Changes to the FDIC Bank Failure Report

In our last FDIC Bank Failure Report, we took a look at Corus Bank's assets and the consequent FDIC losses, and smelled a rat. Corus' $7 billion in assets had cost the FDIC $1.7 billion... but the FDIC sold off $3 billion of those assets to an unwitting sucker in the form of MB Financial Bank. So, the $1.7 billion cost-to-DIF was actually on the $4 billion in ex-Corus assets which the FDIC kept, giving Corus Bank a losses-to-assets ratio of 42.50%. Bad, quite bad, and made worse so in our eyes, as Corus' raw losses-to-assets originally came up at a paltry 24.29%.

But then, we started thinking. How could it be that Corus' $7 billion in assets didn't cover the $7 billion in FDIC-insured deposits? Why was it that the FDIC had to spend $1.7 billion on a bank which should have been able to be liquidated and be able to pay out?

The answer is obvious, of course: Corus' reported assets were overvalued. But just how overvalued were they? It's around this point when we realised we had been looking at the answer for months, now, without it having sunk into our thick skull: the assets were overvalued by the amount of money the FDIC admitted it had to spend on the failed bank!

So... forget everything about losses-to-assets, we've got something new to look at: recoverable value. Simply put, what percentage of declared value the bank's assets are really worth when they're put up on the FDIC's auction block.

As an example, we'll take Corus. The $7 billion in declared assets were supposed to cover the $7 billion in FDIC- insured deposits. They didn't, to the tune of $1.7 billion (i.e. cost-to-Deposit Insurance Fund). This means that the assets on Corus' books were reported overvalued by $1.7 billion. Doing the math, Corus' assets were only worth $5.3 billion or so.

And lo, the recoverable value appears: the declared value of Corus' assets was only 75.71% recoverable.

This is horrible, with a capital H, O, R, R, I, B, L, and E! To see a major bank have assets whose market value is only 75.71% of their declared value is unbelievably bad. Why Corus wasn't shut down months ago, we have a few dark suspicions – a topic for a later post. Suffice it to say, Corus Bank was insolvent, out of cash, massively overvalued, and otherwise scum-of-the-earth as far as a bank goes.

Did we forget to mention it gets much, much worse? Let's hop onto a time machine, and look at some bank failures from the past. First stop, Washington Mutual, the FDIC's whack-job for our friends over at JPMorgan Chase. The two 'divisions' of WaMu had combined assets of $307 billion, and combined deposits of $188 billion. The FDIC, at the time of WaMu's assassination – or closure, if you prefer – made a great fanfare about how the failure was not going to cost the DIF a single cent.

That all might be true, but we read in the FDIC's press release that JPMorgan Chase gave the FDIC $1.9 billion. For what, we wonder? Perhaps to cover costs to the DIF, so that the FDIC could have a media coup? Hmmm... we suspect that it is indeed just that: the true cost of the failure, conveniently hidden by JPMorgan Chase's willing assistance; so, we count that $1.9 billion as the actual cost-to-DIF.

Using our new methodology – subtract cost-to-DIF from total FDIC-insured deposits – we find that WaMu's assets were only worth about $186.1 billion; recoverable value was only 60.62%. Yes, dear Reader, that is worse than Corus, and much bigger too! However, a happy moment can be found in WaMu: the FDIC didn't just gift several hundred billion dollars to JPMorgan Chase, it actually gave it a bag of bad assets and rotting derivatives. You know, the usual fare at JPMorgan.

Anyway, one more failure to visit, this one even deeper in the past: IndyMac F.S.B. It had assets at a declared value of $32.01 billion, and total deposits of $18.06 billion. From the day that the FDIC closed the bank, until the FDIC sold off the successor zombie-bank, the total cost-to-DIF was a lovely $10.7 billion – making IndyMac the most costly bank failure in raw dollars this far in the Depression, as an aside.

But now, the scary part... Using our new methodology – subtract cost-to-DIF from total FDIC-insured deposits – we find that IndyMac's assets were only worth about $7.36 billion.

Pause a moment, dear Reader, and ponder that number. That's a bad number. Compare to the dlecared asset value of $32.01 billion. IndyMac's recoverable value, after all was said and done, was a chillingly slender 22.99% of declared asset value. This makes IndyMac the biggest loser so far in the Depression; a bottomless pit into which the FDIC shoveled money.

So ends today's time-travelling. We hope it was enlightening for you, as it was quite eye-opening for us. A final bit of bad news: using our new methodology on the total declared assets of all banks closed since December 2007, the recoverable value of all 119 of these banks was 57.46%. Although the comparison is not exact, one can suggest that it is possible that the entire United States' banking system will only be about 57% recoverable, or so. We must be honest here: we fully expect that this will get worse in the future. Much worse.