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This is nuts – but it’s just like all the other government Ponzi schemes.  I just read an article on CNN about the FDIC taking money from large banks in order to have enough funds to bail out failed banks – which have been mainly smaller banks.

The article says  “A lot of large banks haven’t failed because of massive government assistance,” Bair said. “If it weren’t for those, some big banks would have failed and there would have been costs.”

Duh.  So Bair’s policy is effectively to take government money from large banks (which have received bailouts) and use it as insurance to pay depositors in small banks.  Is she really so stupid that she doesn’t think we can tell that it’s government money being used to pay for government insurance?  And that we don’t realize where that money is coming from?

The money is literally being printed out of thin air, which causes inflation.  I’m not the brightest candle on the shelf, but even I can tell that this is not going to actually solve anything.

gk

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In the NY Times today, Paul Krugman does a good job of explaining why Ireland is in deep trouble.  Unfortunately, Mr. Krugman draws the wrong conclusions from the Irish experience – he thinks we need to nationalize banks, when the lesson to learn is to not bailout private banks.

Mr. Krugman says Last September Ireland moved to shore up confidence in its banks by offering a government guarantee on their liabilities — thereby putting taxpayers on the hook for potential losses of more than twice the country’s G.D.P., equivalent to $30 trillion for the United States.

The combination of deficits and exposure to bank losses raised doubts about Ireland’s long-run solvency, reflected in a rising risk premium on Irish debt and warnings about possible downgrades from ratings agencies.

Hence the harsh new policies. Earlier this month the Irish government simultaneously announced a plan to purchase many of the banks’ bad assets — putting taxpayers even further on the hook — while raising taxes and cutting spending, to reassure lenders.

Sound familar?  To me it sounds like the multiple rounds of bailouts that we’re doing in the US.  The sad part is that if the US and Irish governments would have simply let the bad banks fail, we’d be on our way out of this mess by now.  Instead, we’re sinking deeper and deeper into the private sector problems.

For now, the United States isn’t confined by an Irish-type fiscal straitjacket: the financial markets still consider U.S. government debt safer than anything else.

But we can’t assume that this will always be true. Unfortunately, we didn’t save for a rainy day: thanks to tax cuts and the war in Iraq, America came out of the “Bush boom” with a higher ratio of government debt to G.D.P. than it had going in. And if we push that ratio another 30 or 40 points higher — not out of the question if economic policy is mishandled over the next few years — we might start facing our own problems with the bond market.

Duh.  That’s what many of us have been saying for over a year.  The Chinese are eventually going to get tired of loaning us money to buy more stuff from them.  The US government debt will be paid eventually – but with inflated dollars.

And it all could’ve been avoided if we wouldn’t have started this whole bailout process.  Let the banks that took high risks go broke.  Let the companies and individuals who invested with them go broke.  The good banks (yes, there are some) would have bought those assets at a fire sale price and turned them into a profit center.  But now we’re all on the hook for the private sector losses.

Let’s call it “Going Irish”.  We can also call it dumb.

gk

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Like many of you, I just watched Helicopter Ben’s interview in 60 Minutes.  Here’s a quote from the transcript on 60Minutes.com that struck me:

Asked if it’s tax money the Fed is spending, Bernanke said, “It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing.”

Hey Ben, why not simply “mark up” the size of every one’s accounts?  What’s that you say?  You can’t do that because it would cause the value of the dollar to drop immediately?  And by creating (printing) money just for the banks, you slow down that process? But guess what – you’re simply delaying the inevitable.

The interview continues…

“You’ve been printing money?” Pelley asked.

“Well, effectively,” Bernanke said. “And we need to do that, because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation.”

They’ve been printing money (as I’ve said all along) and they plan to stop printing when the economy recovers.  Anyone want to bet on that?  Have anyone – ever – seen a government bureaucracy do something right?

Yeah, that’s a rhetorical question.  I may have more to say about the interview later, but this part really struck me because it’s so stupid.

Just let the bad banks go broke.  The few good ones left will buy up the good assets cheap, and the bad investments (and those who made them) will be gone.  Problem solved.

gk

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The NY Times has a good article today which examines why we’re stuck paying hundreds of billions in bailouts to AIG.  The article is titled Propping Up a House of Cards.

It’s a good article, and it does a good job of explaining what happened, but I think it draws the wrong conclusion.  The NY Times says we need to continue the bailout of AIG regardless of the cost.  I say we should simply let them fail and let the house of cards collapse.

