Archive for the ‘Bank Collapse Watch’ category

Bank Collapse Watch: First Georgia Community Bank

December 5, 2008

Georgia bank shuttered by regulators
First Georgia Community Bank is the 23rd bank to be closed this year.

NEW YORK ( — State regulators in Georgia closed First Georgia Community Bank on Friday, marking the 23rd bank failure of the year.

The Federal Deposit Insurance Corp. said that the four branches of the Jackson, Ga.-based First Georgia Community Bank will reopen on Saturday as part of United Bank, of Zebulon, Ga.

First Georgia Community Bank had total assets of $237.5 million and total deposits of $197.4 million.

The FDIC estimates that the cost of Friday’s action to the Deposit Insurance Fund will be $72.2 million.

Bank failures have increased dramatically this year as a global financial crisis has unfolded. The 23 banks closed this year compares with only three bank failures last year, and no bank failures in 2006 and 2005.

And look at this:

Click = big

It was number seven on the list I referenced earlier.

Chronicles Of Depression 2.0: #442: Destruct

November 26, 2008

This Is Not A Normal Recession: Moving on to Plan B

There are many types of of structured instruments including asset-backed securities (ABS), mortgage-backed securities (MBS), collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) all of which provide a revenue stream from loans that were chopped into tranches and turned into securities. There are many problems with these complex securities, the biggest of which is that there is no way to unravel the individual pools of loans to isolate the bad paper. That’s why subprime mortgages had such a destructive affect on the secondary market, because–even though subprimes only defaulted at a rate of roughly 5 percent–MBS sales slumped nearly 90 percent. Why? Former Secretary of the Treasury Paul O’Neill explained it like this: “It’s like you have 8 bottles of water and just one of them has arsenic in it. It becomes impossible to sell any of the other bottles because no one knows which one contains the poison.”

Exactly right. So why weren’t these structured debt-instruments “stress tested” before the markets were reworked and the financial system became so dependent on them?

Greed. Because the real purpose of these exotic investments is not to provide true value to the buyer, but to maximize profits for the seller by increasing leverage. That is the real purpose of MBS, CDOs and all the other bizarre-sounding derivatives; higher profits with less capital. It’s a scam. Here’s how it works: A mortgage applicant buys a house for $400,000 and puts 10 percent down. His mortgage is sold to Wall Street, chopped into pieces, and stitched together in a pool of similar loans. Now the brokerage can use the debt as if it were an asset, borrowing at ratios of 20 or 30 to 1 to fatten the bottom line. When Fannie Mae and Freddie Mac were taken into conservatorship by the government, they were leveraged at an eye-popping 100 to 1. This shows that nearly an infinite amount of debt can be precariously balanced atop a paltry amount of capital. This explains why the $4 trillion aggregate value of the 5 big investment banks and the $1.7 trillion value of the hedge funds is now vanishing more quickly than it was created. Once the mighty gears of structured finance shift into reverse, deleveraging begins with a vengeance pulling trillions into a credit vacuum.

Emphasis added by me.

You know what’s screwy? This is exactly a laissez-faire market at work and there are people who refuse to recognize that! This is a Comment posted to the Blogger backup of this blog in response to my scourging the “Austrian school” of economics:

This crisis was neither a failure of laissez-faire capitalism nor Ayn Rand’s ideas, it was a failure of intensive regulation —with Greenspan’s hypocritical contributions.

Hello! These structured investments had no regulations governing them at all! That’s as fucking laissez-faire as gets!

Back to this post:

So far, the Federal Reserve has provided nearly $2 trillion through its lending facilities just to keep the financial system upright. The Treasury is currently distributing $700 billion to key banks and other financial institutions that are perceived to be “too big to fail”. In truth, the “too big to fail” mantra is a just public relations hoax to conceal the web of counterparty deals that make it impossible for one institution to fail without dominoing through the rest of the system and wreaking havoc. That’s why AIG is still on life-support with regular injections of taxpayer money; because it had roughly $4 trillion of credit default swaps (structured “hedges” that are not traded on a regulated exchange) for which AIG does not have sufficient capital reserves. In other words, the taxpayer is now paying the debts of an insurance company that didn’t set aside the money to pay its claims. (As yet, No SEC indictments for securities fraud) In fact, the Fed and Treasury are now providing a backstop for the entire structured finance system which is frozen solid and shows no sign of thawing any time soon.

