurance Fund balance of about $52.4 billion, which represented a reserve ratio of 1.22% of its exposure to insured deposits totaling about $4.29 trillion. The 2008 year-end insured deposits were projected to reach about $4.42 trillion with the reserve growing to $55.2 billion, a ratio of 1.25%.
As of June 2008, the DIF had a balance of $45.2 billion. Bank failures typically represent a cost to the DIF because FDIC, as receiver of the failed institution, must liquidate assets that have declined substantially in value while at the same time making good on the institution’s deposit obligations. In July 2008, IndyMac Bank failed and was placed into receivership. The failure was initially projected by the FDIC to cost the DIF between $4 billion and $8 billion, but shortly thereafter the FDIC revised its estimate upward to $8.9 billion. Due to the failures of IndyMac and other banks, the DIF fell in the second quarter of 2008 to $45.2 billion. The decline in the insurance fund’s balance caused the reserve ratio (fund’s balance divided by the insured deposits) to fall to 1.01 percent as at 30 June 2008, down from 1.19 percent in the prior quarter. Once the ratio falls below below 1.15 percent, FDIC is required to develop a restoration plan to replenish the fund, which is expected to involve requiring higher contributions from banks which deal in riskier activities.
In light of apparent systemic risks facing the banking system, the adequacy of FDIC’s financial backing has come into question. Beyond the funds in the Deposit Insurance Fund above and the FDIC’s power to charge insurance premia, FDIC insurance is additionally assured by the Federal government. According to the FDIC.gov website (as of January 2009), “FDIC deposit insurance is backed by the full faith and credit of the United States government”. This means that the resources of the United States government stand behind FDIC-insured depositors.” The statutory basis for this claim is less than clear. Congress, in 1987, passed a non-binding resolution to this effect, but there appear to be no laws strictly binding the government to make good on any insurance liabilities unmet by the FDIC.
Insurance Qualifications
To receive this benefit, member banks must follow certain liquidity and reserve requirements. Banks are classified in five groups according to their risk-based capital ratio:
-Well capitalized: 10% or higher
-Adequately capitalized: 8% or higher
-Undercapitalized: less than 8%
-Significantly undercapitalized: less than 6%
-Critically undercapitalized: less than 2%
When a bank becomes undercapitalized the FDIC issues a warning to the bank. When the number drops below 6% the FDIC can change management and force the bank to take other corrective action. When the bank becomes critically undercapitalized the FDIC declares the bank insolvent and can take over management of the bank.
As the balance of the FDIC gets depleted the “backing from the government” means that the taxpayers will be held accountable.
Economic Update: Bartering Is Cool, George Soros Speaks and G20 Leans on Global Currency
The Great Depression brought various methods to the fold in order to keep some type of currency flowing and people consuming. In many ways this is being called the “Great Recession,” and there still is that feeling in the air that a Great Depression may again be heading our way. However, some of these old systems such as the barter system or local currencies are being used again.
The barter system became popular in recent years and has become more modernized for today’s society. Craigslist became incredibly popular when it first began but during these pressing times, Ebay and Craigslist have seen more traffic than usual and one statistic earlier this month had the traffic for Craigslist up by 100%. New barter sites are popping up during this downturn such as www.tradeaway.comwhere you can sell and buy real estate, boats, cars, land, etc. Even Match.com’s traffic has soared, because young people who may or may not be let go first if a company needs to downsize (due to less tenure on the job) say that dating sites are cheaper than going out to bars to meet people.
I find it incredibly intriguing that local communities have begun using a method from the Great Depression in which they issue and name their own “currency.”
The systems generally work like this: Businesses and individuals form a network to print currency. Shoppers buy it at a discount — say, 95 cents for $1 value — and spend the full value at stores that accept the currency.
Workers with dwindling wages are paying for groceries, yoga classes and fuel with Detroit Cheers, Ithaca Hours in New York, Plenty in North Carolina or BerkShares in Massachusetts.
This type of currency encourages consumers to buy and it also encourages consumption at a local level to support local businesses that are also cash-strapped.
This could be a good thing for people to see value in limited government. Local and state government, or Federalism, is truly the more appropriate form of government rather than a larger centralized organization.
However, you still have to pay your taxes on it…
By law, local money may not resemble federal bills or be promoted as legal tender of the United States, says Claudia Dickens of the Bureau of Engraving and Printing.
“We print the real thing,” she says.
The IRS gets its share. When someone pays for goods or services with local money, the income to the business is taxable, says Tom Ochsenschlager of the American Institute of Certified Public Accountants. “It’s not a way to avoid income taxes, or we’d all be paying in Detroit dollars,” he says.
Many still feel that bad times are ahead for the United States, our economy and the dollar.
George Soros is echoing what many conservatives and libertarians have been saying the past few months with the incessant government spending and bailouts. He foresees the U.S. becoming much like Japan in the 90’s, where they continued to spend in order to try and dig themselves out of a collapse, and their interventionist policies actually made things worse. Soros said that he believes the United States will go throw a period of relatively low growth coupled with high inflation…DUH!
Thank you Captain Obvious!
The recovery will look like “an inverted square root sign,” Soros said. “You hit bottom and you automatically rebound some, but then you don’t come out of it in a V-shape recovery or anything like that. You settle down—step down.”
“I don’t expect the U.S. economy to recover in the third or fourth quarter so I think we are in for a pretty lasting slowdown,” Soros said, adding that in 2010 there might be “something” in terms of U.S. growth.
The healing of the banking system and housing markets is crucial to recovery. “The banking system, as a whole, is basically insolvent,” Soros said.
“What we have created now is a situation where the banks who will be able to earn their way out of a hole, but by doing that, they are going to weigh on the economy,” he said. “Instead of stimulating the economy, they will draw the lifeblood, so to speak, of profits away from the real economy in order to keep themselves alive. This is the zombie bank situation.”
Another Wall Street Scheme; This Time Involving Nukes to Iran
If you thought the ponzi schemes with Madoff and Stanford were the latest and greatest and as bad as things could get you are dead wrong!
It appears that the big banks on Wall Street unwittingly were also aiding in the armament of Iran and Ahmadinejad.
Officials plan to unseal a 118-count indictment Tuesday accusing a Chinese national of setting up a handful of fake companies to hide that he was selling millions of dollars in potential nuclear materials to Tehran.
“This case will cut off a major source of supply to Iran and it shows how they are going ahead full steam to get a nuclear bomb. Long-range missiles they pretty much have already,” a law enforcement source close to the case said.
“We think it is one of the largest suppliers of weapons of mass destruction to Iran.”
Will we receive those posters now who think that Iran is the land of gumdrops and kittens? or will liberals finally come to their senses and admit that Iran is dangerous and Ahmadinejad is not a person willing to negotiate nor will he stop his goal of building a nuclear weapon? It’s quite obvious if you ask me!
Experts now warn that Iran is incredibly close to having enough nuclear material to create an atom bomb. Sanctions and U.N. embargoes have typically worked in the past for Iran, but this is a case and point story that Iran will stop at nothing to amass these materials to get to its final goal of a nuclear bomb. Ahmadinejad, if you recall, made statements that he believes he is the chosen one to bring back the next coming of the prophet or the 3rd Jihad.
58 illegal transactions were documented between 2006 and 2008. Shipments also included various banned substances from China to Iran.
An example of some of the transactions:
