Tuesday, December 29, 2009

Forgive Us Our Debts

So I was doing some post-holiday reading (my son’s gift to me Invictus; my wife’s gift to me The Magna Carta Manifesto, and the FDIC’s 2009 Failed Bank List) and, while I know I’m biased, my family was far more in tune with “interesting” than our dear friend Ms. Bair. That said, I don’t want, for a moment, to have you think that there wasn’t a good dose of intrigue in the FDIC’s bestseller and I figured that the year wouldn’t be complete without one more FDIC moment of incredulity. I guess, in a strange way, as Congress’ actions on Christmas Eve showed us, we really should take our debt situation seriously. So, I thought, it may be worth one more visit with the Keeper of the Scythe into the Crypt of Failed Banks 2009 to see what tales the dead could tell.

In my desperate plea for someone to recognize that this involved some effort, I should point out that this journey involved reviewing, as best I could, the capital positions of over 120 banks, the FDIC’s stated exposure on each, and the identities of the financial institutions which stepped in to acquire the assets of failed institutions. Let me summarize some observations that will certainly lead to deeper inquiry on my own part and, with all luck, on the part of others.

First of all, I found it quite fascinating to see that the distribution of bank failures was anything but a normal distribution. Outside of Illinois, with 14% of this year’s failures, the FDIC found its primary prey in the southlands with Georgia (17%), California (12%) and Florida (10%) leading the nation in collapses. That’s right, four states accounted for over 50% of the nation’s bank failures. Arizona (4%), Texas (4%), and Washington (3%) were in the distant second tier. Banks failed in 31 states 43% of which would be considered Northern.

The assets of the banks reviewed were approximately $143 billion with 20 institutions listing assets in excess of $1 billion. But this is where it gets a bit murky. According to the data listing the FDIC’s exposure to these institutional failures, it appears that they hold approximately $32.4 billion in insured exposure but were “aided” or “absolved” of a total of $110.4 billion. Now, I realize that this appears to have a perfectly rational explanation – namely, that many of the assets were acquired by other institutions and therefore are not at an insured loss exposure at present. Eight institutions had no buyer of record whatsoever. However, in each of these instances, the nominal assets and the FDIC exposure were incongruous and the delta is worth considering. Almost $6.7 billion appears to have vanished. No one bought the assets and the FDIC doesn’t claim that it has an obligation to cover them. And there’s more. There seems to be discrepancy between what the FDIC thinks acquiring banks took on and what the FDIC outstanding liability may be.

The obvious conclusion that should explain this is that there are a number of deposits that exceeded the maximum insured benefit and therefore have no insured benefit. Maybe, depositors were just foolish and put way to much cash in bad banks. While all these questions may appear the product of blurry vision after reading too many spreadsheets, there’s a material reason why this really matters.

You see, to stave off it’s own insolvency the FDIC has decided to accelerate an advance-paid premium scheme assessed against insured deposits. And the scheme, per the FDIC’s most recent posting, is based on actual insured deposits at a variety of capriciously set times calculated against rather arcane actuarial assumptions. So, the $110.4 billion (against which premiums have been already paid by the now defunct banks) sits in a fascinating limbo from the standpoint of those who wish know the true actuarial position of the FDIC. To further confound the matter, the FDIC, through it’s actuarial and investment negligence, required the aid of other financial institutions to step in mightily and bail the insurer out of its own insolvent position. Therefore, the approximately $32.4 billion that is currently the responsibility of the FDIC does NOT conform to historical actuarial data with respect to secondary market recovery. It is “junkier” junk than was the case in the past meaning that the FDIC will be more on-the-hook than usual.

So, as we look through the soiled diaper on the little baby called 2010, we find ourselves realizing that the FDIC accounting creativity and actuarial acrobatics is merely the warm-up for what Congress will face between mid-January and the end of February at which time the mystery moves into the realm of trillions, not these pesky billions.

For all those who suggested that we weathered the storm and we’re coming out with a healthier financial sector, be cautious. Remember that the fee income that led to bank profitability in an era where NO meaningful commercial lending origination was going on was based on moving government money – commissions on TARP on the way in and commissions on TARP on the way out. Oh, sure, technically this couldn’t have actually happened but, remember, the same entities that jumped to aid the Treasury in managing bailout funds actually wound up being consumers of the very funds they were moving and, yes, they collected fees for moving taxpayer money. The automotive industry got its bite at the apple with clunkers. The real estate market got its bite twice with homebuyer tax credits and Freddie and Fannie illusory capacity. And the banks got the windfall by moving it all and collecting fees each time anything moved.

The Bretton Woods and Nixon debt currency experiment is ready for examination. The vaunted institutions that were promoted to “protect” the American citizen from the recklessness of the past and to insure that some perversion of Keynesian monetary theory persisted have lost their moorings. No new acronyms are going to rescue us from ourselves. Our reflexive response to Irrational Fear which has led us into countless, unconsidered yawning chasms, deferred accountability, and reckless excesses must be brought into refinement.

In the throes of the Cold War in 1956 (the year after Rosa Parks’ bold stand for equality which was met with oppression), we intertwined our national identity to our money enshrining as our national motto “In God We Trust” – a motto that was not derived from piety but from the presence of that statement on coinage minted to unify the nation during the Civil War. I think what we really meant was that in the debt dependent American Consumer Capitalism (and in the government institutions that are there to shield us from our own wanton excesses) we trust. Well both the unconsidered consumption and the prophylaxis for irresponsibility have failed us. What took the chosen ones in the desert 40 years of wandering to learn took us 50 years. Following an idol animated by fear and greed gets you nowhere. Our “promised land” – then defined as “not communism” – has been leveraged and the note has come due. So there’s some gallows humor in realizing that it is China – the last bastion of our greatest animating fear for which we had to proclaim our “Trust” in “God” – that now holds the Sword of Damocles over the great experiment.

As we peer into that which is coming, I am convinced that prudence dictates a careful consideration of precisely how we want to manifest a new future. And here, I’m inspired by my other two readings to which I made reference at the beginning of this piece – Invictus and The Magna Carta Manifesto. You see, these two books merge a most insightful narrative evoking the possibility of a more conscious, considered future. Whether it is the Springboks “One Team One Country” that helped carry South Africa past the certain ravages of bloodshed that was thought inevitable at apartheid’s end, or whether it was the truce embodied in the 1215 accords at Runnymede – the Magna Carta and the Charter of the Forest – in which economic, religious, and government tyranny were addressed by people dictating the terms under which THEY would be governed, the essential message of both is that we, the people, must first accept and then expect responsible actions from each other and then our governments. One way or another, we’re going to need to re-examine “In God We Trust” through the lens of E Pluribus Unum.

Happy New Year!


1 comment:

  1. Excellent as usual.

    I eagerly await the next article in the present series, which I presume could be "As we forgive our debtors", particularly as February approaches.

    I remain worried that as time (and dangerously silly legislation) proceeds, fewer trust our government to act responsibly. Ex uno plures seems more likely.


Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave