The Dubai Gambit

Although we just wrote about Dubai and its impressive level of debt - not to mention its impressive malinvestment of its resources - the Emirate has made a manoeuvre which we didn't even think of: declaring the debt of Dubai World not backed by government guarantee. From the BBC:

"[Creditors] think Dubai World is part of the government, which is not correct," said finance minister Abdulrahman al-Saleh. "Creditors need to take part of the responsibility for their decision to lend to the companies."

Clever, very clever; it seems to us that Dubai is looking to have its cake and eat it too, after a manner of speaking. They got their theme parks and little islands, and now the investors can go stick it wherever they'd prefer the pain. And if those investors attempt to foreclose on the assets of Dubai World, they just might run into the little problem that said parks and islands are property of the Dubai government, or perhaps the Abu Dhabi government; in other words, foreclosure is not happening, because we really don't think an UAE court would care to strip a sovereign government of its assets. Certainly not for foreigners, and the latest incident with the Swiss banning minarets will likely not help the situation.

A thought arises from the move, which we give the same title as this post: the Dubai Gambit. We'll put it in the general terms for starters. A nation's Government spawns this enterprise (we'll use the U.S. term of Government-Sponsored Enterprise, or GSE, with apologies for such Amero-centrism), and lets it just toddle along, doing its thing. As a GSE, it would seem to investors that the GSE enjoys an implicit Government guarantee; the Government made it, so why wouldn't it keep it going if times were tough? So, investors cheerfully pile into the debt of this GSE, because from their perspective it's just as good of debt as sovereign debt.

But surprise! It doesn't say anything anywhere in the GSE's charter (or what have you) about a Government guarantee. That means the Government, at its fickle discretion, can either help out the GSE in times of trouble, or not. The average investor, being apparently rather dim-witted when it came to reading fine print, was speculating much harder than he or she thought; the money he or she plopped down for the GSE's debt might never come home from the front lines of the Free Market. It's a messy place, we hear, and casualties can be heavy.

Bad times come along, and the GSE gets into some serious trouble. Investors start thinking "Boy, I be sure glad that thar GSE's got some sort of gum'ment guarantee or some such. I's real smaaart," and patiently sit on the deck of their double-wide trailer waiting for the cheque from the Government to make them whole. Grandma Kettle's rocking chair creaks as she loads up the shotgun to take aim at a stray dog; the hole in the roof gets a little bigger; no Government cheque comes in.

That's because the Dubai Gambit was brought into play; the Government decided the GSE was not, in fact, going to enjoy a bailout. In the real world, this would probably happen when such a GSE was in such horrible shape, that the Government would have risked its own credit rating to support the malinvestment of the investors, and the GSE's own malinvestments. GSE debt goes from being 'as good as Government' to 'someone has to do something about this!' overnight, as the bonds go belly-up. Investors are left footing the bill for someone else's good time, and the Government comes out, theoretically, smelling like a rose, at least to the credit markets.

As this meltdown of the GSE is underway, the Government finally steps in, but not in the way the investors were expected. Instead of providing a backstop for the full value of the GSE debt, the Government starts Agency X, with the explicit goal of winding down the GSE's debt. With a pre-packaged bankruptcy agreement - and a sufficiently... agreeable... court system - Agency X gets to cherry-pick the good assets of the GSE, and leave the GSE with all of its liabilities. Investors in the failed GSE would get Agency bonds worth pennies on the dollar of their original GSE debt, and the Government gets to have at least something for its efforts.

We fully expect Dubai to do this manoeuvre, or at least something like it. If it seems far-fetched to you, dear Reader, please consider the shenanigans surrounding the General Motors bankruptcy fiasco in the United States. The 'old' GM went into bankruptcy, gave its few good assets to the 'new' GM (owned by the U.S. Government, the Crown in Right of Canada, and a few other favoured parties), and then left its legacy of toxic waste dumps (or, 'factories,' as they are charmingly misnomered) and other such massive liabilities upone the shoulders of now wiped-out investors; the 'new' GM is in the clear. This, in civilised countries, is typically considered unlawful conveyance, but since the Federal Government was involved, such trivialities were easily brushed aside.

