There are a number of disturbing trends that can be discerned, if one has the time, from rummaging through the data coming out of the Bureau of Economic Analysis. One is that out of the $89.4 billion growth in national income from the second quarter of this year to the third, $12.8 billion was growth of "subsidies". That does not refer to "cash for clunkers" and so forth, but money heading from the taxpayer into government enterprises (our guess mostly Fannie Mae and Freddie Mac - but really, who knows?). How that can be construed as income is bizarre enough, but it's not good news that 1/7 of third quarter growth comes from something so fishy.
But such accounting shenanigans could be dismissed as mere noise compared to some really big numbers - such as the jump in the profits of our corporate masters: $110.4 billion dollars. One might astutely note that this is actually more than the increase in national income, $21 billion more as a matter of fact. Or putting the whole matter another way, all (and then some) of the much touted 'recovery' is growth of corporate profits, and the rest of us will just have to make do with the scraps.
But the really bad news is something hidden (in the sense that it is not presented by itself - but has to be derived from two data sets) and insidious: the approaching excess of consumption of fixed private capital ($1525.5 billion) over fixed private investment ($1,712.6 billion). We say "approaching" because obviously the latter figure is larger than the former, but it has been falling at a rate of 21% over the year ending September 30 (and without a third quarter "recovery") and 4% the year before that.
Between bank lending contracting, the real estate market collapsing, and corporations being inclined to invest their winnings overseas, there isn't much prospect for anything other than continued decline in fixed private investment. We really can't say if the rate is going to accelerate or moderate but even if it continues at, say, a moderated 10%, the cross over would likely come in late 2010.
What this means in plain English is that at some point in the near future, the economy will reach a state where consumption of capital exceeds its formation, and there will be no prospect of any kind of economic growth ever, until growth in private investment materialises. It could be a long wait.
Tuesday, December 22, 2009
Saturday, December 19, 2009
FDIC Bank Failure Report
On 18/12/09, the Federal Deposit Insurance Corporation closed seven banks: Rockbridge Commercial Bank of Atlanta, Georgia; Peoples First Community Bank of Panama City Florida; Citizens State Bank of New Baltimore, Michigan; New South FSB of Irondale, Alabama; Independent Bankers' Bank of Springfield, Illinois; Imperial Capital Bank of La Jolla, California; and First Federal Bank of California in Santa Monica, California. The total assets of the closed bank were $14,448,100,000, and total deposits were $11,157,130,000. The cost to the FDIC is estimated at $1,827,420,000.
According to our methodology, the recoverable value of the banks was only 64.57% of the declared asset value. This makes the recoverability of this week's closures distinctly above the cumulative recoverability since December of 2007, which stands at 57.66% (up slightly from last report's 57.48%).
Cumulative cost-to-FDIC so far in the Depression was brought to $56,384,590,000. These closures bring the total declared assets of FDIC-failed banks (since December of 2007) to $544,460,780,000, and total FDIC-insured deposits to $370,346,650,000. The recoverable value of all failed banks was only $313,962,060,000 (57.66% of the declared value).
* * *
This week's closures were definitely not typical, as there were a number of straight out liquidations; three, to be exact. One of those liquidations (Rockbridge) will be complete by Monday! We pity the customers whose outstanding checks will be bouncing next week. We suspect a bit of year-end housekeeping on the part of the FDIC, as they will be kicking back between the 24th and 28th of December. Further closures this year are doubtful due to the upcoming holiday; perhaps Santa Claus has made the banking system all better.
* * *
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. Kansas
5. Minnesota
6. Utah
7. Florida (up from #8)
8. Missouri
9. Oregon
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 (38.89%, up from 36.65%)
2. Colorado, up from #4 (42.80%)
3. Michigan (43.53% up from 42.78%)
4. California, down from #2 (45.06% up from 42.28%)
5. Nevada (49.81%)
6. Ohio (50.84%)
7. Georgia (54.64% up from 54.62%)
8. Utah (55.45%)
9. Washington (56.18%)
10. North Carolina (56.70%)
* * *
The Frugal Scotsman's FDIC Cash Burn Through O'Meter gets adjusted with a subtraction of $1,827,420,000. The value now stands at $39,559,990,000.
According to our methodology, the recoverable value of the banks was only 64.57% of the declared asset value. This makes the recoverability of this week's closures distinctly above the cumulative recoverability since December of 2007, which stands at 57.66% (up slightly from last report's 57.48%).
Cumulative cost-to-FDIC so far in the Depression was brought to $56,384,590,000. These closures bring the total declared assets of FDIC-failed banks (since December of 2007) to $544,460,780,000, and total FDIC-insured deposits to $370,346,650,000. The recoverable value of all failed banks was only $313,962,060,000 (57.66% of the declared value).
* * *
This week's closures were definitely not typical, as there were a number of straight out liquidations; three, to be exact. One of those liquidations (Rockbridge) will be complete by Monday! We pity the customers whose outstanding checks will be bouncing next week. We suspect a bit of year-end housekeeping on the part of the FDIC, as they will be kicking back between the 24th and 28th of December. Further closures this year are doubtful due to the upcoming holiday; perhaps Santa Claus has made the banking system all better.
