So many topics to touch on... but only so much time in the day to sit down and talk about them.
So today I will focus on American events.
Bank Failure Friday returned last week when the FDIC released information regarding the first US bank closure of 2010 – Horizon Bank of Bellingham, Washington.
You can't really hit much closer to home (in relation to Vancouver) than Bellingham (Blaine is too small).
But it's the size and scope of the closure that is so astounding. If it is indicative of things to come it will be a very rough year for our American cousins and the FDIC.
According to the FDIC, Horizon Bank had $1.1 billion in deposits and balance sheet assets of $1.3 billion; yet the FDIC’s estimated cost to close the bank is $539.1 million.
Say wha???
That means the real market value of Horizon’s assets is believed to be about $561 million – 41.5% of the value claimed.
Ay carumba!
As has become the norm, the FDIC had to enter into a loss-share transaction with respect to $1.0 billion of the assets purchased, meaning there is significant concern the assets will turn out to be worth even less than presently estimated.
This cost of closing this bank amounted to 49% of the value of Horizon’s deposits – the highest relative cost seen so far in this crisis.
By way of comparison, the cost of closing the first three banks in this crisis (in late 2007) was about 5.7% of deposits.
Perhaps you now have a keener appreciation of the importance of the FDIC's 'Interest Rate Advisory' for banking institutions.
That's the FDIC's stern warning for US Banks to prepare to "manage interest rate risk." Soaring rates will further depress market values which will further undermine the real worth of the bank's assets and balance sheets.
It does not bode well for the year ahead and we will watch the banking developments with keen interest this year.
But banking isn't the only story you should pay attention to.
Last Friday also bore witness to the stunning announcement that another 661,000 jobs were lost in the United States.
This at the height of the Christmas hiring period.
The broad U6 category of unemployment statistics rose to 17.3% (that's adding all the Americans who did not show up in 'official' statistics because they have stopped looking for work).
That is the stat that really matters. It means that December was the worst month for US unemployment since the Great Recession began.
Can you see what is coming next?
The home foreclosure axe usually drops for homeowners a year or so after people lose their job, and exhaust their savings. After six months they drop off the unemployment rolls. Six months from now that axe will start dropping.
That's what 2010 is going to be all about Charlie Brown. And that's despite the fact that foreclosures are already setting new records.
Realtytrac says defaults and repossessions have been running at over 300,000 a month since February in America. One million American families lost their homes in the fourth quarter. Moody's Economy.com expects another 2.4 million homes to go this year.
Meanwhile commercial real estate is a disaster. Check on this article in Time magazine.
"It's not that everything's fine in the commercial real estate business. Everything's awful and will probably get more awful. But unlike 2008's Wall Street panic, this particular financial unraveling looks as if it will play out over a period of years, not weeks."
Headlining the news is Tishman Real Estate in New York City. They will miss payment on a commercial loan of over $5 billion on a massive New York apartment complex, the 2nd largest default in commercial real estate loans in history.
As this unfolds, California declares an economic emergency. They are the biggest concern but there are another 40 states in deep trouble. Hawaii can't even afford to hold a congressional election.
Riddle me this... if foreclosures are skyrocketing... and rental vacancies are soaring... where are the people going?
Does it suprise you that homelessness is rising dramatically?
And then there is consumer credit. Consumer credit in the US last month dropped a record $17.5 billion.
This despite the fact that many cash-strapped US homeowners are doing exactly what their UK counterparts are doing: "New research from Shelter, the homeless charity, [suggests] that as many as 1 million people have used their credit cards to pay mortgage bills or rent demands in the past year."
And what is that going to lead to?
"You would have to be relatively desperate, at least in the short-term, to go down this route. Many of those people are likely to end up defaulting on their credit card bills, or on their mortgages, or both," quotes the article.
Against this backdrop, does anyone really think American quantative easing is going to end in March?
All the talk about the US Federal Reserve draining the excess reserves is comical. That's why gold shot up on the weekend.
And that's why it's going to shoot even higher. Watch the next big spike to take the metal to over $1,650 an ounce.
Last week the Vancouver Sun carried a story out of New York that proclaimed home prices in major US cities rose in May for the first time in nearly three years.
The closely watched Case-Shiller home-price index, put out by Standard & Poor’s, marked its first increase since July 2006. The index gained 0.5% in May from the previous month.
A small increase, to be sure, but after several months of sharp declines of 2% or more the increase was hearlded as a welcome sign of stability for the U.S. housing market.
This turnaround in housing market statistics is considered significant because it will help stabilize the U.S. banking system and encourage more lending, which would help get the economy on the mend.
But... as always... the news might not be as good as it appears.
This week two analysts for Barclay's (one of the leading providers of personal loans and mortgages) came out and disputed the statistics.
Barclays' analysts Ajay Rajadhyaksha and Glenn Boyd wrote that while the S&P/Case-Shiller index for May showed the first month-over-month price increase since 2006 and a 2 percent seasonally adjusted annualized drop, a more-accurate reading probably would have been an annualized decline of 10 to 15%.
"Seasonally adjusted home-price data has been skewed higher during the spring months of this year and last year by an 'amplified' version of typical patterns, according to the analysts. More homeowners sell their properties during those months, cutting the share of foreclosed homes being offloaded at distressed prices, as new buyers focus on 'desirable neighborhoods' where values hold up better."
"Data reflecting a reversal of the seasonal benefit, as well as a tide of new foreclosure sales' as a moratorium on the seizing of homes put in place by banks subsides, will lead to 'renewed weakness' in the fall," they said.
Rajadhyaksha and Boyd project that U.S. home prices will fall an additional 11% on average before bottoming next year, bringing the total decline to 40% nationally from their peak.
The Barclay's analysts are raining on the parade of some soothsayers who are seeing green shoots that indicate the recession is nearing an end. They cling to the belief that this would mean that even if prices and economic activity don’t shoot back up to boom levels, they would at least stop falling.
But the Barclay's analysts are seeing the same thing that we have been talking about on this blog... another mortgage problem looming on the horizon before this whole situation calms down.
Option ARM's.
The bulk of Option ARM's are going to reset in 2011. These are the ‘pick a payment‘ mortgage products that were marketed as perfect for sophisticated buyers with growing incomes.
The problem was they could quickly get out of hand if the buyer chooses the negative amortization route. In the US about 40% of these loans made in 2006 - 2007 are already delinquent.
New Barclay's Capital research shows that the recasts in the next year or so are expected to be a minor event. But by mid-2011, these borrowers are forecast to see payments that are 50% to 80% higher than what they are grappling with now. (Many of these option ARM's are concentrated in former hot-spot real estate markets, such as California and Florida.)
Loan modification attempts by banks don’t seem to be working with these particularly noxious loans.
In the face rising payments, borrowers don’t have an incentive to keep up with their current payments for homes that are already so horrendously under water, i.e. the loan amount is far above the current value of the property.
