Economisch herstel? 150 banken op het punt van omvallen.

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Toxic Loans Topping 5% May Push 150 Banks to Point of No Return

By Ari Levy

Aug. 14 (Bloomberg) -- More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.

The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.

The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound.

“At a 3 percent level, I’d be concerned that there’s some underlying issue, and if they’re at 5 percent, chances are regulators have them classified as being in unsafe and unsound condition,” said Walter Mix, former commissioner of the California Department of Financial Institutions, and now a managing director of consulting firm LECG in Los Angeles. He wasn’t commenting on any specific banks.

Missed payments by consumers, builders and small businesses pushed 72 lenders into failure this year, the most since 1992. More collapses may lie ahead as the recession causes increased defaults and swells the confidential U.S. list of “problem banks,” which stood at 305 in the first quarter.
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Banking On The Financial System? Not So Fast!
Hoh hoh hoh! We're finally seeing some recognition of what I've been talking about for the last two years!

Aug. 14 (Bloomberg) -- More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.

And Bloomberg appears to have recognized the key problem with these banks (all of which should have been shut over a year ago):

Excluding the stress-test list, banks with nonperformers above 5 percent had combined deposits of $193 billion, according to Bloomberg data. That’s almost 15 times the size of the FDIC’s deposit insurance fund at the end of the first quarter.

Yeah, that's a problem.

But the real problem is regulatory malfeasance. See, the purpose of the Tier Capital Ratio is to permit the government (FDIC) to come in via the OTS or OCC before the regulatory capital cushion is entirely depleted, and if the law is actually followed and people actually do their jobs, there is no loss to the depository insurance fund.

That is, so long as a bank's assets can be sold (in total) for more than its liabilities (deposits) there is no loss. The bank may go bust from a standpoint of being a "going concern" but there is no hit to the taxpayer, no hit to the depository fund and no problem (other than for the shareholders of the bank involved.)

But when you allow banks to lie for two years for the explicit purpose of "trying to earn their way through the cycle" you hitch your argument to the view that the real issue is one of consumer confidence, not excessive debt and loose lending.

Only a fool would have argued that given what we know of the lending environment from 2003-2007, yet that is exactly the argument that Bernanke, Paulson, Geithner, Bair and others have made through this entire mess!

President Obama should have closed all banks for a week when he first came into office, sent in the examiners, and allowed those with non-performing loan bases of 2% or less to re-open. He should have set forth a 2% non-accrual standard and stuck by it - hit that, you're closed. Period.

But that would have run dimensionally contrary to the viewpoint that we must "enhance lending" to get out of this recession - a foolhardy perspective when the reason you're in recession in the first place is that too many people made too many loans to too many people who had no money to pay them back!

Now we're stuck - we appear to have "avoided" a Depression, but we have in fact done no such thing. We have instead played "extend and pretend" writ large on the taxpayer's back, and yet the default rate continues to explode higher because we have refused to force these institutions to disgorge their bad assets.

In reality the root of this problem lies with lax (or absent) regulation over the last ten years in the banking sector, where "fog a mirror" loans were available for virtually any purpose.

As a consequence of our government's refusal to face this problem head-on in 2007 and 2008 (despite many calling for it, myself included) we are nowhere near the end of this crisis, despite rallies in the stock market. Indeed, I remain convinced that recognition of reality will come fast and hard in the next year or so as these "not too big to fail" firms blow up one by one, forcing regulators to come in and close them, and finally, asset valuations are forced down to a realm that comports with reality.

Domino D-Day 1998 #4