* * *
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. Kansas
5. Minnesota
6. Utah
7. Florida (up from #8)
8. Missouri
9. Oregon
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 (38.89%, up from 36.65%)
2. Colorado, up from #4 (42.80%)
3. Michigan (43.53% up from 42.78%)
4. California, down from #2 (45.06% up from 42.28%)
5. Nevada (49.81%)
6. Ohio (50.84%)
7. Georgia (54.64% up from 54.62%)
8. Utah (55.45%)
9. Washington (56.18%)
10. North Carolina (56.70%)
* * *
The Frugal Scotsman's FDIC Cash Burn Through O'Meter gets adjusted with a subtraction of $1,827,420,000. The value now stands at $39,559,990,000.
Wednesday, December 16, 2009
FDIC Bank Failure Report - Updated
This report is current as of 11 December. The report for this weekend's closures will follow.
Well, 158 FDIC press releases later, we've finished updating our information. We'll work on historical data (i.e. before the past two weeks) in the near future.
* * *
On 11/12/09, the Federal Deposit Insurance Corporation closed three banks: SolutionsBank, of Overland Park, KS; Valley Capital Bank, of Mesa AZ; and Republic Federal Bank, of Miami, FL. The total assets of the closed bank were $984,400,000, and total deposits were $815,300,000. The cost to the FDIC is estimated at $257,160,000.
According to our methodology, the recoverable value of the banks were $558,140,000, or only 56.70% of the declared asset value. This makes this week's closures distinctly below the cumulative recoverability since December of 2007, which stands at 57.48% (unchanged from last report's revised recoverability of 57.48%).
Cumulative cost-to-FDIC so far in the Depression was brought to $54,557,170,000. These closures bring the total declared assets of FDIC-failed banks (since December of 2007) to $530,012,680,000, and total FDIC-insured deposits to $359,189,520,000. The recoverable value of all failed banks was only $304,632,350,000 (57.48% of the declared value).
* * *
The changes we made to our analysis (i.e. taking into account premiums/discounts which acquiring banks paid for failed banks' insured deposits) made a distinct difference. A difference of 0.08% - the difference between the revised recoverability (57.48%), and the unrevised (57.56%) - might not seem like much, but applied to the assets of all banks closed so far, the assets loose an additional $424 million in value. Isn't leverage a beautiful thing, dear Reader?
We don't have much to say about these three closures, however; the seem fairly average... which is probably a problem. We still feel in the FDIC is managing its closures to pick and choose its cost. A question occures to us as we write: does the FDIC pick their cost first, and then close the banks which fit within the cost they selected beforehand? Inquiring minds want to know.
* * *
Because of the revisions we made to our data, we are updating the Frugal Scotsman's Ten Nastiest Bank Closures To Date. Here are the Gruesome Tensome:
1. IndyMac (CA) - 22.99%
2. BankUnited FSB (FL) - 28.91%
3. First Bank of Idaho - 37.10%, revised down from 37.39%
4. Community Bank of Nevada - 39.10%
5. Franklin Bank (TX) - up from #10 at 39.94%, revised down from 41.18%
6. Sherman County Bank (NE) - new to list, 40.06%
7. Horizon Bank (MN) - up from #8, 40.39%, revised down from 40.98%
8. First Bank of Beverly Hills (CA) - down from #6, 40.39%
9. Riverside Bank of the Gulf Coast (FL) - new to list, 40.60%
10. Century Bank FSB (FL) - down from #5, 40.72%, revised up from 39.42%
* * *
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. Kansas (up from #6)
5. Minnesota (down from #4)
6. Utah (down from #5)
7. Missouri
8. Florida (up from #9)
9. Oregon (down from #8)
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 (36.65%, up from 36.13%)
2. California (42.28, revised down from 42.43%)
3. Michigan, up from #4 (42.78%, revised down from 43.18%)
4. Colorado down from #3 (42.80, revised up from 42.76%)
5. Nevada (49.81, revised down from 50.13%)
6. Ohio (50.84. revised down from 50.91%)
7. Georgia (54.62%, revised down from 54.75%)
8. Utah (55.45%. revised up from 55.39%)
9. Washington, up from #10 (56.18%)
10. North Carolina, new to list (56.70%)
* * *
Due to the revisions, the FDIC did not spend as much money as we thought previously (it's complicated, don't ask). The Frugal Scotsman's FDIC Cash Burn Through O'Meter gets adjusted with a subtraction of $257,160,000, and also revised upward. The value stands at $41,387,410,000.
Well, 158 FDIC press releases later, we've finished updating our information. We'll work on historical data (i.e. before the past two weeks) in the near future.
* * *
On 11/12/09, the Federal Deposit Insurance Corporation closed three banks: SolutionsBank, of Overland Park, KS; Valley Capital Bank, of Mesa AZ; and Republic Federal Bank, of Miami, FL. The total assets of the closed bank were $984,400,000, and total deposits were $815,300,000. The cost to the FDIC is estimated at $257,160,000.
According to our methodology, the recoverable value of the banks were $558,140,000, or only 56.70% of the declared asset value. This makes this week's closures distinctly below the cumulative recoverability since December of 2007, which stands at 57.48% (unchanged from last report's revised recoverability of 57.48%).
Cumulative cost-to-FDIC so far in the Depression was brought to $54,557,170,000. These closures bring the total declared assets of FDIC-failed banks (since December of 2007) to $530,012,680,000, and total FDIC-insured deposits to $359,189,520,000. The recoverable value of all failed banks was only $304,632,350,000 (57.48% of the declared value).
* * *
The changes we made to our analysis (i.e. taking into account premiums/discounts which acquiring banks paid for failed banks' insured deposits) made a distinct difference. A difference of 0.08% - the difference between the revised recoverability (57.48%), and the unrevised (57.56%) - might not seem like much, but applied to the assets of all banks closed so far, the assets loose an additional $424 million in value. Isn't leverage a beautiful thing, dear Reader?
We don't have much to say about these three closures, however; the seem fairly average... which is probably a problem. We still feel in the FDIC is managing its closures to pick and choose its cost. A question occures to us as we write: does the FDIC pick their cost first, and then close the banks which fit within the cost they selected beforehand? Inquiring minds want to know.
* * *
Because of the revisions we made to our data, we are updating the Frugal Scotsman's Ten Nastiest Bank Closures To Date. Here are the Gruesome Tensome:
1. IndyMac (CA) - 22.99%
2. BankUnited FSB (FL) - 28.91%
3. First Bank of Idaho - 37.10%, revised down from 37.39%
4. Community Bank of Nevada - 39.10%
5. Franklin Bank (TX) - up from #10 at 39.94%, revised down from 41.18%
6. Sherman County Bank (NE) - new to list, 40.06%
7. Horizon Bank (MN) - up from #8, 40.39%, revised down from 40.98%
8. First Bank of Beverly Hills (CA) - down from #6, 40.39%
9. Riverside Bank of the Gulf Coast (FL) - new to list, 40.60%
10. Century Bank FSB (FL) - down from #5, 40.72%, revised up from 39.42%
* * *
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. Kansas (up from #6)
5. Minnesota (down from #4)
6. Utah (down from #5)
7. Missouri
8. Florida (up from #9)
9. Oregon (down from #8)
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 (36.65%, up from 36.13%)
2. California (42.28, revised down from 42.43%)
3. Michigan, up from #4 (42.78%, revised down from 43.18%)
4. Colorado down from #3 (42.80, revised up from 42.76%)
5. Nevada (49.81, revised down from 50.13%)
6. Ohio (50.84. revised down from 50.91%)
7. Georgia (54.62%, revised down from 54.75%)
8. Utah (55.45%. revised up from 55.39%)
9. Washington, up from #10 (56.18%)
10. North Carolina, new to list (56.70%)
* * *
Due to the revisions, the FDIC did not spend as much money as we thought previously (it's complicated, don't ask). The Frugal Scotsman's FDIC Cash Burn Through O'Meter gets adjusted with a subtraction of $257,160,000, and also revised upward. The value stands at $41,387,410,000.
Housing Price Report for December
Our North American Housing Price Index registered a 6.46% drop from November, which likely would have been much deeper if we had not seen a sharp uptick on the top of the housing market. The drop from May - when we started the Index - is now 15.86%, representing a massive fall in the North American housing markets, and likely correlated by a similar drop in the valuation of bank mortgage portfolios. On an annualised basis the Index suggests the market is down 27.18%, a truly staggering loss.
That 27.18% drop strongly suggests the stimulus effect of the US Government's tax credit has worn off. Record low rates for conventional mortgages seem to be little help as few applicants qualify for the new, stringent requirements. All in all, we declare that the housing crash appears to have resumed.
Given the huge shadow inventory of foreclosed houses, the impending wave of Alt-A defaults, high unemployment, and falling income across the board, there is essentially no hope the housing market will find 'a bottom' any time in the foreseeable future. Additionally, the 8.9% rise in housing starts reported by Forbes will only add to the pain of existing housing stock, as new - and difficult to move - houses come into the market and further drive down already distressed property.
We expect the bottom, when it comes, will be shockingly low. We boldly predict a real price decline somewhere in the neighbourhood of 90% on average, peak to trough. In some places, such as Las Vegas, we expect a decline of 100% as the whole urban field there becomes indefensible. Attractive urban centres will fare the best, but it will be grim consolation.
Price declines may be obfuscated by inflation, if that should arrive. Given the devastation banking elites would suffer in a true deflation, we suspect the 'powers-that-be' will attempt to engineer a burst of high inflation to save the banks. On the other hand, such efforts may be unsuccessful, as it would be exceedingly difficult to discern the optimum amount of money-printing. As powerful as banking elites are, they may be sacrificed on the altar of the Almighty Dollar.
That 27.18% drop strongly suggests the stimulus effect of the US Government's tax credit has worn off. Record low rates for conventional mortgages seem to be little help as few applicants qualify for the new, stringent requirements. All in all, we declare that the housing crash appears to have resumed.
Given the huge shadow inventory of foreclosed houses, the impending wave of Alt-A defaults, high unemployment, and falling income across the board, there is essentially no hope the housing market will find 'a bottom' any time in the foreseeable future. Additionally, the 8.9% rise in housing starts reported by Forbes will only add to the pain of existing housing stock, as new - and difficult to move - houses come into the market and further drive down already distressed property.
We expect the bottom, when it comes, will be shockingly low. We boldly predict a real price decline somewhere in the neighbourhood of 90% on average, peak to trough. In some places, such as Las Vegas, we expect a decline of 100% as the whole urban field there becomes indefensible. Attractive urban centres will fare the best, but it will be grim consolation.
Price declines may be obfuscated by inflation, if that should arrive. Given the devastation banking elites would suffer in a true deflation, we suspect the 'powers-that-be' will attempt to engineer a burst of high inflation to save the banks. On the other hand, such efforts may be unsuccessful, as it would be exceedingly difficult to discern the optimum amount of money-printing. As powerful as banking elites are, they may be sacrificed on the altar of the Almighty Dollar.
Tuesday, December 15, 2009
No Silver Lining
A perverse meme is circulating in the news media and blogosphere that some good can come out of house price declines, mortgage defaults, and mortgage restructurings.
Charles Hugh Smith discusses Why a 35% Decline in Housing Values Would Be Good for the Nation. Smith, an otherwise competent commentator, does state the obvious: people have been spending too much on housing and to spend less on that will help households and consequently, the economy in other areas. However he neglects to mention the enormous economic catastrophe that will result from having a huge part of the US National balance sheet permanently wiped out. The US financial sector, as healthy economic agents, cannot survive the permanent impairment of mortgage assets that would result. Bank equity - which forms the basis of banks ability to lend, and even just hold deposits, would be wiped out.
As a matter of fact, it is already wiped out de facto - the FDIC and other regulators just keep banks going in the hopes that a recovery in housing prices will make most of the mortgages legitimate investments again. A further decline to lasting low prices will make that charade simply the legitimisation of a zombie banking system a la Japan.
In a Wall Street Journal editorial on 'walking away' masquerading as an article, the author states:
If "shedding debts" means defaulting (as the article seems to imply), then citizens as taxpayers will feel the suck of money coming out of their wallets as Uncle Sam through the FDIC has to make depositors whole. And, as mentioned above, having a walking-dead banking system is not going to help recovery.
On the whole, the intellectual basis of the perspective of this 'article' is entirely flawed. We suspect it is simply another in a long series of efforts by the Ministry of Truth to put a positive spin on the ongoing havoc caused by the Depression.
Not that this flawed intellectual notion doesn't get the support of some heavy guns. Nobel-prize winning Joseph Stiglitz is quoted in Bloomberg as saying a new kind of bankruptcy needs to be created to let mortgage holders write down their mortgage to a market level and keep it! Either Mr. Stiglitz knows better and is dissembling, or he is the one suffering from bankruptcy - intellectual bankruptcy.
There is a serious moral hazard issue here. Dysfunctional economic units must be allowed to suffer the consequences of poor decisions. Stiglitz's proposal is yet another bailout - this time a bailout for credulous, housing-bubble participants on the borrowing side.
We do not approve of bailouts for housing-bubble participants on the lending side, either. But two wrongs do not make a right. The more poor decision-makers are coddled through bailouts, the more society at large is harmed by resources being diverted to the thieving, hapless and stupid; and the less resources are available to be used by the Intelligent who were wise enough not to get involved in the housing bubble, and who are truly the World's only hope of economic progress.
Charles Hugh Smith discusses Why a 35% Decline in Housing Values Would Be Good for the Nation. Smith, an otherwise competent commentator, does state the obvious: people have been spending too much on housing and to spend less on that will help households and consequently, the economy in other areas. However he neglects to mention the enormous economic catastrophe that will result from having a huge part of the US National balance sheet permanently wiped out. The US financial sector, as healthy economic agents, cannot survive the permanent impairment of mortgage assets that would result. Bank equity - which forms the basis of banks ability to lend, and even just hold deposits, would be wiped out.
As a matter of fact, it is already wiped out de facto - the FDIC and other regulators just keep banks going in the hopes that a recovery in housing prices will make most of the mortgages legitimate investments again. A further decline to lasting low prices will make that charade simply the legitimisation of a zombie banking system a la Japan.
In a Wall Street Journal editorial on 'walking away' masquerading as an article, the author states:
People's increasing willingness to abandon their own piece of America illustrates a paradoxical change wrought by the housing bust: Even as it tarnishes the near-sacred image of home ownership, it might be clearing the way for an economic recovery.and:
Unfortunately, less money flowing out of the pockets of consumers as debtors means less money flowing into the pockets of citizens as creditors (e.g. the proverbial little old ladies who rely on savings income). It is a bogus calculus which could in any way construe the process as 'healing'.For the 4.8 million U.S. households that data provider LPS Applied Analytics estimates haven't paid their mortgages in at least three months, the added cash flow could amount to about $5 billion a month -- an injection that in the long term could be worth more than the tax breaks in the Obama administration's economic-stimulus package.
"It's a stealth stimulus," says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again."
If "shedding debts" means defaulting (as the article seems to imply), then citizens as taxpayers will feel the suck of money coming out of their wallets as Uncle Sam through the FDIC has to make depositors whole. And, as mentioned above, having a walking-dead banking system is not going to help recovery.
On the whole, the intellectual basis of the perspective of this 'article' is entirely flawed. We suspect it is simply another in a long series of efforts by the Ministry of Truth to put a positive spin on the ongoing havoc caused by the Depression.
Not that this flawed intellectual notion doesn't get the support of some heavy guns. Nobel-prize winning Joseph Stiglitz is quoted in Bloomberg as saying a new kind of bankruptcy needs to be created to let mortgage holders write down their mortgage to a market level and keep it! Either Mr. Stiglitz knows better and is dissembling, or he is the one suffering from bankruptcy - intellectual bankruptcy.
There is a serious moral hazard issue here. Dysfunctional economic units must be allowed to suffer the consequences of poor decisions. Stiglitz's proposal is yet another bailout - this time a bailout for credulous, housing-bubble participants on the borrowing side.
We do not approve of bailouts for housing-bubble participants on the lending side, either. But two wrongs do not make a right. The more poor decision-makers are coddled through bailouts, the more society at large is harmed by resources being diverted to the thieving, hapless and stupid; and the less resources are available to be used by the Intelligent who were wise enough not to get involved in the housing bubble, and who are truly the World's only hope of economic progress.
Sunday, December 13, 2009
The Curse of Reverse Banking
Banking is the great octane booster of the engines of economy. It can make many people feel rich. Albert deposits $100 in the First National Bank. Bertrand borrows $100 from the First National Bank and deposits the funds in the Second National Bank. Clyde borrows $100 from the Second National Bank ... and so on ad infinitum. Everyone has $100 in their bank accounts at the same time! There is a lot more spendable funds now than if Albert had just kept his $100 under the mattress. A whole lot more. Whee!
This sort of dementia has been going on for a couple hundred years and has reached a fevered pitch in the last ten or so. How could this go on so long without it all crashing down like the house of cards that it is? That is the marvel of economic growth. As long as the economy, and consequently income, keeps growing in the aggregate, there will be plenty of funds to keep all those plates spinning.
When banking goes into reverse though, it is deadly. Sufficient losses on loans cause banks to become unprofitable. Unprofitable banks have to pull the loss out of their equity and shrink lending, because loans cannot exceed a regulated ratio of bank equity. Roughly $10 of lending has to be cut for every $1 of losses. When lending is cut, borrowers have to pay back loans (if they can) instead of rolling them over. When they can't pay the loans back, the banks have further losses, and must restrict lending even more.
It gets worse. When borrowers have to pay back loans they have to cut other spending. If their income is falling, this causes their spending to fall disproportionately. One person's spending is another's income, so income tends to fall. When income falls, debt becomes harder to pay back, and many borrowers default, causing more loan losses for banks, and more restrictions on lending.
Around and around this destruction goes, and where it stops nobody knows. The entire World's economy is wildly indebted. Households, businesses, and governments have never been so in debt as they are now. What goes up, must come down. The bottom could be shockingly low.
This sort of dementia has been going on for a couple hundred years and has reached a fevered pitch in the last ten or so. How could this go on so long without it all crashing down like the house of cards that it is? That is the marvel of economic growth. As long as the economy, and consequently income, keeps growing in the aggregate, there will be plenty of funds to keep all those plates spinning.
When banking goes into reverse though, it is deadly. Sufficient losses on loans cause banks to become unprofitable. Unprofitable banks have to pull the loss out of their equity and shrink lending, because loans cannot exceed a regulated ratio of bank equity. Roughly $10 of lending has to be cut for every $1 of losses. When lending is cut, borrowers have to pay back loans (if they can) instead of rolling them over. When they can't pay the loans back, the banks have further losses, and must restrict lending even more.
It gets worse. When borrowers have to pay back loans they have to cut other spending. If their income is falling, this causes their spending to fall disproportionately. One person's spending is another's income, so income tends to fall. When income falls, debt becomes harder to pay back, and many borrowers default, causing more loan losses for banks, and more restrictions on lending.
Around and around this destruction goes, and where it stops nobody knows. The entire World's economy is wildly indebted. Households, businesses, and governments have never been so in debt as they are now. What goes up, must come down. The bottom could be shockingly low.
Saturday, December 12, 2009
Changes to FDIC Report
We're going to be late on publishing the latest FDIC Bank Failure Report, because we need to again retool our data. It seems that the FDIC has been getting bidding wars started over the deposits of some of the banks it closes, as demonstrated by premiums which acquiring banks are willing to pay to get the failed bank's deposits.
We presume that the FDIC counts that premium against the outlay from the DIF, thus reducing the apparent cost-to-DIF. It seems overall these premiums amount to a fairly large chunk of change. We will be adding those premiums back into the total cost-to-DIF in our analysis, which will likely result in a more accurate picture of total recoverable value of the U.S. banking system.
We presume that the FDIC counts that premium against the outlay from the DIF, thus reducing the apparent cost-to-DIF. It seems overall these premiums amount to a fairly large chunk of change. We will be adding those premiums back into the total cost-to-DIF in our analysis, which will likely result in a more accurate picture of total recoverable value of the U.S. banking system.
US Households: Unhappy Speculators
The economist Hyman Minsky divided financing techniques into three categories: Ponzi finance - where principal and interest on debt cannot be paid out of earnings but only ever more borrowing; Speculative finance - where interest on debt can be paid out of earnings but principal must be rolled over; and Hedge finance where both principal and interest on debt can be paid out of earnings.
From 1952 to 2007 the ratio of debt to income for US households rose from about .35 (hedge financing) to about 1.3 (speculative financing). Even two years into the Depression, the ratio has only declined a bit.
In times of economic contraction - especially when a major asset bubble bursts (i.e., housing), speculative financing units run into two significant problems. Routine debt service becomes more burdensome, and more critically, the ability to refinance becomes often impossibly difficult.