The Dubai Gambit is, at its core, entirely designed to have the Government - any Government - protect its credit rating at all costs. Dubai seems to be very much conscious of that factor, as why else would the Emirate have explicitly withdrew any implicit Government guarantee? Dubai World et al. is a mess financially, and it would probably bring down the Government if it tried to back the enterprise's debt for its full value. At pennies on the dollar, as it were, Dubai might be able to convince the UAE central bank, or Abu Dhabi, to bankroll a resolution of the fiasco; Dubai keeps its sovereign credit rating, the UAE and Abu Dhabi look like heroes, and investors in Dubai World don't feel quite as raped as they otherwise would have.

The question is, if Dubai makes this Gambit work, and to paraphrase Tom Lehrer, who's next?

Some changes to the Gazette

The noble experiment of this blog is now over a year old, and so we felt it time to do a little rearranging of the format. We found, as time went on, that managing four blogs was just too much effort, so we've dropped the Curmudgeon Report, the Silver Money Report, and Stylishly Cheap Living. The posts of these three old blogs will be rolled into the Archives of the Depression Gazette.

Simply put, a little freshening up. Have no fear, you can continue to expect the same quality commentary we've been cranking out over the past year!

Windfalls and the Collapse of Dubai

The post didn't come out right when first posted. Paragraphs have been corrected, with apologies.

* * *

It seems that the banking system of the United States got all better for the Thanksgiving holiday, because the FDIC did not close a single bank. Frankly, we wonder how the FDIC has managed to keep its reputation as high as it is, because this sort of politicisation is completely outrageous. As we understand it, the FDIC is tasked with protecting depositors of banks, not gauging the public mood for whether or not it should protect said depositors. This inaction is completely outrageous, in our humble opinion; we wish others were outraged, too. It does not make us feel confident that our banks aren't complete trash-heaps, and we wonder just how safe “[every] single penny of deposits” really is.

But at any rate, let us turn to world events. Dubai, we read, totters on the brink of default, and the rest of the world begins to panic about all the debt from the best skiing land the far side of the Rub' al Khali. Those little private islands aren't looking so hot as investments right about now, we'd hazard to guess; although, if we'd be permitted to moralise for a moment, they seem to us to be the logical conclusion of the insanity of suburban development. We honestly can think of nothing more ridiculously 'exclusive' than one's own, artificial island. The situation with Dubai is an interesting one, from a malinvestment point of view.

Let us be honest here: we fully expect anyone and everyone who invested in Dubai's madness will end up losing every single penny they ever invested. It will probably be a very fascinating blow-out to watch, but we'd like to take a look at how, exactly, this malinvestment probably came about. We are supporters of the notion of Peak Oil; i.e. the idea that the economically-extractable amount of oil in the world is finite, and will result in a permanent decrease in the availability of a potent energy source to fuel human economies. This is not a popular view, as we're sure you are aware; in fact, to even breath the words 'peak oil' in a sentence, and not immediately ridicule the concept as lunacy and defeatism, is to give suspect to one's character.

The popular discourse, as we understand it, is either permanently-increasing availability of cheap oil, or the latest stupidity called 'plateauing,' where oil reaches a level of production which can be maintained indefinitely. If it is taken as given that oil will never run out, then Dubai seems like a great investment, because the Emirate would forever become richer and richer; better invest now, before it gets even more expensive!

No one, it seems, stopped to question this notion of infinite oil before they leveraged themselves to the hilt to invest in Dubai. If, indeed, oil has peaked, which we believe it has, Dubai is probably going to be getting permanently poorer, at least in the long run. Hence, the grand malinvestment in Dubai, Dubai World, et al.

Dubai's madness – for really, what else could it be called, other than wilful insanity? – was facilitated by its endowment of oil. We'd like to present that oil as a windfall, for conceptual purposes; it was a one-time shot at something, granted by a quirk of geology and human development to the Emirate. They took that windfall and blew it on skiing in the desert and artificial islands shaped like palm trees; a grand gesture, we think, to the stupidity of humanity.

Norway, on the other hand, took their oil windfall and tried to use it for better purposes. As we understand it, they tried to use the vast wealth which came from the one-time exploitation of their oil to improve the quality of life for all Norwegians; something that Dubai has not done, and will never do. Quality of life in Norway will, we think, continue to be quite high, long after Dubai is perhaps consumed by sandstorms, or at least reduced to a ruin of its former self. The differences, we posit, between wise investment of a windfall, and a windfall-driven orgy of conspicuous consumption, will probably not be better evidenced than by these two nations.

The collapse of Dubai will likely serve as a model for future national collapses in the 2007 Depression. Those nations which have a windfall, and have already blown it, are probably going to go the way Dubai goes; namely, somewhere very dark and scary. It should serve as a stern warning to those nations which still have a windfall they're in the process of blowing, because it's not too late to change course. Smart investment of resource windfalls, such as oil, will be increasingly paramount in the future.

In this category, we're thinking of the resource-heavies of the world, and not the silly notion of BRIC which is presently flying around (Brasil, Russia, India, China); India and China, in our opinion, are going to blow out along the lines of Dubai. Instead, we'd like to present our pet notion of CARB: Canada, Australia, Russia, and Brasil. These four nations apparently enjoy fairly large resource endowments, which have not yet been economically exterminated; if husbanded, life in the 2007 Depression might not be quite so bad in CARB, as opposed to, say, Dubai.

The concept of CARB is one which we would prefer to address in a separate post, to avoid accusations of wind-baggery. Instead, and in closing, we'd like to point out the nation which has blown its resource windfall far more than Dubai could ever hope to accomplish.

Go on, guess. We dare you.

The New World was beyond a shot in the arm to the European economy, when it first began colonising the new continents; it was like speed, angel dust, crack, LSD, and crystal meth all rolled into one, injected directly into the brain. But before that granddaddy of all economic stimulus could be used for the benefit of European colonial powers, the United States came along and had the indecency to clam a vast swath of the New World for its own. From there, it proceeded to burn through the incredible, mind-boggling amount of wealth which was to be had, to build... umm... wait, we know this one. Oh yeah, suburbia, and the most expensive military the world has ever seen. Right, sorry.

Simply put, however bad Dubai will become, we will not be the least bit surprised if the U.S. ends up being far, far worse. It had a much bigger windfall, which it blew over about two hundred years and far too many pointless wars. The era of Warren Buffet's 'never bet against America,' we posit, is over. There is money to be made shorting the U.S. and investing elsewhere, not the other way around.

House Prices, Property Taxes, and Rent

Today we present a case study of a sleepy little town on the Pacific Coast of North America somewhere between Powell River and Portland. We have changed the name to Prosperity Harbour to protect the innocent. This town is fairly average; its heyday being some decades in the past.

Being an older place, the houses tend to be on the small side with plenty of cottages, each having less than 1000 square feet of floor space. As of today, the asking price on these little, older cottages ranges from $90,000 to $180,000. Prices have only sagged a bit since the onset of the Depression thanks to generous mortgage programmes from the Government.

Property taxes here are modest, averaging about 1% annually of the market value of the houses. Rents in Prosperity Harbour are low for a place on the West Coast. A typical two bedroom house rents for $600 per month.

The gross rental yields tend to range from 5 to 6%. After allowing 1% for taxes, 2.5% for maintenance, and .5% for insurance the net yield works out to only 1 to 2%.

Until recently, landlords were banking on appreciation to make up for the lack of yield. The last two years have been disappointing in that department, to say the least. Furthermore, there is no hope of raising rents or even maintaining them anytime in the foreseeable future. A great wave of rental construction completions has been hitting the market: luxury duplexes; low-income projects; warehouse district renovations; and everything in between - all begun at the peak of the recent housing mania. The major property management companies have even entered a price war as their efforts to whittle down their swelling rental listing portfolios become desperate. Even with asking rents down 1/3 or more from their peak two years ago, vacancies go begging.

Prosperity Harbor is not losing population. What is shrinking is the number of households. Or put differently, the increase in household formation - a fact of life in North America since the European settlement began - has gone into reverse, here as elsewhere. Unemployed and underemployed persons are doubling up and making do with more cramped conditions.

What hope is there for Prosperity Harbor's landlords? None. As long as incomes continue to fall, there will be less and less money available for rent. Property taxes will not fall. As assessed property values decline, rates will rise in order to maintain public expenditures. Even if a frenzy of cutting the public sector hits Prosperity Harbor's voters, it will only serve to shrink the incomes of the local public servants - furthering the vicious cycle of declining incomes.

In a word, Prosperity Harbor's landlords are f****d. This goes for the landlords who rent to themselves as well, a.k.a. homeowners. Housing here is a terrible, terrible investment and will be remain so until prices come in line to a sane multiple of rents - meaning those old cottages need to be selling for something like $9,000 to $18,000 - a mere one tenth the current prices!

The Last "Normal" Holiday Season

As we prepare our purposefully irreverent meal for this day of thanksgiving - boiled oats and day-old biscuits - we would like to stop and make a fearless prediction which has been rolling around in our heads since about the middle of this year. We really don't have any hard data to back up our assertion; in fact, we're going to just put it right out there, that this is an intuition.

Simply put, we posit this will be the last holiday season that anyone in the United States, or elsewhere, can call normal. Note the call normal; last year saw the last holiday season which could be considered actually normal. This season, however, will be all about keeping up appearances; the show must go on, after all.

Take this Thanksgiving in the United States; 49 million Citizens are going hungry at the end of every month. Now, at last report in September, 28.4 million Citizens are on food stamps. Hmm, we sense a number problem here... but anyway, on top of that, half of all children in the U.S. will receive food aid, as well as 90% of African-American children.

Let that settle in your mind for a moment, dear Reader. Those numbers are not from Haiti or Zimbabwe, but rather the only so-called superpower in the world, the United States. Those are not good numbers to be seeing from an OECD nation; it makes us think about terms like 'third world' and 'failed state.'

This will be a failed Thanksgiving; people will max out what little credit they have remaining for the month in order to have a 'feast.' By that, we mean keep up appearances, as there are really very few people in the U.S. right now who can actually afford to have an extravagant meal, pay their bills, and have savings. Perhaps the 'recovery' propaganda has worked its magic, and most Citizens have moved into a Keynesian dreamland, where they spend now and have an economy later. We frankly think not; we posit most U.S. Citizens couldn't make a budget - and keep it - if their lives depended on it. For 49 million of those Citizens, their lives do depend on it, and they seem to prove unequal to the task.

After Thanksgiving will be the failed consumer orgy of Christmas; failed, because one cannot have an orgy if no one shows up. That's not to say that lights won't be strung and trees erected, because they will be... probably with more 'animal spirits' energy than ever. Under those trees, though, will tell the real tale. Show us an average Citizen who has lots of gifts, and we will show you someone who is nearing the end of their financial rope.

As we're writing, an ironic thought occurs to us: would it not be an expression of cosmic justice, if the attempt at summoning up a holiday shopping extravaganza is what finally topples the still-tottering U.S. economy? Think about it: maxing out credit cards for one last huzzah; blowing the savings on gifts for the kids, or Social Security cheques on the grandkids? Citizens of the United States are far too broke to enjoy the spendy, spendy ways to which they became accustomed; at this point, they should go limp, take their financial kicks to the stomach, and try to get things in order again. Instead, they will - and we mean will - go down, in vast numbers, and in flames.

FDIC Bank Failure Report - Super Late Edition

We're very late on this one; apologies. We saw the FDIC had closed only one bank on Friday evening, and thought "naw, they wouldn't close only one bank." Well, they did, and we forgot to write about it.

* * *

This past weekend, the Federal Deposit Insurance Corporation closed one bank: Commerce Bank of Southwestern Florida, Fort Myers, FL. The total assets of the closed bank were $79,700,000, and total deposits were approximately $76,700,000. The cost to the FDIC is estimated at $23,600,000.

According to our methodology, the recoverable value of the bank was $53,100,000, or only 66.62% of the declared asset value. This makes this week's closures distinctly above the cumulative recoverability since December of 2007, which stands at 57.70% (unchanged from last week).

Cumulative cost-to-FDIC so far in the Depression was brought to $51,500,500,000. This closure brings the total declared assets of FDIC-failed banks (since December of 2007) to $515,603,680,000, and total FDIC-insured deposits to $349,005,920,000. The recoverable value of all failed banks was only $297,505,320,000 (57.70% of the declared value).

* * *

We're not quite sure what the FDIC is thinking, but perhaps they don't either. Even so, it is interesting that Florida saw the only bank failure, despite the relative smallness of the closure. We really don't know what to say about that, because we're fairly confident the United States' banking system has not enjoyed the 'laying on of hands' over the past week. Sickness is still in the system, and it appears the FDIC would prefer to let the sickness spread.

* * *

On the basis of the ratio of bank closures to population (i.e. simply the number of failures in each State, with no account of assets or deposits), the ten most afflicted States are listed here. Only those States which have two or more closures are considered.

1. Georgia
2. Nevada
3. Illinois
4. Minnesota
5. Utah
6. Kansas
7. Missouri
8. Oregon
9. Florida
10. Arizona

The recoverable value represents how much of declared assets are worth by our estimate on the open market. The following are the ten States with the lowest recoverable value; only those States which have had two or more closures are considered in this analysis.

1. Florida (36.13, up from 36.00%)
2. California (42.43%)
3. Colorado (42.76%)
4. Michigan (43.18%)
5. Nevada (50.13%)
6. Georgia (53.79%)
7. Utah (55.39%)
8. Arizona (56.08%)
9. Washington (56.18%)
10. North Carolina (56.7%)

* * *

The Frugal Scotsman's FDIC Cash Burn Through O'Meter gets adjusted with a subtraction of $26,600,000. The value stands at $43,987,000.

Housing Price Report for November

Our result for the first six months of our North American Housing Price Index is a drop of 10.45%. This is a very serious drop, and has implication for more than just the house owners who need the value of their houses to say up. It also means that, on average: the housing collateral on bank balance sheets is impaired by around 10%; any and all securities of bundled mortgages have seen their value reduced by 10%; any house owners relying on the value of their house to keep up appearances have seen their appearances reduced by 10%.

Prices are showing some sign of improvement in the USA, which is to be expected thanks to the Federal Government's herculean efforts to prop up the industry.The 10% US Federal income tax credit has been extended, and all things being equal, this will tend to keep prices in the USA 10% higher than they otherwise would be. We'll be watching for a sudden fall when the program ends, if ever.

Interestingly enough, though, we are seeing some weakness in the Canadian housing market. This strikes us as rather odd, as the credit available to Canadian Citizens is still growing at a respectable clip. Additionally, the Federal Government has a very direct hand in guaranteeing mortgages in Canada, whereas the U.S. Federal Government only proves a wishy-washy guarantee to bail out banks.

Frankly, it seems that the animal spirits are friskier in the United States than Canada, undoubtedly supported by the U.S. Federal Government's housing tax credit. It is also possible U.S. Citizenry is a bit more credulous of the 'recession is over' propaganda than are the Canadians; it's time for Americans to do their patriotic duty and spend, spend, spend!

FDIC Bank Failure Report

This weekend, the Federal Deposit Insurance Corporation closed three banks: Century Bank, FSB of Sarasota, Florida; Orion Bank of Naples, Florida; and Pacific Coast National Bank of San Clemente, California. The total assets of the closed banks were $3,562,400,000, and total deposits were approximately $2,861,900,000. The cost to the FDIC is estimated at $968,400,000.

According to our methodology, the recoverable value of the banks was $1,875,500,000, or only 52.65% of the declared asset value. This makes this week's closures distinctly below the cumulative recoverability since December of 2007, which stands at 57.70% (down from last week's 57.73%).

Cumulative cost-to-FDIC so far in the Depression was brought to $51,476,900,000. This closure brings the total declared assets of FDIC-failed banks (since December of 2007) to $515,523,980,000, and total FDIC-insured deposits to $348,929,220,000. The recoverable value of all failed banks was only $297,452,320,000 (57.70% of the declared value).

***

The closures in Florida confirm our model of Florida as the state with the poorest quality assets. Century Bank had a recoverable value by our model of only 39.42% - the 5th worst so far in the Depression. In keeping with the spirit of poor quality of assets, we are introducing the Frugal Scotsman's Ten Nastiest Bank Closures To Date. We will be updating this list as newer, nastier closures occur. We are quite confident that this will be a regular feature, given the trend in place of deteriorating bank asset quality.

1. IndyMac (CA) - 22.99%
2. BankUnited FSB (FL) - 28.91%
3. First Bank of Idaho - 37.39%
4. Community Bank of Nevada - 39.10%
5. Century Bank FSB (FL) - 39.42%
6. First Bank of Beverly Hills (CA) - 40.39%
7. Bank of Clark County (WA) - 40.81%
8. Horizon Bank (MN) - 40.98%
9. Union Bank (AZ) - 41.13%
10. Franklin Bank (TX) - 41.18%

***

On the basis of the ratio of bank closures to population (i.e. simply the number of failures in each State, with no account of assets or deposits), the ten most afflicted States are listed here. Only those States which have two or more closures are considered.

1. Georgia
2. Nevada
3. Illinois
4. Minnesota
5. Utah
6. Kansas
7. Missouri
8. Oregon
9. Florida (up from #11)
10. Arizona

The recoverable value represents how much of declared assets are worth by our estimate on the open market. The following are the ten States with the lowest recoverable value; only those States which have had two or more closures are considered in this analysis.

1. Florida (36.00, up from 32.44%)
2. California (42.43%, up from 42.37%)
3. Colorado (42.76%)
4. Michigan (43.18%)
5. Nevada (50.13%)
6. Georgia (53.79%)
7. Utah (55.39%)
8. Arizona (56.08%)
9. Washington (56.18%)
10. North Carolina (56.7%)

***

The Frugal Scotsman's FDIC Cash Burn Through O'Meter gets its first adjustment now with a subtraction of 986,400,000. The value stands at 44,013,600. Forty-four weeks to go!

The Big Bank Problem No One Talks About

Consumer credit in the USA is falling, falling, falling. Whatever numbers you pick, there's no massaging the data to make it look innocent. This all is well known, as is the concern that lack of consumer borrowing will be a drag on the consumer portion of the economy.

Something else about this situation seems to be slipping through the cracks of public awareness, however. Once upon a time, maybe twenty years ago, when lenders cared a lot more about credit quality, it was well known that subprime could never work as a profitable lending model. Too many companies had come and gone promising to be profitable lending to high-risk customers. Their seeming profitability was a trick of accounting legerdemain: a growing book makes loss ratios look lower than they actually are since ageing loans are more likely to sour than fresh ones.

In the huge, recent credit bubble when almost everyone (and sometimes their pets) were receiving credit offers, loan books were growing smartly and loss ratios were low. Now that credit is contracting, people who can pay back their loans tend to be doing so. And those who can't (but are not yet to the point of defaulting) are just trying to keep them rolling over. The net result is that the overall quality of bank's loan books is deteriorating rapidly.

Banks are becoming less solvent over time, not more so, in spite of their efforts to improve their condition. Banks efforts to reign in credit by jacking up interest rates and cutting credit lines will actually backfire because better borrowers will simply pay off their loans. Borrowers who accept the barrage of insults are in such poor condition financially they can only subject themselves to usury.

In conclusion, the end state of this process will likely be the Federal Government (having had to bail out the banks and then the FDIC over and over) holding consumer loan portfolios that have little to no value. Cost to taxpayer: something like two trillion dollars, and further debauchment of the Dollar. Banks will be kept in business to keep up appearances, and may even book a nominal profit.

FDIC Prepayment Approved

The Board of Directors of the FDIC has approved the three-year prepayment of deposit insurance premiums. According to the FDIC's press release, the prepayment will amount to about $45 billion, to be collected between now and December 30th, 2009. A quote from the press release:

The pre-payment allows the FDIC to strengthen the cash position of the Deposit Insurance Fund (DIF)... While the prepayment will immediately improve the FDIC's liquidity, it will not have an impact on the fund balance.

To translate: the DIF's present balance is more or less zero, and the $45 billion is going to be shovelled out the door very quickly indeed. If the FDIC's bank closures cost around $1 billion per week, we fully expect this prepayment will be burned through in about 45 weeks or so. At that point, the FDIC will have its bank against the wall: it will have no further regular income from assessments until 2013, and 'special assessments' will become quickly onerous to a failing banking system. When that happens, the FDIC will have to either tap its lines of credit, or look for a direct bailout from the Federal Reserve or the U.S. Treasury.

But at any rate, we're pleased to introduce the Cash Burn-Through Meter; you will find it on the left, at the top of the menus. We will start the Meter at $45 billion, and with every week's closures we will subtract that value from the total prepayment. When it reaches zero we will buy a bottle of champagne.

The Unexpected Weakness of the Recovery

Our title today comes from a phrase ripped out of context from a recent Wall Street Journal article. The article itself is not important, but the assumption of the phrase was just too rich for us to pass by uncommented upon.

As discussed copiously elsewhere, a propaganda campaign of gargantuan proportions has been unleashed upon the world's populace. The term perception management sums it up nicely. The basic idea is that if people are confident, they will consume. If people will consume, there will be 'work' to do. It is an effort to restore society and the economy to the defined norm of 'the way things were until about two years ago.' Whatever an individual sees or experiences to the contrary (especially unemployment and homelessness), is to be disregarded in favour of the consumerist paradigm.

Almost everything you read or hear will be attempting to reinforce the notion that the recent (and thankfully over) financial and economic crisis was just a bump in the road to ever greater prosperity.

Whether there is a vast conspiracy orchestrated by the Ministry of Truth, or whether it is merely the unconscious coordination of wishful thinking is immaterial. This informational miasma is deadly and if one wants to make it through the Depression without being too battered, one had best learn to recognise the disinformation, not get sucked in, and think straight instead.

The unhappy reality is the Depression is still on and it is going to get worse - a lot worse. Incomes are still falling. It doesn't matter that stocks are recovering or house prices in Australia are hitting new highs. In terms of purchasing power, aggregate incomes are going to be falling for a long time and everyone had better get used to that fact. Tragically, the more the truth is evaded (whether deliberately or otherwise), the worse off everyone will be.

FDIC Bank Failure Report

This week, the Federal Deposit Insurance Corporation closed five banks: United Security Bank, of Sparta, GA; Home Federal Savings Bank, of Detroit, MI; Prosperan Bank, of Oakdale, MN; Gateway Bank of St. Louis, of St. Louis, MO; and United Commercial Bank, of San Francisco, CA. The total assets of the closed banks were $11,599,100,000, and total deposits were approximately $7,866,300,000. The cost to the FDIC is estimated at $1,532,700,000.

According to our methodology, the recoverable value of the banks was $6,333,600,000, or only 54.60% of the declared asset value. This makes this week's closures distinctly below the cumulative recoverability since December of 2007, which stands at 57.73% (down from last week's 57.81%).

Cumulative cost-to-FDIC so far in the Depression was brought to $50,490,500,000. This closure brings the total declared assets of FDIC-failed banks (since December of 2007) to $511,961,580,000, and total FDIC-insured deposits to $346,067,320,000. The recoverable value of all failed banks was only $295,576,820,000 (57.73% of the declared value).

***

The situation with United Commercial Bank (UCB) is an interesting one, as it marks a degree of cooperation previously unseen in the banking world. UCB, UCB of Hong Kong, and UCB-China in Shanghai were all closed by the FDIC's actions, in cooperation with the Hong Kong government and the China Banking Regulatory Commission. Although it's a moment to wave the non-existent flag of international fellowship and all that, we would like to point out just how bad this looks to us.

The FDIC's actions show just how interconnected the financial systems of the World are, and how terribly difficult it is to find any sort of separation across national borders; this will make sorting failed banks like UCB very difficult, especially if non-US agencies are not quite as cooperative as they were this time. In addition, it's all well and good, as far as the average U.S. Citizen is concerned, that the FDIC took over banks in China; what happens if and when China starts taking over banks in the United States?

But leaving that aside, we have a loose prediction for the general trend of future, weekly FDIC closures: they will likely consist of a handful of minor community banks, and one large-ish bank. This week's format is a good example of what we're walking about, as the banks other than UCB were quite small indeed. Since we are fully convinced the FDIC is effectively out of money, this would suggest that the banks which the FDIC manages to scrape up the cash to close are the worst imaginable banks in the United States... leaving aside such cesspools as Citibank, Wells Fargo, Bank of America, JPMorgan Chase, et al.

***

On the basis of the ratio of bank closures to population (i.e. simply the number of failures in each State, with no account of assets or deposits), the ten most afflicted States are listed here. Only those States which have two or more closures are considered.

1. Georgia
2. Nevada
3. Illinois
4. Minnesota
5. Utah
6. Kansas
7. Missouri (up from #8)
8. Oregon (down from #7)
9. Arizona
10. Colorado

The recoverable value represents how much of declared assets are worth by our estimate on the open market. The following are the ten States with the lowest recoverable value; only those States which have had two or more closures are considered in this analysis.

1. Florida (32.44%)
2. California (42.37%, up from 40.11%)
3. Colorado (42.76%)
4. Michigan (43.18%, up from 43.07%)
5. Nevada (50.13%)
6. Georgia (53.79%, up from 53.74%)
7. Utah (55.39%)
8. Arizona (56.08%)
9. Washington (56.18%)
10. North Carolina (56.7%)

***

We're very pleased with how these two lists have shaped up; the movement from week to week is becoming very slight, so we're pretty confident this gives a relatively accurate idea of how badly off these various States and the banks within them are. Of course, our analysis only reflects those States which have had over two bank failures, so that leaves a good portion of the Union (and its... extensions) not reflected in our report.

Nevertheless, these five States - Georgia, Utah, Arizona, Nevada, and Colorado, in no particular order - are likely to be among the worst-off, as they are represented in both the preceeding lists. We really can't say which of those is the king of the dung heap, as it were, because we still haven't figured out how to compare apples and oranges.