No, the result won’t be pretty, but it will be over. A lot of large banks will go under, both here and in Europe, but some will be left.  And the trillions of dollars of losses will have been taken by the people who invested in AIG and the banks that relied on them – and that’s the way it should be.

gk

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Fortune has a good article today that talks about the causes and potential solutions of the banking crisis.  I disagree with their conclusions, but the article does a good job of explaining the risks that the banks are facing – and getting ready to face.

How can it be that the banks are tottering after the government fortified them with hundreds of billions in bailout cash and guarantees on their troubled assets? For the past 18 months, the banks’ problems with toxic securities, especially collateralized debt obligations (CDOs) and other exotic products that packaged subprime mortgages, attracted most of the attention – and alarm. Now the storm is entering an entirely new phase that’s potentially even more dangerous: a historic meltdown in the bread-and-butter businesses of credit card, home-equity, and mortgage lending.

Unfortunately, at the very start of the article, Shawn Tully gives up.  In the paragraph just before the one I quoted above, he says Fear is spreading that if all that rescue money can’t revive these stumbling giants, only one road remains. Everyone from former Fed chief Alan Greenspan to Senate Banking Committee chairman Chris Dodd is warning that the sole solution may be the once unthinkable one: nationalization.

Why does he so quickly get to nationalization as the “sole solution”?  It’s not.  There’s another solution to the problem.  Let them go broke.  It’s how stupid people are separated from their money.

In talking about the 19 largest banks (those with assets over $100 billion) the article says:  Washington won’t let those big banks fail: It will boost their capital by purchasing preferred stock that will pay a 9% dividend. If a bank has trouble paying the hefty dividend, it can convert the preferred shares into common stock. Hence, the weakest big banks may well end up with the government as their largest shareholder.

How is that different from nationalization?  They may still be private companies on paper, but if the government is the largest shareholder, the bank has been effectively nationalized.  Government can now dictate policy to an even greater extent than they do now, sticking their noses into such things as bonuses, who gets a loan and who doesn’t, salaries, etc.  There may be a technical difference, but the end result is identical.  Bad.

FBR predicts the banks will eventually write off about 9% of their loan portfolios, with the vast bulk of losses coming in the next three years. That would hit the big four with around $300 billion – or $100 billion a year – in credit losses, more than three times the projected damage from their toxic securities.

And that’s at the four largest banks alone.  That’s Bank of America, Citigroup, J.P. Morgan Chase, and Wells Fargo.  Between them, they hold almost half of all U.S. consumer and business loans.  Double that number to $200 billion per year to get an idea of the losses still to come for the banks.

How the government proceeds from there will say a lot about the future of the banking sector. The fear is that Washington will continue to prop up Citi and other wounded banks in their current form. The best course would be to force battered banks to sell enough assets to restore their financial health – if that’s possible – or to dissolve.

I say dissolve them.  Let them go broke and bankrupt and sell off whatever assets they have at fire sales to the highest bidder.  That quickly establishes a market price for this crap, and it allows the good banks to stay in business.  No government money is needed.  And that’s the way it should be.

gk

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If it’s Friday, there must be a bank failure….  The FDIC shut down two more banks yesterday, bringing the total of failed banks to 15 for the year.

In case you’re wondering, I think this is a good thing.  It’s what we should be doing with all the failed banks.  Instead, we’re spending billions to bail them out.  Why not simply let them fail and let other solid banks bid on the assets?  That’s what the FDIC does in these cases.

Here’s part of the FDIC statement for Security Savings Bank of Henderson, NV.

Security Savings Bank, Henderson, Nevada was closed today by the Nevada Financial Institutions Division, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Bank of Nevada, Las Vegas, Nevada, to assume all of the deposits of Security Savings Bank.

As of December 31, 2008, Security Savings Bank had total assets of approximately $238.3 million and total deposits of $175.2 million. Bank of Nevada did not pay a premium to acquire the deposits of Security Savings Bank.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $59.1 million. The Bank of Nevada’s acquisition of all the deposits of Security Saving Bank was the “least costly” resolution for the FDIC’s Deposit Insurance Fund compared to alternatives. Security Savings Bank is the sixteenth bank to fail in the nation this year. The last bank to fail in Nevada was Washington Mutual Bank, Henderson, on September 25, 2008.