Consider the case of otherwise solvent households with exotic interest-only mortgages with impending punitive resets. The reset payments are unsupportable, and yet there is typically no way to roll the mortgage into a conventional mortgage as the value of the collateral is typically less than the mortgage balance. The underwater position also almost always prevents a sale to terminate the mortgage since that will require bringing too much money to the table.
Barring a sudden and extremely improbable surge in house values, these households will be ruined by the trap. Even many households with fixed rate mortgages will find those unsupportable in the face of income loss, and have no non-bankrupting exit strategy due to their underwater position. Another trap is facing households with sudden rate hikes on large credit card balances.
The distribution of the pain of the speculative unwind will not fall evenly on US households. A substantial number - perhaps 1/4 - have little to no debt and at least adequate resources. Another substantial number - also perhaps 1/4 - have no debt because of too-low income and too-few resources.
This puts the burden of the pain squarely on the roughly 1/2 who have substantial debts. We suspect that most of these households' net worth will be wiped out, creating ever more cascading failure throughout the economy. The end state will be a poorer USA, but one where debt revulsion is so strong, households will once again be Hedge financial units.
From 1952 to 2007 the ratio of debt to income for US households rose from about .35 (hedge financing) to about 1.3 (speculative financing). Even two years into the Depression, the ratio has only declined a bit.
In times of economic contraction - especially when a major asset bubble bursts (i.e., housing), speculative financing units run into two significant problems. Routine debt service becomes more burdensome, and more critically, the ability to refinance becomes often impossibly difficult.
Consider the case of otherwise solvent households with exotic interest-only mortgages with impending punitive resets. The reset payments are unsupportable, and yet there is typically no way to roll the mortgage into a conventional mortgage as the value of the collateral is typically less than the mortgage balance. The underwater position also almost always prevents a sale to terminate the mortgage since that will require bringing too much money to the table.
Barring a sudden and extremely improbable surge in house values, these households will be ruined by the trap. Even many households with fixed rate mortgages will find those unsupportable in the face of income loss, and have no non-bankrupting exit strategy due to their underwater position. Another trap is facing households with sudden rate hikes on large credit card balances.
The distribution of the pain of the speculative unwind will not fall evenly on US households. A substantial number - perhaps 1/4 - have little to no debt and at least adequate resources. Another substantial number - also perhaps 1/4 - have no debt because of too-low income and too-few resources.
This puts the burden of the pain squarely on the roughly 1/2 who have substantial debts. We suspect that most of these households' net worth will be wiped out, creating ever more cascading failure throughout the economy. The end state will be a poorer USA, but one where debt revulsion is so strong, households will once again be Hedge financial units.
Friday, December 11, 2009
The Real Deal
A recent letter to SurvivalBlog.com shows that at least one person out there has his or her head screwed on mostly right. The conclusions, unfortunately as is typical on that site, run toward the 'get your guns' mentality. However, the honest and intelligent observations are worth quoting at length.
As for having a car, our addition would be that you may find yourself needing to set up a living situation that doesn't require you to own a car - either sharing a car with a relative or friend, or walking and/or using public transit.
As these strategies for downward mobility become increasingly utilised, they will cause GDP to decline. Not only will demand for goods and services shrink, but the informal market (yard sales, thrift stores, eBay, etc.) will become flooded with cheap, liquidated stuff. We expect this strategy to be employed eventually by a majority of the population as the Depression runs its course and cascading failure undermines the economic system.
We find it a sad commentary on the state of 'the Press' that such an honest report can only be found in a 'fringe blog' and beyond that, as a letter. The Ministry of Truth does seem to have a lockdown on the situation. Telling information can be found, however, if you look for it. According to a recent Gallup poll, November year-over-year consumer spending is down 20%. This is a knock-your-socks-off, the-economy-is-in-a-Depression-folks number if there ever was one. The report qualifies its information as "self-reported" but even so, it seems a heck of lot more reliable to us than the bogus recovery spiel coming out of the Ministry of Truth.
Pathetically, the Gallup commentary states: "On a national level, the spending new normal suggests slower economic growth than otherwise might be expected in the years ahead." Let's take a look at 'economic growth' in the USA at present.
According to the Bureau of Economic Analysis, the growth rate is 2.8% in the third quarter of 2009. Consumer spending allegedly increased 2.9%. In order for the approximately -25% gleaned from Gallup data and the official +2.9% to reconcile, households would have to wildly increase their spending for housing (hard to do in the face of lower rents, skipped mortgage payments, and household formation gone into reverse), professional services (bankruptcy lawyers, anyone?), and so forth. Frankly, we don't think such a reconciliation is possible, and we smell a R-A-T.
The economy has taken a dramatic turn for the worse for many Americans. Hundreds of pages could be written to describe how it happened and who did it. While many individuals and households have had the financial resources and good fortune which will allow them to weather economic uncertainty, many will simply not be able to maintain their standard of living. Many two income households are now one income households and that income may have decreased due to companies cutting back on work hours. This situation has been occurring for many Americans for many many months, forcing people to assess what is important and downgrade their lifestyle. The time to make hard decisions has arrived, and will dramatically alter the lives of many for years.We have a few comments to make on these observations. First, in light of how little access to emergency funds American (among other) households have as mentioned in yesterday's post, deferring maintenance on houses and cars is a species of financial brinkmanship that will not only require "costlier repairs down the road," but quite possibly become the 'straw that breaks the camel's back' of the impaired household finances.People who relied on spouses to pay the bills are now paying the bills. Those who have relied on savings and unemployment benefits to maintain their standard of living are now faced with the reality that those resources are exhausted. Bills are not being paid. Healthcare premiums are not being paid. Automobile and household maintenance is being neglected which will create costlier repairs down the road. Simply put:
- You might have to stop making your car payment and save those payments up to buy a used car. The car you currently have financed will be repossessed.
- You might have to stop paying your mortgage and save those payments up to move into an apartment.
- You might have to give up your healthcare, your magazine subscription, your club membership, your vacation plans, your charitable donations, your cell phone, your internet access or home phone service, your lawn care service, your financial support that you provide to friends and family who are having financial problems themselves, and many more expenditures not listed here.
- You might have to contact an attorney to discuss bankruptcy.
- You might have to sell off your possessions and assets.
- You might have to move in with other families, friends, relatives, or shelters provided by the government or charitable organizations.
- You may come to realize that what you thought was valuable and important to you has no value or significance at all.
Basic human needs will become the biggest priority in your life after you shed the things that have merely brought comfort and convenience to you. You may be forced to downscale your lifestyle so dramatically that it will cause you to question your own intelligence and hindsight for not planning for such a life changing event.
As for having a car, our addition would be that you may find yourself needing to set up a living situation that doesn't require you to own a car - either sharing a car with a relative or friend, or walking and/or using public transit.
As these strategies for downward mobility become increasingly utilised, they will cause GDP to decline. Not only will demand for goods and services shrink, but the informal market (yard sales, thrift stores, eBay, etc.) will become flooded with cheap, liquidated stuff. We expect this strategy to be employed eventually by a majority of the population as the Depression runs its course and cascading failure undermines the economic system.
We find it a sad commentary on the state of 'the Press' that such an honest report can only be found in a 'fringe blog' and beyond that, as a letter. The Ministry of Truth does seem to have a lockdown on the situation. Telling information can be found, however, if you look for it. According to a recent Gallup poll, November year-over-year consumer spending is down 20%. This is a knock-your-socks-off, the-economy-is-in-a-Depression-folks number if there ever was one. The report qualifies its information as "self-reported" but even so, it seems a heck of lot more reliable to us than the bogus recovery spiel coming out of the Ministry of Truth.
Pathetically, the Gallup commentary states: "On a national level, the spending new normal suggests slower economic growth than otherwise might be expected in the years ahead." Let's take a look at 'economic growth' in the USA at present.
According to the Bureau of Economic Analysis, the growth rate is 2.8% in the third quarter of 2009. Consumer spending allegedly increased 2.9%. In order for the approximately -25% gleaned from Gallup data and the official +2.9% to reconcile, households would have to wildly increase their spending for housing (hard to do in the face of lower rents, skipped mortgage payments, and household formation gone into reverse), professional services (bankruptcy lawyers, anyone?), and so forth. Frankly, we don't think such a reconciliation is possible, and we smell a R-A-T.
Thursday, December 10, 2009
Households at the Edge
According to a recent survey, many people would find it impossible to raise just $2000 in 30 days from any source - savings, credit, family, friends, etc. - in a pinch. The table below is extracted from the article, which is well worth reading.
The results are shocking to say the least, especially for the USA - supposedly the "richest country in the world." $2000 is not a lot of money when one aspires to a middle-class lifestyle; it could represent the cost of car repair, a home repair, a minor medical problem, and so forth.
These sorts of things crop up continually.
Mexico is no great surprise, but the fact that the UK, Germany, and the USA (all supposed major economic powers) rate worse than Argentina - a country with serious issues in its struggle to remain prosperous and civilised - should be cause for concern. This survey, if accurate, indicates that not only are half of UK, German, and US households there essentially broke, but most of the other half is so frayed financially they are in no position to help out poorer friends and relations; or perhaps simply socially support networks have collapsed. In either case (and both could be true) the situation is terrible.
This is not the sort of economic information we would like to see near the beginning of this Depression - and yes, we are still early on in this thing. Faced with falling income and no standby resources to fall back on, it is clear that more and more supposedly 'middle class' households are going to sink into financial ruin merely from routine financial stresses.
Our advice to our readers is simple: make sure you are living well below your means; that your net worth is rising and not falling; that you have ample financial resources (savings, lines of credit, willing friends or family) to draw upon should the need arise. This is serious stuff - it may require you to drop many of the trappings of middle class life in order to prevent ruin.
There are ample horror stories out there about people who discovered 'middle class poverty' by not changing their spending habits in the face of income loss. Typically they expect "something is going to happen" to fix their deteriorating situation: a new job; selling the house; etc. But that "something" never happens.
More and more, what were for many once reasonable expectations - say, getting a full-time job - are going to be as likely as having a winning lottery ticket. In a nutshell, this is why getting through the Depression is going to be about survival. Don't delude yourself; ignore the blather on the telly; get real about what is happening.
The results are shocking to say the least, especially for the USA - supposedly the "richest country in the world." $2000 is not a lot of money when one aspires to a middle-class lifestyle; it could represent the cost of car repair, a home repair, a minor medical problem, and so forth.
These sorts of things crop up continually.
Mexico is no great surprise, but the fact that the UK, Germany, and the USA (all supposed major economic powers) rate worse than Argentina - a country with serious issues in its struggle to remain prosperous and civilised - should be cause for concern. This survey, if accurate, indicates that not only are half of UK, German, and US households there essentially broke, but most of the other half is so frayed financially they are in no position to help out poorer friends and relations; or perhaps simply socially support networks have collapsed. In either case (and both could be true) the situation is terrible.
This is not the sort of economic information we would like to see near the beginning of this Depression - and yes, we are still early on in this thing. Faced with falling income and no standby resources to fall back on, it is clear that more and more supposedly 'middle class' households are going to sink into financial ruin merely from routine financial stresses.
Our advice to our readers is simple: make sure you are living well below your means; that your net worth is rising and not falling; that you have ample financial resources (savings, lines of credit, willing friends or family) to draw upon should the need arise. This is serious stuff - it may require you to drop many of the trappings of middle class life in order to prevent ruin.
There are ample horror stories out there about people who discovered 'middle class poverty' by not changing their spending habits in the face of income loss. Typically they expect "something is going to happen" to fix their deteriorating situation: a new job; selling the house; etc. But that "something" never happens.
More and more, what were for many once reasonable expectations - say, getting a full-time job - are going to be as likely as having a winning lottery ticket. In a nutshell, this is why getting through the Depression is going to be about survival. Don't delude yourself; ignore the blather on the telly; get real about what is happening.
Wednesday, December 9, 2009
FDIC Bank Failure Report - Insanely Late Edition
This past weekend, the Federal Deposit Insurance Corporation closed six banks: Buckhead Community Bank of Atlanta, Georgia; First Security Bank of Norcross, Georgia; Tattnall Bank of Reidsville, Georgia; AmTrust Bank of Cleveland, Ohio; Benchmark Bank of Aurora, Illinois; and Greater Atlantic Bank of Reston, Virginia. The total assets of the closed bank were $13,424,600,000, and total deposits were $9,368,300,000. The cost to the FDIC is estimated at $2,386,400,000.
According to our methodology, the recoverable value of the banks were $6,981,900,000, or only 52.01% of the declared asset value. This makes this week's closures distinctly below the cumulative recoverability since December of 2007, which stands at 57.56% (down from last report's 57.70%).
Cumulative cost-to-FDIC so far in the Depression was brought to $53,886,900,000. These closures bring the total declared assets of FDIC-failed banks (since December of 2007) to $529,028,280,000, and total FDIC-insured deposits to $358,374,220,000. The recoverable value of all failed banks was only $304,487,320,000 (57.56% of the declared value).
* * *
As if to make up for the prior two weeks, the FDIC went to town. Following its usual pattern, it muted the failure of a moderately large regional bank - AmTrust - by closing it along with several smaller banks. AmTrust was a particularly sad case with a recoverable value according to our method of only 50% of assets. It had been on a death watch for over a year having received a cease-and-desist order from the Office of Thrift Supervision in the fall of 2008. One wonders how much extra the FDIC's dithering cost the Deposit Insurance Fund.
* * *
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%)
2. California (42.43%)
3. Colorado (42.76%)
4. Michigan (43.18%)
5. Nevada (50.13%)
6. Ohio (50.91%) - new to the list due to now having two closures
7. Georgia (54.75% up from 53.79%)
7. Utah (55.39%)
8. Arizona (56.08%)
9. Washington (56.18%)
* * *
The Frugal Scotsman's FDIC Cash Burn Through O'Meter gets adjusted with a subtraction of $2,386,400,000. The value stands at $41,600,600,000.
According to our methodology, the recoverable value of the banks were $6,981,900,000, or only 52.01% of the declared asset value. This makes this week's closures distinctly below the cumulative recoverability since December of 2007, which stands at 57.56% (down from last report's 57.70%).
Cumulative cost-to-FDIC so far in the Depression was brought to $53,886,900,000. These closures bring the total declared assets of FDIC-failed banks (since December of 2007) to $529,028,280,000, and total FDIC-insured deposits to $358,374,220,000. The recoverable value of all failed banks was only $304,487,320,000 (57.56% of the declared value).
* * *
As if to make up for the prior two weeks, the FDIC went to town. Following its usual pattern, it muted the failure of a moderately large regional bank - AmTrust - by closing it along with several smaller banks. AmTrust was a particularly sad case with a recoverable value according to our method of only 50% of assets. It had been on a death watch for over a year having received a cease-and-desist order from the Office of Thrift Supervision in the fall of 2008. One wonders how much extra the FDIC's dithering cost the Deposit Insurance Fund.
* * *
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%)
2. California (42.43%)
3. Colorado (42.76%)
4. Michigan (43.18%)
5. Nevada (50.13%)
6. Ohio (50.91%) - new to the list due to now having two closures
7. Georgia (54.75% up from 53.79%)
7. Utah (55.39%)
8. Arizona (56.08%)
9. Washington (56.18%)
* * *
The Frugal Scotsman's FDIC Cash Burn Through O'Meter gets adjusted with a subtraction of $2,386,400,000. The value stands at $41,600,600,000.
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