Barclay's says that many of the option ARM loans that do get modified turn delinquent soon afters anyway.
They’ve crunched some numbers and forecast that 95% of the loans that are slated for modification will eventually default.
If you think that sounds bad, get this: They say that 80% of the option ARM loans out there that are ok and up-to-date as of right now will eventually default, too.
The message?
There's a heap o' mortgage pain still on the horizon. Pain which is going to wreck havoc on the U.S. banking system, continue to impair lending, and further prevent the world economy from mending.
Two snapshots of institutions on either side of the 49th parallel for you today.
First we start with with our favorite whipping post, the US Banks.
As our Prime Minister commented on last year, the recovery will not begin until the US Banking system stabilizes.
So what's the outlook?
Yesterday there were four more bank failures on Bank Failure Friday bringing the total to 57 for the year. Unfortunately that may only be a drop in the bucket compared to the tsumani of failures on the horizon.
A report in Forbes.com (see article here), notes that the banking industry is bracing for continued losses from consumer loans due to the rising unemployment rate and an expected wave of commercial real-estate losses.
At a Senate Banking Committee hearing in Washington on Thursday, Sen. Jim Bunning (R-Ky.), repeated a comment relayed to him by Federal Deposit Insurance Corp. Chairman Sheila Bair that another 500 banks could fail "unless something dramatic happens."
So much for stabilizing.
Meanwhile there is the Canada Mortgage and Housing Corporation (CMHC).
As I have already stated the Canadian goverment, in a desperate attempt to prevent a repeat of the US real estate collapse, has thrown massive fiscal stimulus and ultralow interest rates at the Canadian economy in a desperate attempt to supercharge real estate and forestall the collapse of values.
Not only could such a development put the Canadian economy is jeopardy, but the Canadian goverment could be facing a supreme risk as well.
Consider... Canada’s housing insurance agency, run by Ottawa and accountable to the Minister of Finance, provides endless amounts of cheap insurance for high-ratio loans (with minimal down payments). In doing so, CMHC allows Canadian banks to pass off the risk of these home loans to the federal government.
Presumably this allows them to be more willing lenders.
Currently CMHC guarantees about $630 billion in mortgages, an amount of equal in size to half the Canadian economy.
Half! That's an astonishing amount of money.
And what assets stand behind this? Down payments worth about $8 billion (plus the book value of the real estate).
So what happens if the real estate bubble bursts and asset values crash? For starters it will mean that up to 98% of its liabilities will not be covered. Moreover Canada will be facing a situation worse than that which faced US mortgage giants Freddie Mae and Fannie Mac, which lost 90% of their market value.
Some of you have asked why the government is moving heaven and earth to keep the real estate market afloat. That's why.
But as economic recovery takes longer and longer to come into play, we have a situation where the current average home price can only be supported at artificially-low interest rates. And our Canadian banks only make those loans because they are backstopped by a federal government now running its worst-ever deficit.
Over $600 billion in mortgage risk belongs to the taxpayers – and Ottawa is already tapped out. So what is going to happen when interest rates rise?
What we have is Canada's own little subprime crisis in the making. The Bank of Canada has ushered in interest rates that are comparible to the US subprime-style teaser loans.
I say this because the Bank of Canada knows that these rates will be doubled or tripled in the years ahead. Yet, by dropping their key lending rate to the lowest point ever, they have created a situation that allows 3% mortgages to further inflate house values.
And just like the US subprime teaser-rates, when the mortgages reset at the higer rates... a wave of defaults and foreclosures will result.
When that first wave hits, the banking system will seize up, credit will stop dead in it's tracks, and the goverment will be pushed to the brink of insolvency.
A series of dominos are building. And when they start to tumble, the result is going to be devestating.
The housing crisis has not been avoided in Canada. It's only been delayed as officials pray for a swift economic recovery that is not coming.
One only has to look at the US Banking system's failure to stabilze for that evidence.
A chilling report was issued yesterday by T2 Partners titled "An Overview of the Housing/Credit Crisis and Why There is More Pain to Come". If you want to see the actual report, click here.
Tomorrow I am going to hilight the key points of the report, but before I do let's cover some background leading up to the current situation. I had several questions about the whole subprime issue and how it came about so let's look at it.
So much has been made of the subprime mortgage implosion that you would think it was almost totally responsible for the economic collapse, and that once the subprime problem was fixed then the worst would be over.
Unfortunately nothing could be further from the truth. But what was 'subprime' all about?
After the dot-com collapse of 2000/2001, a dramatic wave of inducements entered the financial markets to resusitate the economy. Led by the US Federal Reserve under Allan Greenspan, interest rates were dropped making money cheap to borrow at the highest levels of the finance world. Thus began the greatest campaign in American history to get you - the consumer - to borrow money.
When you opened your mailbox in the United States in 2004, 2005, you could barely go a day without all kinds of people pressing on you all matters of schemes in which to expand your personal debt and mortgage debt.
Perhaps the most amazing aspect of this was that you could borrow more than 100% of the price of a house under these schemes with the most fragile of financial bonafides.
One of the mortgage products offered in this atmosphere was something called subprime loans, meaning less than prime quality.
The borrowers that were targeted by these products often had sketchy credit, were financially strapped or lacked sufficient income to qualify for a standard mortgage. The key component of these loans was that after a year of artificially low payments, the interest rates on subprime loans jumped all the way to 10 or 11%.
So why would anyone in the right mind take one of these loans?
Two reasons, primarily. The first (incredibly) was you could actually MAKE money taking out a loan. Yes, you could actually get paid to buy a house!
In many cases people were getting loans in excess of 100% of the value of their property. In this way people were actually putting a little bit of money in their own pocket at close of escrow. You bought the house with nothing down and then were given extra money on top of that for buying the house.
To understand how this was possible, you have to understand what Wall Street was doing with mortgages.
Almost all of the people involved in a mortgage transactions made huge amounts of money arranging the loan, then they passed the risk on to somebody else.
Instead of keeping dicey loans in their own portfolios, the big banks and giant mortgage companies that originally underwrote them resold the mortgages to big New York investment houses.
Firms like Bear Stearns and Merrill Lynch then sliced the loans into little pieces and packaged them up with other investments, then sold them to their best customers around the world as high-yield mortgage-backed securities, turning sows' ears into silk purses, all with the blessing of rating agencies like Standard & Poor’s.
And at every step of the way, somebody has his or her hand out, getting paid.
The broker who arranged the mortgage got paid. He or she was happy. The lending officer, ditto. The rating agencies who assessed home values and the worthiness of the mortgage got paid for passing judgment on these securities. They, too, were pleased, and their stockholders were happy. And on and on.
Because of this 'securitization process', those who instigated the loans were eager to make the loans happen. Therefore whatever a buyer wanted to state for their income, the bank would accepted that at face value and made the loan based on that ficticious income.
You would literaly apply to a bank, or a mortgage broker for a loan. When you filled outthe loan form, you would say, "I have an income of, oh, $150,000 a year." They say, "You do? Fine. Just sign right there." And they would nod, and because they were being paid, not by the veracity of the information, but by the consummation of the deal, not further investigation was necessary.
Next the lending office would say, "Ah. You have verified this?" And the bank would say, "Why, yes, we have." And the lending officer would say, "Great. So do I." Then they would get paid.
Next it was passed on to Wall Street to be bundled up and sold in packages, with Wall Street reaping huge commissions for those sales.
This 'easy money' created a housing frenzy from 2002-2008 unlike anything ever seen.
Easy money started bidding wars for properties and housing values skyrocketed. As the frenzy intensified, Wall Street's hunger for more and more mortgages to securitize grew by leaps and bounds.
Enter the subprime mortgages.
In it's gluttonous lust for more and more mortgages, products were crafted to offer loans to borrowers with sketchy credit (or to offer to those who lacked sufficient income to qualify for a standard mortgage). These subprime mortgages came with artificially low monthly payments in the first year of the mortgage, but then the interest rates jumped after that all the way to 10 or 11%.
People would take these loans because they didn't have to put any downpayment on the house. Then, by getting false assesments about the true value of the house, they would pocket the extra money from the mortgage immediatly (thus getting paid to buy the house).
These false assesments about the true value of the houses were rationalized within the real estate frenzy. Property values were climbing by 10-20% every year. If the house wasn't really worth that now, it would be in a matter of months.
Meanwhile borrowers didn't worry about the interest rate resets after a year because they could afford the initial payments and planned to refinance the mortgage before the interest rate jumped to 11%. Home values would have risen and the mortgage would now represent a smaller percentage of the assessed value of the house. Plus borrowers would have equity in the property (based on the new 'value' after a year of prices booming) and would therefore qualify for a standard mortgage instead of a subprime mortgage.
Real Estate ownership was a licence to print money.
That is... until the bubble began to burst in the most bubbly cities in Florida and California.
It wasn't a big drop. But it didn't matter, a small drop is all it took. When the value of some of these homes dropped in 2007, a ticking time bomb was activated.
And the subprimer's were the first hit.
When the subprimers went to refinance their mortgages after one year, they couldn't do it because the value of the house had fallen below what they owed on the mortgage. So when those 11% interest resets kicked in, it was game over - and the defaults/foreclosures started.
The first wave of defaults triggered a greater drop in housing values as foreclosed properties started to flood the market.
A small drop became a sizable drop. And the dominos began falling.
To the subprime mortgage holders, it really wasn't a big deal.
The subprimer's were never really invested. Most of the people who lost the houses didn’t lose any money because they never put any money down. Though their credit is damaged, and they could face legal action in some circumstances, they got to live in a new house for a couple of years, and some of them even managed to get some money with home equity loans or by refinancing.
And when the crush came, people just said, "Take the house. Good-bye. I'm leaving." And the cascade of foreclosed homes really began flooding the market (furthing driving values down).
Prior to this housing boom, loans were made by your local banker or building and loan associations or savings and loan. They had a stake in the risk of the loan. But as mortgages became securitized and Wall Street became involved, mortgages became very transactional and there was no relationship built with the borrower and the lender.
Lenders failed to act to make loans to credit worthy borrowers, and borrowers were willing to simply walk away from their obligations to a face-less Wall Street entity.
It was greed on both sides of the table, lenders and borrowers with everyone was gaming the system. Warnings were issued, and ignored, by the likes of Nathan Roubini, Schiller, Peter Schiff and Ron Paul.
This hitler inspired parody of the crash lampoons all these factors and has become a classic comic representation of the entire housing crisis...
Ultimately subprime was a very small fraction of the overall mortgage market. But the impact of subprime on the market was like a giant, first domino that triggered a cascading effect.
And with home values plummeting, and the housing sector - one of the largest and most vital parts of the American economy - grinding to a standstill, America was pushed towards recession.
Wall Street and foreign investors were stuck with millions of distressed properties. The unsold condos in Miami, the unfinished apartments on the Vegas Strip, the developments in Atlanta, and the collapsing California dream, it was all interlocked in a giant real estate ponzi scheme.
That’s the fascinating part of this whole debacle. Mortgages are sold in mortgage backed securities, so they’re pooled. The pools are part and parcel of those high-yield mortgage backed securities everyone gobbled up a few years ago, and are now stuck in the windpipe of the world's financial system.
No one wants to buy them, so no one can sell them.
Bonds marked triple-A are now quoted at 50 cents to the dollar, 40 cents on the dollar. Some of them, much less. Some are worth nothing on the dollar. And nothing on the dollar is the worst thing that has happened to Wall Street in a long time.
How many of these securities are out there? A trillion with a T-plus.
But the worst of the subprime fiasco is past, as you can see by this graph (click on image to enlarge)...As you can see, the huge wave of subprime mortgages resettings from "teaser" rates to market rates has virtually ended.
The problem is that subprime mortgages were never a significant part of the mortgage industry.
Looming on the horizon is a gigantic wave of regular mortgages whose terms reset after 5-7 years. With the value of real estate having plummeted over 40% in many areas of the United States, these homeowners represent a catastrophic mass of mortgages that cannot be renewed because of their current negative equity position.
Tomorrow we will look at that and the impact it will have on the economy.
As faithful readers know, I do not side with the current optomists who would have us believe the global economic crisis is ebbing and recovery is on the way.
Instead your dilligent scribe sides with the likes of longtime market analyst Bob Chapman who calls green shoots "Poison Ivy" and economist Nouriel Roubini who says those green shoots are "yellow weeds". Both these analysts insists there's lots more pain ahead.
To read the daily papers we have gone from the the worst financial crisis, economic crisis and recession since the Great Depression to a consensus that the outlook is now becoming optimistic again.
How can this be? The problems of the financial system are still severe and many US banks are still insolvent. Our goverments continue to pile public debt on top of private debt in an attempt to socialize the losses and unemployment is growing by leaps and bounds as government revenue from taxes contines to drop.
The reality is that at some point the government's balance sheet is going to break, and if that happens, it's going to be a disaster.
As for the recent stock market rise, how can it be anything but a Bear Market? As the US economy keeps contracting and the financial system suffers unexpected or manipulated shocks, the markets will surely crash again in a repeat of the 1929 - 1942 pattern.
Joining the chorus to offer warnings of what is to come is highly respected market analyst Louise Yamada. Yamada was top-ranked among her peers in 2001, 2002, 2003 and 2004 when she worked at Citigroup's Smith Barney division. Since 2005, she's headed her own independent research company. She penned the bullish tome Market Magic, Riding the Greatest Bull Market of the Century.
But as Randall Forsyth reported in the May 25 issue of Barron's Up and Down Wall Street column, Yamada bull ride has come to an end. She paints a picture of what is to come that is anything but bullish:
"It is almost uncanny the degree to which 2002-08 has tracked 1932-38", Yamada writes in her latest note to clients. She then offers her "Alternate Hypothesis" and compares this structural bear market to 1929-42:
the dot-com collapse parallels the Great Crash and its aftermath, followed by the 2003-07 recovery, similar to 1933-37;
then the late 2008 - early March 2009 collapse tracks a similar 1937-38 trajectory, after which a strong rally followed much like today;
then in November 1938, the market dropped 22% followed by a 26% rise and a series of further ups and downs - down 28%, up 23%, down 16%, up 13%, and a final 29% decline ending in 1942;
from the 1938 high (analogous to where we are now, she says), stock prices fell 41% to a final bottom.
Optomists claim we have already hit the final bottom to the market. Yamada disagrees. She says structural bear markets typically last 13 - 16 years so this one has a long way to go before "complet(ing) the repair process." She calls the current rebound "a bungee jump," very typical of bear markets. Numerous ones occurred during the Great Depression, 8 alone from 1929 - 1932, some deceptively strong.
It's yet another voice warning you, dear reader, to take care that you understand exactly what is going on around us.
Outstanding Video Clip for you:
Robert Rodriguez – Reflections & Outrage.
Some very rare truth telling in this five minute clip and a must see.
The United States of America, the great bastion of capitalism, is having a crisis of confidence on a scale that few common Americans appreciate.
And within that crisis of confidence, a debate is emerging that will form and shape the 21st Century.
First it was President George W. Bush, now it is President Barack Obama. Both Presidents have returned America to a Keynesian economic philosophy.
What does that mean? Keynesian economics is a term that means diddly to the average American and Canadian.
John Maynard Keynes (June 5, 1883 – April 21, 1946) was a renowned economist from Britain whose many ideas on economic and political theories as well as on governments' monetary policies influenced America during the Great Depression. He advocated a government that played an active role in the lives of people regarding business, economy, etc. His ideas are the basis for the school of thought known as Keynesian economics.
Keynes spearheaded a revolution in economic thinking that overturned the older ideas which held that free markets would certainly allow full employment for all workers who agreed to lower their demands for higher wages. Shortly before the end of the Great Depression his ideas were wholeheartedly put into practice by leading Western economies. During the 1950s and 60s, the success of Keynesian economics was so resounding that almost all capitalist governments around the globe utilized its policies.
Keynes's ideas became less influential in the 1970s, after attacks from Milton Friedman and other economists who were less optimistic than Keynes about the potential for interventionist government policy to complement the free market.
The adverse economic conditions of the seventies, most especially the 1973 oil crisis and the recession that followed, unleashed a swelling tide of criticism for Keynesian Economics.
By 1979 Monetarist principles had displaced Keynes as the primary influence on Anglo-American economic policy and America saw a return to the free market principles that made it the bastion of capitalism.
'Creative Destruction' returned as a guiding force of capitalism. Officially Creative Destructions denotes a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."
Creative destruction occurs when something new kills something older. A great example of this is personal computers. The industry, led by Microsoft and Intel, destroyed many mainframe computer companies and rendered them obsolete. In doing so, entrepreneurs created one of the most important inventions of this century.
But today Keynes's ideas are enjoying a revival, with Keynesian thinking being behind the plans of President Barack Obama and other global leaders to rescue America's treasury and economy.
But is that what we really need right now?
Can you imagine if the computer revolution were taking place today? The government would be scrambling to bailout IBM and other giant mainframe computer companies because they were 'integral' to the economy.
The billions thrown at the likes of IBM would keep them from failing and that would have greatly hindered the development of the home computer and the technological revolution that sprang from it.
Can you imagine a world with no internet? No home computers? Such intervention would have probably profoundly devastated its development.
And that, many fear, is what is happening now. GM, Chrysler, AIG, Bear Stearns, US Banks, Fannie Mae and Freddie Mac. The list goes on and on.
Let other car companies pick up the pieces and start anew. Let other investment bankers fill the void. Critics argue that the United States must let 'Creative Destruction' run it's natural course and allow capitalism to destroy the value of established companies that enjoyed some degree of monopoly power and allow them to fail.
This process frees up capital and labour so it can be redeployed and put to better use elsewhere.
Companies that once revolutionized and dominated new industries – for example, Xerox in copiers or Polaroid in instant photography – have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs.
Should we have prevented that?
Creative destruction is a powerful economic concept and explains many of the dynamics of industrial change; the transition from a competitive to a monopolistic market, and back again.
It lies at the heart of evolutionary economics.
The problem is Creative Destruction can also hurt.
Layoffs of workers with obsolete working skills can be one price of new innovations valued by consumers. And while a continually innovating economy generates new opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who cannot acquire the skills and work experience.
This destruction lies at the heart of the American Capitalist Experience and is crucial to the American economy reinventing itself. The problem is American is now abandoning this philosophy as President Barack Obama and other global leaders attempt to rescue America's treasury and economy with a revival of Keynesian thinking.
Like the giant forest that catches fire and burns to the ground as part of a renewal process that sees it return stronger and greater than before... so must the economy burn down the deadwood of the economic forest. When men interfer in the regeneration of forests by preventing forest fires; the amount of debris on a forest floor gathers greater and greater until it sparks an even more ferocious blaze.
Critics fear this is what both Bush and Obama are doing with the American Economy.
The US Republican Party currently founders for renewal after the folly of George W. Bush and his abandonment of American's finest capitalistic principles.
Don't any of them realize that restoring America to it's status as the world's greatest capitalist nation is the path to both the party's, and the nation's, salvation?
If you missed the late updates, there was a total of three bank failures for the list yesterday in the US.
While the US economy may be lagging, much of the postitive economic news lately has been focused on China. Part of the recent optimism in world markets rests on the belief that China’s fiscal-stimulus package is boosting its economy and that GDP growth could come close to the government’s target of 8% this year.
A significant portion of the stock market gains in Canada have been premised on China's revival and their need for commoditites to fuel that growth.
Now it apears red flags are being raised on that optomism.
Concerns are appearing that all may not be as rosy as portrayed by Bejing. Some economists suspect that the Chinese figures overstate the economy’s true growth rate. These same economists are saying that Beijing would report 8% growth regardless of the truth.
Economists have long doubted the credibility of Chinese data and it is widely accepted that GDP growth was overstated during the previous two downturns. In 1998-99, during the Asian financial crisis, China’s GDP grew by an average of 7.7%, according to official figures. However, using alternative measures of activity, such as energy production, air travel and imports, Thomas Rawski of the University of Pittsburgh calculated that the growth rate was at best 2%.
The biggest adjustment seems to have been made in 1989, the year of political protests in Tiananmen Square. Officially, GDP grew by over 4%; while analysis shows that it actually declined by 1.5%.
China’s growth in the first quarter of this year has led some to conclude that the government is up to the same old tricks. According to official figures, GDP was 6.1% higher than a year earlier. Yet electricity production in the first quarter was 4% lower than it had been a year earlier. In the past, GDP and electricity output have moved broadly together. Given that power statistics are less likely to have been tampered with than politically sensitive GDP figures, is this evidence that the latter have been fiddled?
Then there are government tax revenues. These have fallen by 10% over the past year, compared with a surge of 35% in early 2008, suggesting that incomes and output have tumbled.
Abraham Lincoln famously said you cannot fool all of the people all of the time.
If the revival in China turns out to be less than it appears... can you guess how the Canadian stock market is going to react?
As I said yesterday, in the end it’s all about the economy.
For several weeks now pundits have been agog about the 'green shoots' indicating a recovery may be at hand.
Balderdash.
While it is true that the markets have recovered over 30% from last year’s lows, something just doesn't add up.
First quarter corporate earnings are down over 30% and there is a serious disconnect between stock prices and economic reality - just like in late 2007. Those plunging headlong back into the market seem to think that the 50% sell-off in 2008 was overdone and great bargains are now available.
I believe those investors simply do not understand the economic maelstrom of last October.
As I have said over and over, the crash of 2008 was a once in a multi-generational event borne of systemic problems in the economy.
Economists like Peter Schiff have succinctly identified the issue and we have profiled them on this site. The North American economy must allow dead industries to die and permit the natural restructuring of capital and manpower that will rebuild the economy.
But government is interfering. Like an addled heroin addict who cannot break free of his drug addiction, our governments continue to indulge in the traditional vices of over-borrowing and over-spending. Wherever the private sector attempts to correct its behavior, a bloated federal government overrides its efforts.
Faced with a meltdown of the banking system. World governments injected trillions of dollars into their economies and changed accounting rules to ensure that a systemic banking failure was averted. Though the system has stabilized, investors seem to forget that none of the fundamental problems have been solved. We may have survived the initial catastrophe, but the system remains wrought with faults.
By diverting trillions of borrowed dollars into keeping alive vegetative corporations such as AIG, Chrysler, Big Banks and GM, our governments are preventing new enterprises from access to vital labor and capital resources. We are enshrining inefficiency.
North America needs fundamental restructuring in order to compete in an increasingly competitive marketplace. Meanwhile, profitability in those countries that do the hard work of restructuring can be expected to rise disproportionately as the world economy revives.
The news wires are already a tither about another avalanche of loan defaults and derivative failures that are coming down the pike, sham “stress tests” notwithstanding. The "stress-tests" will prove to be nothing more than a confidence-boosting whitewash of the massive problems confronting the banking industry.
As corporate earnings fail to keep pace with the blistering ascent of stock prices, look for investors to bail on the market as they did in late 2008.
Only this time the damage will be even more severe.
After the crash of 2008, investors fled to the safe havens of the U.S. dollar and U.S. government debt.
It won't happen that way next time.
China, the world’s largest gold producer, has recently doubled its central bank’s gold reserve. China also floated a preliminary idea at the recent G-20 meetings to replace the U.S. dollar with a gold-linked international reserve currency. This idea may soon catch on among creditor nations who value real money but also want the flexibility to undervalue their paper currency for the benefit of exporters.
Russia, in a news story announced yesterday, has moved away from using the US dollar as its basic reserve currency (see story here)
At the beginning of the 20th century, the U.S. dollar became the world’s reserve currency because, at the time, it was “as good as gold.” Now the world’s largest debtor nation will suddenly confront the true weight of its obligations and be forced to significantly lower its standard of living.
We are nearing the crest of some serious (and tumultuous) times. And the markets are starting to sense it.
Earlier this month, the U.S. reported the first budget deficit for April in 26 years, with spending exceeding revenue by $20.9 billion, even though that’s the month when taxpayers have to stump up to the Internal Revenue Service and the government’s coffers should be overflowing.
So far this fiscal year, the U.S. shortfall is $802.3 billion, more than five times the $153.5 billion gap in the year-earlier period.
For the fiscal year ending Sept. 30, the Congressional Budget Office forecasts a record deficit of $1.75 trillion, almost four times the previous year’s $454.8 billion shortfall and about 13 percent of gross domestic product. Bear in mind that the target demanded of European nations wanting to join the euro was a deficit no greater than 3 percent of GDP.
Meanwhile Chinese exports are dropping as the global economy weakens, with overseas shipments declining 23% in April from a year earlier. This leaves China (a nation that has already expressed concern about its U.S. investments) with less to spend on supporting that debt in the future.
This is not going to end well.
And Real Estate will be but one of the massive casualties.
As you already know, Whisperer has been critical of US Banks like Wells Fargo. Their stunning turnarounds in profits have been a large factor in the current market rally that continues to gather steam.
Enter Meredith Whitney, a former analyst at the investment bank Oppenheimer & Co. Inc.
Whitney, who has her own firm now, is renowned for calling out the problems with banks' toxic assets before the issue became widespread. What's her take on the great bill of health given to banks by the recent stress tests?
Whitney thinks Banks are overvalued and the government enabled them to have better first quarter earnings than they should. "At a core basis, I would not own these stocks," she said on CNBC. "Their business models are not going to come back."
Whitney also said that consumer spending is still going to remain slow. "There's a massive retraction in consumer liquidity," said Whitney. "Credit contraction is happening at an accelerated pace. Consumer spending is going to be less than people expect going forward."
Whitney also issued an ominous warning for stock market investors when she said that the rules of trading have changed because of the government's role. "For investors, you invest on what you know to be the rules of the game," said Whitney. "But with the government involved, no rules apply."
Whitney said the changing rules create a big problem for investors going forward. "The biggest danger here is having the retail investor shut out for a period of time because they don't know who to trust on market values."
Day after day more warnings come out about the health of this market rally and how it is not based on solid fundamentals.
At the beginning of last week I made a post about how Wells Fargo Bank had stunned the world by proclaiming it had just finished its most profitable quarter ever. Stock market investors jumped on the news with blind faith and the bank's stock soared. What sent Wells shares soaring was a three-page press release in which the San Francisco-based bank said it expected to report first-quarter net income of about $3 billion. Wells disclosed few details of what was in that figure. And by pushing the stock up 32 percent that day to $19.61, investors sent a clear message: They didn’t care.
As I said, we will watch the Fargo situation unfold with interest as questions were being raised about the Banks optimistic appraisal of it's financial situation.
On April 22nd the company will be releasing its first-quarter results and the flurry of speculation is intensifying.
We already talked about how Wells’s earnings may have gotten a boost from an accounting maneuver, since banned, that it used last year as part of its $12.5 billion purchase of Wachovia Corp. Specifically, Wells carried over a $7.5 billion loan-loss allowance from Wachovia’s balance sheet onto its own books.
Once it took control of the reserve from Wachovia, Wells was free to start dipping into it to absorb new credit losses on all sorts of loans, including loans Wells had originated itself.
It appears to be a very deceiving slight of hand. Had Wells completed its purchase of Wachovia on Dec. 31, it wouldn’t have been allowed to carry over the allowance had it completed the acquisition a day later. On Jan. 1, new rules by the Financial Accounting Standards Board took effect prohibiting such transfers. A Wells spokeswoman, Janis Smith, declined to comment.
As if that were not enough, other interesting tidbits are now coming out.
The most closely watched measure of a bank’s capital these days is a bare-bones metric called tangible common equity. While the term doesn’t have a standardized definition under generally accepted accounting principles, it typically means a company’s shareholder equity, excluding preferred stock and intangible assets, such as goodwill leftover from past acquisitions.
Measured this way, Wells had $13.5 billion of tangible common equity as of Dec. 31, or 1.1 percent of tangible assets. Yet in a March 6 press release, Wells said its year-end tangible common equity was $36 billion. Wells didn’t say how it arrived at that figure.
Even more disturbing is Wells’s Dec. 31 balance sheet. On it is a $109.8 billion line item called “other assets.” What’s in that number? For that breakdown, you need to go to a footnote in Wells’s financial statements. And here’s where it gets comical.
The footnote says the largest component was a $44.2 billion bucket that Wells labeled as “other.” Yes, that’s right: The biggest portion of “other assets” was “other.” And what did this include? The disclosure didn’t say.
That $44.2 billion is more than Wells’s tangible common equity, and no one knows what it is comprised of.
The more information that comes out, the more disconcerting the stability of the bank appears.
Watch for Fargo stock to drop like a rock when complete financial statements come out.
And with it could go investor confidence in the latest market rally.
Spend some time last week ruminating with one of this blog's faithful readers about the stock market soaring on word that the US Bank 'Wells Fargo' had projected a surprising $3 Billion first quarter profit.
Howard Atkins, chief financial officer for Wells Fargo, said in the release, "Business momentum in the quarter reflected strength in our traditional banking businesses, strong capital markets activities, and exceptionally strong mortgage banking results — $100 billion in mortgage originations, with a 41 percent increase in the unclosed application pipeline to $100 billion at quarter end, an indication of strong second quarter mortgage originations.”
Uh-huh.
Market investors seized on the news. And since so many pundits have identified the stabalizing of US Banks as a key condition of restoring prosperity to the North American economy; the news was significant.
But you can colour me a skeptic.
Aforementioned faithful reader had a chuckle over my pensive reaction. But it seems my doubt may not have been completely misplaced.
I came across a report today on Housing Wirethat suggests that as much as nearly one-third of the bank’s first quarter earnings may be nothing more than an accounting maneuver.
Apparently the jump in earnings pertains to FAS 160, an accounting rule first announced in 2007 that became effective on January 1, 2009. The rule addresses accounting for minority interests, and mandates that the ownership interests in subsidiaries held by parties other than the parent corporation be clearly identified and presented as equity for the purpose of consolidated reports.
The effect of the new accounting rule allows certain liabilities to ‘jump over’ to the asset book as non-cash transactions via paid-in capital, thereby rolling directly into earnings and boosting reported equity.
In the case of Wells Fargo, the bank found itself with up to $824m it could use this quarter as an accounting gain to earnings.
Now... even if HousingWire’s Teri Buhl is correct... that still leaves more than $2 billion in profit. But even that remaining profit margin may not survive scrutiny.
Further investigation has lead critics to query the status of a large number of bad loans at Wachovia, the diversified, wholly owned financial services subsidiary that Wells Fargo recently acquired. What happened to them?
In it's announced earnings, Wells Fargo gave no details on delinquency trends or Wachovia’s credit losses.
Now there is rampant speculation that the timing of the merger has obscured these losses through purchase accounting adjustments.
So while this anomaly is being investigated investors are being cautioned to remember that what Wells Fargo has released is merely a quarterly statement. Quarterly statements are not audited (only annual reports undergo a full audit).
And what is the significance of all of this?
Well... under normal circumstances such accounting games within corporate PR announcements raise nary an eyebrow with the general public.
But in these tenuous times, the stock market received a huge boost on the Wells Fargo first quarter profit announcement. And the announcement has played a crucial part in bolstering the confidence of the public in the governments efforts to resusictate the economy.
These are times of strained public confidence and trust in both Wall Street and the Banking Community. I suspect that if this so called 'profit' turns out to be an accounting slight-of-hand, there may be a severe public counter-reaction.
And that counter-reaction could trigger another round of significant losses on Wall Street.
We will watch with great interest as this unfolds.
It seems that there are daily reports of troubles for the big US financial giants such as Citigroup, Bank of America and AIG. But as the worst banking crisis since the Great Depression grinds on it appears several of Washington State's community banks also face looming problems.
According to the Seattle Times, at least a dozen of the 52 Washington-based banks examined are carrying heavy loads of past-due loans, defaults and foreclosed properties.
While banks big and small have been kneecapped by the collapse of the housing bubble, the crisis has played out differently for the big "money center" banks and the thousands of regional and community banks sprinkled across the country.
The main problem for the big banks and investment firms has been exotic instruments such as collateralized mortgage obligations, structured investment vehicles and credit-default swaps — all tied, one way or another, to pools of residential mortgages that were bought, sold, sliced up and repackaged like so much salami.
But at most community banks, residential mortgages were a relatively small part of their business. Instead, their troubles are tied directly to their heavy dependence on real-estate loans — mainly loans to local builders and developers.
"Many community banks found that (construction and development loans) was an area in which they could compete effectively against the big banks," said Pat Fahey, CEO of Everett-based Frontier Financial.
At Frontier Financial, for example, construction and development loans made up 44.5 percent of all assets at year's end. City Bank had 53.3 percent of its assets in such loans, and at Seattle Bank (until recently Seattle Savings Bank), they constituted a full 54.2 percent of total assets.
Meanwhile more than a third of Bremerton-based Westsound Bank's assets aren't generating any revenue.
Anchor Mutual Savings Bank, of Aberdeen, had $64.2 million in past-due loans at the end of 2008, but just $8.3 million set aside in its bad-loan fund.
Horizon Bank, of Bellingham, charged off $19.6 million in bad loans last year, more than 100 times what it charged off in 2007.
And Friday, the FDIC disclosed that it's given Venture Bank, of Lacey, a deadline to raise new capital or find a buyer.
Those banks whose situations don't soon improve may have to take steps that will hit shareholders, employees and would-be borrowers in the wallet. (Depositors, so long as their accounts are within federal insurance limits, are protected no matter what.)
To bring their capital resources back in line with their outstanding loans, industry analysts say, thinly capitalized banks can slash dividends, lay off staff or call in loans & mortgages.
Four Washington banks — Horizon, Frontier, Westsound and Bank Reale of Pasco — are operating under FDIC "corrective action plans" that place tight restrictions on their lending practices, management and overall operations.
Corrective action plans are often early steps taken by the FDIC before banks fail. It seems our weekly 'Bank Failure Friday' feature may soon take on a regional flavour.
How long before real estate values, a mere 25 minute drive to the south of Vancouver, start to experience a California-style depreciation?
. Bank Failure Friday Update: 3 Bank Failures and 2 Credit Union Failures(see bottom of post)
As faithful readers already know, Garth Turner is the author of After the Crash, web blogger at Greater Fool and one of the early Canadian soothsayers who acurately predicted the downturn in Canadian Real Estate.
He steadfastly stood up against critics and warned Canadians about the real estate crash and how it would spread to Canada.
So I asked Garth. What does he think about my concerns of inpending inflation worries?
"Not a credible position", he told me matter-of-factly.
"We are trying to escape the jaws of deflation. There will be no threatening inflation and no rate increses in 2010."
Garth elaborated yesterday on his blog. He thinks the market reaction to Bernanke's decision to dump another $1 Trillion dollars is the manic over-reaction of bullionist's who don't understand the process.
While we may teeter on the cusp of Depression, Garth says that Governments will spend whatever it takes to stave it off, borrowing massive wealth from the future disregarding how the Boomers and their kids in the process. Interest rates will continue to race to zero and stay there.
"GDP will likely be rising marginally a year from now, but that does not mean ugly days will be passing. Far from it. Recession in the real economy – where we work, buy houses and shop – will last for several years. Real estate prices will be lower at Christmas than they are now, will stabilize in 2010, and then flatline for years after that. Jobs will start to reappear by next Spring, but they will come back in dozens after being lost in hundreds and thousands."
"Most significantly, however, is the certainty that what governments are doing to stave off depression will only cause another problem of equal size in the future. And, no, I am not talking about hyper-inflation in a year or two because of the new American trillions. Instead, we are guaranteeing a future of higher taxes, debt-shackled governments, a far less competitive North America and the end of the US empire."
Turner summarizes the bullionist's position as opportunists who are betting that the US Federal Reserve (and other central banks, like the Bank of Canada and the European Central Bank) will buy up government securities and create a honking big pot of money to scare off the deflation demons. The bullionist's, Garth says, are convinced we are just months away from the collapse of paper money as crazed central banks overdose on creating cash.
"Under their scenario, hard assets inflate wildly as paper money deflates. The US dollar collapses, causing the likely demise of major banks. In this world, smart wealth rushes into the only global currency alternative – bullion – sending it skyward, as the rest of us use hundred-dollar bills to buy bread and watch as our life savings are destroyed in a matter of months. Others see real estate, oil, two-by-fours and chickens soaring in value. As that happens, debt fixed in dollars fades as fast as your RRSP, which means mortgages slip away into nothingness, at the same time as interest rates hit 20% or 40% or higher."
And then Garth Turner dismisses the argument. He says, "this is exactly why it ain’t gonna happen. No depression. No hyper-inflation. Both are toxic to human society and would inflict irreparable damage. There is not a sane government in the world (sorry. Zimbabwe) which will allow either to take place. If we tip either way, it will be totally by accident."
Impressive argument. But it begs the question... would any sane goverment have allowed the current crisis situation we find ourselves in, to have taken place to begin with?
Yet it happened and all government can do is react.
As we wait on the FDIC to give us our Bank Failure Friday fix, I invite you to check another oracle who predicted not only the 2006 subprime mortgage disaster in the United States, but also predicted the 2008 stock market crash.
His name is Peter Schiff and he started making the real estate predictions in 2002. Check out this compilation of his interviews on the major American business networks. Co-panelists openly laugh at him, audibly scoffing and gasping at his claims about pending real estate and stock market crashes.
He holds a viewpoint on inflation that is diametrically opposed to that of Garth Turner.
Schiff is adament that rapid inflation will happen and it won't be by accident, leaving govement nothing to do but react.
His views tomorrow.
Bank Failure Friday
Bank Failure #18: FirstCity Bank, Stockbridge, Georgia
From the FDIC: The Federal Deposit Insurance Corporation (FDIC) approved the payout of the insured deposits of FirstCity Bank, Stockbridge, Georgia. The bank was closed today by the Georgia Department of Banking and Finance, which appointed the FDIC as receiver.
The FDIC estimates the cost of the failure to its Deposit Insurance Fund to be approximately $100 million. FirstCity Bank is the eighteenth FDIC-insured institution to fail this year. The last bank to fail in Georgia was Freedom Bank of Georgia, Commerce, on March 6, 2009.
Bank Failure #19: Teambank, National Association, Paola, Kansas
From the FDIC:Teambank, National Association, Paola, Kansas, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Great Southern Bank, Springfield, Missouri, to assume all of the deposits of Teambank.
The FDIC estimates that the cost to the Deposit Insurance Fund will be $98 million. Great Southern Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Teambank is the twentieth FDIC-insured institution to fail in the nation this year and the first in the state. The last FDIC-insured institution closed in Kansas was The Columbian Bank and Trust Company, Topeka, on August 22, 2008.
Bank Failure #20: Colorado National Bank, Colorado Springs, Colorado
From the FDIC: Colorado National Bank, Colorado Springs, Colorado, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Herring Bank, Amarillo, Texas, to assume all of the deposits of Colorado National.
The FDIC estimates that the cost to the Deposit Insurance Fund will be $9 million. Herring Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Colorado National is the nineteenth FDIC-insured institution to fail in the nation this year and the first in the state. The last FDIC-insured institution closed in Colorado was BestBank, Boulder, on July 23, 1998.
Credit Unions
In addition to the three bank failures, two large Corporate Credit Unions were seized today by the National Credit Union Administration (NCUA): U.S. Central and WesCorp. These two credit unions had a combined $57 billion in assets. The affected institutions don't serve the general public. They provide critical financing, check clearing and other tasks for the retail institutions. These wholesale credit unions, known in industry parlance as corporate credit unions, are owned by their retail credit-union members.
Laurel Magri: lying, deceptive, manipulative whore. UPDATE: Bank Failure #17: Freedom Bank of Georgia, Commerce, Georgia (the weekend can officially begin now)
The day after the DOW plunges to fresh 12-year lows we reflect on quite a week.
The grim news reads like a police blotter: GM said its survival is in doubt, bank shares took a beating, Citigroup fell below a buck and China defied expectations by failing to boost its economic stimulus program (and that's just yesterday's news).
Meanwhile layoffs were the story of the week. Adding to the list yesterday was the Toronto Star, the biggest Canadian daily, who issued pink slips to 60 employees, all from sales and marketing. 3,400 Canadians have now lost their jobs over the past four days.
Bank of Canada deputy governor Pierre Duguay came out and warned Canadians not to be spooked by "irrational fear" over the economy but then goes on to tell the House of Commons finance committee that "there will be more bad economic news coming".
[Remember that if you are laid off. You can meet with your bank manager after failing to make three consecutive mortage payments and say, "hey, chill dude... don't be spooked by irrational fear, man"]
But it's Friday so let's turn our attention to our neighbours to the south as we keenly await the carnage from Bank Failure Friday.
As faithful readers know, bank failures in the US always seemed to be delayed until late on Friday afternoons, prompting Friday to be renamed 'Bank Failure Friday' by many economic blogs.
And it appears it might be a banner year of Friday's.
The Wall Street Journal reports that the Senate Banking Commission wants to give the FDIC $500 Billion from the Treasury Department Seems the FDIC's deposit-insurance fund has fallen precipitously with 25 bank failures last year and 16 so far in 2009. Loading up for the coming barrage, perhaps?
Maybe the Commission caught American CoreLogic's just released report on households with negative equity. They report 8.3 million US mortgage holders are underwater. Many analysts expect that the number of households with negative equity could rise to 17 to 23 million by the end of 2010. That means more US homes foreclosed, more US banks failing, and more bad economic news for America's largest trading partner: Canada.
Updates from the FDIC as they come in, check back late this afternoon.
In the meantime you may recall the rant from Rick Santelli that we posted on February 19th. Santelli is a former derivaties trader who reports for CNBC from the Chicago Mercantile Exchange. On Feb. 19th, Santelli took issue with President Obama's plan to bailout homeowners.
This provided quite the backlash since Santelli, as former derivatives trader, embodies the Wall Street wormhole into which much of the bailout money has gone.
In response, Jon Stewart eviscerates CNBC and Santelli in this soon-to-be-classic 8 minute clip.
It's worth the time to check it out while we wait for the FDIC.
Freedom Bank of Georgia, Commerce, Georgia, was closed today by the Georgia Department of Banking and Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Northeast Georgia Bank, Lavonia, Georgia, to assume all of the deposits of Freedom Bank of Georgia.
The FDIC estimates that the cost to the Deposit Insurance Fund will be $36.2 million. Freedom Bank of Georgia is the seventeenth FDIC-insured institution to fail in the nation this year. The last bank to fail in Georgia was FirstBank Financial Services, McDonough, on February 6, 2009.
As faithful readers know, bank failures in the US always seemed to be delayed until late on Friday afternoons, prompting Friday to be jokingly referred to as 'Bank Failure Friday' in many economic blogs.
2009 is off to a record breaking year with 14 failures so far.
Mind you... for a while it looked like last Friday might slip by without one. Will that be the case today?
We wait with eager anticipation for today's carnage. Updates from the FDIC as they come in, check back late this afternoon. Click here to read our post: "US Bank Failures - Why Do We Care".
In the meantime, an interesting youtube clip in which Fox News Commentator Glenn Beck goes over the history of housing prices and makes the case that President Obama's plans to stem the collapsing housing market in the US may be doomed from the start. His statistics suggest the collapse - to date - may not have even reached the mid-way point.
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.
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.
Security Savings Bank, Henderson, Nevada was closed today by the Nevada Financial Institutions Division, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.
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.
UPDATE: Bank Failure #14: Silver Falls Bank, Silverton, Orgeon (details below) UPDATE: 6:00pm EDT and no word from the FDIC - a week without a failure perhaps?
UPDATE: DOW rallies after dropping to 7,257.75. Closes down only -100.28 at 7,365.67
Another week goes by and we watch developments in the economy with keen interest.
Yesterday the DOW closed at 7,465.95, a six year low.
In 2002, the lowest level that the Dow hit was 7,286.27.
If the market breaks down below that 2002 level, the DOW will have fallen back to 1997 levels, making it a lost decade for DOW investors (not counting dividends).
It brings to mind former US Federal Reserve Board Chairman Alan Greenspan's speech of December 5, 1996. Speaking to the American Enterprise Institute during the stock market boom of the 1990s, Greenspan made his infamous 'irrational exuberance' comment.
“ [...] Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? [...] ”
The phrase was interpreted by financial pundits as a typically cryptic warning that the market might be overvalued.
And where was the DOW on December 5, 1996? It closed that day at 6,437.
Twelve years later the market may well be on it's way to wiping out those years of 'irrational exuberance' and all the years that came afterwards.
If it does, is a DOW of 5,000 out of the question?
============================================= Can Cameron Read?
Two days ago we profiled BCREA's Chief Economist Cameron Muir's incredulous statements that now is a great time to buy real estate in Vancouver.
I wonder if Cameron read the front page of Wednesday's Washington Postnewspaper?
"Markets around the world plunged Tuesday as evidence mounted that the global economic crisis is worsening. Japan is suffering it's worse downturn in 35 years. The British economy is facing it's sharpest decline in 30 years. Germany is slumping at it's worse pace in 20 years. Meanwhile the job market in the United States, at the epic-centre of the world downturn, is at it's worse in decades. And emerging economies are contracting at a pace few had predicted just months ago. Even China, whose economy is still growing at 6.8% annual pace is grappling and grasping with vast numbers of the unemployed, raising fears of unrest. The sharpness of the global showdown has alarmed economists who see no obvious engine for recovery. Most Western developed economies are going to see the deepest downturn they have seen in a number of decades, in some cases, possibly, since the Second World War."
Last night, while talking to Professor Nouriel Roubini, Mark Zandi chief economist for economy.com, and Fred Mishkin (ex-Fed Governor, Professor Columbia University), Charlie Rose called it 'scary stuff'.
Yet Cameron Muir calls it a great time to buy.
Okie Dokie!
=============================================
Bank Failure Friday
As faithful readers know, we start off Friday's watching to see if it is once again Bank Failure Friday.
Bank failures in the US always seemed to be delayed until late on Friday afternoons, prompting Friday to be jokingly referred to as 'Bank Failure Friday' in many economic blogs.
2009 is off to a record breaking year with four more failures last Friday. That brings the year's total to 13.
(In 2008, 25 banks failed. In 2007, three failed. None failed in 2005 or 2006.)
We wait with eager anticipation for today's carnage... updates as they come in, check back late this afternoon.
Bank Failure #14: Silver Falls Bank, Silverton, Oregon
From the FDIC: Citizens Bank, Corvallis, Oregon, Assumes All of the Deposits of Silver Falls Bank, Silverton, Oregon
Silver Falls Bank, Silverton, Oregon, was closed today by the Oregon Department of Consumer and Business Services, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Citizens Bank, Corvallis, Oregon, to assume all of the deposits of Silver Falls Bank.
The FDIC estimates that the cost to the Deposit Insurance Fund will be $50 million. The Citizens Bank acquisition of all the deposits of Silver Falls Bank was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Silver Falls Bank is the fourteenth bank to fail in the nation this year. The last bank to fail in Oregon was Pinnacle Bank, Beaverton, on February 13, 2009.
“The Federal Reserve is now a government within a government. It is totally out of control. Congress doesn't control it. It's funded by the banks and we either have constitutional government or we don't."
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