The other failed bank is Heritage Community Bank of Glenwood, IL.  Here’s the FDIC statement.

Heritage Community Bank, Glenwood, Illinois, was closed today by the Illinois Department of Financial Professional Regulation, Division of Banking, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with MB Financial Bank, N.A., Chicago, Illinois, to assume all of the deposits of Heritage Community Bank.

As of December 5, 2008, Heritage Community Bank had total assets of $232.9 million and total deposits of $218.6 million. In addition to assuming all of the deposits of the failed bank, including those from brokers, MB Financial Bank agreed to purchase approximately $230.5 million in assets at a discount of $14.5 million. The FDIC will retain the remaining assets for later disposition.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $41.6 million. MB Financial Bank’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s Deposit Insurance Fund compared to alternatives. Heritage Community Bank is the fifteenth FDIC-insured institution to fail in the nation this year and the third in the state. The last FDIC-insured institution closed in Illinois was Corn Belt Bank and Trust Company, Pittsfield, on February 13, 2009.

gk

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This just in from the FDIC – banks will now pay more for FDIC insurance for depositors.  To which I say – Duh!

When you get home insurance in Florida, you’re going to pay more than you would for the same priced home in say, Tennessee.  That’s because Florida is riskier from an insurance perspective because of hurricanes.  The insurer is more likely to have to pay up, so it costs more.  No problem.  That’s the (somewhat) free market system at work.  I say “somewhat” because the insurance industry is heavily regulated by the government.

The problem with FDIC insurance (government sponsored of course, no free market rules apply) is that they charge basically the same rates to everyone.  Here’s a quote from the link above:  Currently, most banks are in the best risk category and pay anywhere from 12 cents per $100 of deposits to 14 cents per $100 for insurance.

The FDIC is adjusting the rates – that’s a good thing – but only slightly: Under the final rule, banks in this category will pay initial base rates ranging from 12 cents per $100 to 16 cents per $100 on an annual basis, beginning on April 1, 2009.

In other words, the new rates will make the riskiest banks pay 16 cents instead of 14 cents per $100 of deposits.  Not much of a change in my opinion.

The FDIC also adopted an interim rule imposing a 20 basis point emergency special assessment on the industry on June 30, 2009. The assessment is to be collected on September 30, 2009. The interim rule would also permit the Board to impose an emergency special assessment after June 30, 2009, of up to 10 basis points if necessary to maintain public confidence in federal deposit insurance.

I’m not sure how much of an additional increase that amounts to, because I don’t know the starting point.  I know 20 basis points is .2%, so it sounds like they mean an additional 2 cents on top of the existing premiums, but I’m guessing at that.

Regardless, raising insurance rates on the riskier banks is a no brainer, and it should have been done years ago.  It makes no fiscal sense to charge the same rate to a technically bankrupt bank like Citi as they charge a fiscally responsible bank.

gk

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It’s hard to believe that Federal Reserve Chairman Ben “Helicopter” Bernanke is actually as dumb as his statements make him sound.  In his testimony to the Senate today, he said that if the government purchases common shares in banks, that it “may or may not” have an impact on shareholders.

Has he never heard of supply and demand?  Whenever the supply of something is increased, each individual part of the “something” is worth less.  This holds true for everything from apples to zebras – and I’ve never seen an exception to that rule.  But Ben doesn’t seem to understand that simple concept.

According to MarketWatch.com, Bernanke spoke in response to questions raised by Sen. Bob Corker, R-Tenn., who expressed concern about how conversion of government capital infusions into common shares could have a negative impact on existing common shareholders of financial institutions. However, Bernanke argued that once converted, the government common stakes “may or may not” dilute common shareholders depending on expectations of the equity shareholders, Bernanke said.

At least Corker and Grassley are now saying the right things.  Hopefully they’ll keep their recently grown backbones and continue to hold these appointed officials accountable.  They didn’t have the backbone to stand up and say this when Bush was president, and I don’t care if political differences cause them to do the right thing or if they figure it out on their own.  Doing the right thing is what matters in the end.

Bernanke simply can’t be that dumb, but he sure plays the role of a dumbass well.

gk

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In what has become a Friday tradition, three (I posted this too soon) four more banks bite the dust.  MarketWatch.com has this story on today’s edition of  FDIC Friday.

(Added at 9:54pm ET – I posted the FDIC Friday story too soon.  MarketWatch hasn’t updated the story yet, but Pinnacle Bank in Beaverton OR was also closed today.  It’s on the FDIC website here.  According to the FDIC Pinnacle Bank had total assets of approximately $73 million and total deposits of $64 million.  The FDIC estimates that the cost to the Deposit Insurance Fund will be $12.1 million.  So add $12.1 million to the numbers below.)

Loup City, Neb.-based Sherman County Bank, Cape Coral, Fla.-based Riverside Bank of the Gulf Coast and Pittsfield, Ill.-based Corn Belt Bank and Trust Company were closed by regulators Friday, bringing the number of U.S. bank failures for 2009 to 12 and 37 total since the start of the credit crisis, the Federal Deposit Insurance Corp. said.

In reading the story, it appears that the FDIC is on the hook for about $28 million for Sherman County Bank, $201.5 million for Riverside Bank, and $100 million for Corn Belt Bank.  That’s $309.5 million this week.

Besides the fact that they do this on Friday so the markets can’t react to the news, another thing really bothers me about these bank failures.  It’s the way the FDIC categorizes the finacial situation of the failed banks.  Here’s a quote to help you understand what I mean: Nebraska’s Sherman County Bank had roughly $129.8 million in assets as of Feb. 12 and $85.1 million in deposits, the FDIC said.

If they really had $129.8 million in assets, and $85.1 million in deposits, why did they fail?

I guess my question is how they can be considered assets when they are actually liabilities?  Notice that every one of these failed banks actually show more “assets” on their books than deposits – and deposits are money that need to be paid back to depositors.  So why are they now broke and out of business?

The answer of course is that the “assets” are actually loans they made.  Many of which will never be repaid.  While the people who deposited money into these banks most assuredly want their money back.  And they’ll get it back via the FDIC – with tax dollars from us.

Well, the money is actually being printed out of thin air so we’re not paying for it yet, but we will.  The government has just stolen $309.5 million worth of our future production from us.  And hardly anyone even bothers to mention it.

We’ve become numb to these numbers, and no one really cares anymore because everyone knows we’re broke as a country.  The national debt (see the counter at the top of this page for the current total debt) will never be repaid.

The way I see it, the US Government has only two choices: Default on the debt or inflate it away.  Guess which one they’re doing?

Tune in right here next week for the next installment of FDIC Friday.  Until then, buy gold.

gk

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WTF is Bernanke smoking?  Is “Helicopter” Ben Bernanke looking at the papers – or using them for rolling papers?

According to a story on MarketWatch, Bernanke is quoted as saying “We have been encouraged by the responses to these programs” and “I think the actions that were taken prevented a much-worse situation — a meltdown that would have led to a catastrophic and long-term low level of activity“.

Which markets has he been watching?  We’re having a meltdown right now, and I think we’re in about the 3rd inning of a 9 inning game.  The Fed’s interference in private markets – especially propping up bad banks – is making the “catastrophic” situation worse long term.  I think his actions in part created the current problems, so why in hell are we thinking he knows how to fix them?

The current mess is easily traced back to government interference in private markets, starting with a Clinton administration policy of pushing banks to give loans to those who would otherwise not qualify.  It was greatly exacerbated by Alan Greenspan’s cheap money policy instituted after the tech bubble and 9/11.  And it’s gone to hell in a hurry because of the trillions in bailouts under Bush/Obama.

Here’s a listing of how the $9.1 trillion in bailout money (as of last week) has been wasted.

A friend of mine posted this on a Facebook page earlier today, and I’m going to shamelessly steal it to emphasis how much of our money Bernanke (under Bush/Obama) has blown.  I haven’t verified any of these numbers, so let me know if any are wrong and I’ll correct the post:

People have a hard time conceptualizing very large numbers, so let’s give this some context. The current Credit Crisis bailout is now the largest outlay In American history.

TOTAL: $4.6165 Trillion dollars

But yet Bernanke says “So far, so good!”

He’s a bigger idiot than his former boss – and that’s tough to beat!

Another quote from the MarketWatch story.  “And we are using whatever means we have to overcome what has been an enormous blow from this financial crisis.”

Evidently “whatever means we have” includes destroying the free market system, converting us entirely into a welfare laden socialist state, and inflating the dollar until it’s worthless.  Intended are not, Bernanke’s actions will have consequences.  And they won’t be good.

gk

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