Emphasis added by me.

Hey, Ayn Randroids and “Austrians,” don’t squeak about the free market. Read here how no capitalist would touch CitiGroup to rescue it! It’s as Ralph Nader said: Capitalism will never die because Socialism will keep rescuing it!

There is much detail in this post about how Paulson’s and Bernanke’s efforts are nothing more than smoke-and-mirror feel-good triage (my terms) rather than fundamental repairs.

The post concludes:

Rome is burning. It’s time to stop tinkering with a failed system and move on to “Plan B” before it’s too late.

They have no “Plan B.”

I do:

Chronicles Of Depression 2.0: #441: Nash V. Smith
Chronicles Of Depression 2.0: #431: Acceleration
Chronicles Of Depression 2.0: #427: 777

Bank Collapse Watch: CitiGroup 4

November 25, 2008

Citigroup collapses! Banking Shutdown Possible

It pains me deeply to announce that, despite the massive government rescue, yesterday’s collapse of Citigroup could ultimately lead to a shutdown of the global banking system.

For many years, I hoped this would never happen, and I thought we might be able to avoid it.

Emphasis added by me.


More recently, in the wake of the biggest financial failures in history — Bear Stearns, Lehman Brothers, Washington Mutual, Wachovia and others — rather than liquidate the failed firms’ bad assets, the authorities have been engineering shotgun mergers. The end result is that they have been sweeping most of the bad assets under the carpet of larger banks like Bank of America, Citigroup, and JPMorgan Chase, each of which already had abundant bad assets of its own. Adding insult to injury, Treasury Secretary Paulson’s decision this month — not to buy up the bad assets from many of these banks — has only heightened this concern. Rather than dispose of the toxic waste, the regulators have been rolling up the garbage to the larger banks.

And now, here we are, nearing the end of the road with the largest banks of all endangered and with no larger bank that can swallow them up. It’s a day of reckoning that leaves me no choice but to issue this three-part warning:

* Despite the U.S. government’s massive Citigroup bailout, it is going to be difficult for the global banking system to survive the shock to confidence for very long.

* Even if insured depositors do not pull out their funds, uninsured institutional investors are likely to run with their money, threatening to bring the system down.

* And alas, even if you have your money in a safe bank with full FDIC coverage, you could be adversely impacted.

Emphasis added by me.

So far, he’s saying what I’ve been screaming here for months!

And if you thought that one quadrillion dollars figure I’ve been referencing was insane, open your eyes with this:

Derivatives are bets made mostly with borrowed money. They are bets on interest rates, bets on foreign currencies, bets on stocks, bets on corporate failures, even bets on bets. The bets are placed by banks with each other, banks with brokerage firms, brokers with hedge funds, hedge funds with banks, and more.

They are often high risk. And they are huge. According to the U.S. Comptroller of the Currency (OCC), on June 30, 2008, U.S. commercial banks held $182.1 trillion in notional value (face value) derivatives. And, according to the Bank of International Settlements (BIS), which produced a tally six months earlier for the entire world, the global pile-up of derivatives, including institutions in the U.S., Europe and Asia, was more than three times larger — $596 trillion.

That was ten times the gross domestic product of the entire planet … more than 40 times the total amount of mortgages outstanding in the United States … nearly 60 times greater than the already-huge U.S. national debt.

Emphasis added by me.

That’s a little over 400 trillion short of one quadrillion dollars. That other 400+ trillion is out there. They just haven’t found it and factored it in. Do they need to? Isn’t that amount staggering in and of itself? It dwarfs the income of the entire fucking world!

What happens when the music stops? A metaphor:

The Mafia knows all about systemic meltdowns of gambling networks. In the numbers racket, for example, players place their bets through a bookie, who, in turn is part of an intricate network of bookies. Most of the time, the system works. But if just one big player fails to pay bookie A, that bookie might be forced to renege on bookie B, who, in turn stiffs bookie C, causing a chain reaction of payment failures.

The bookies go bankrupt. The losers lose. And even the winners get nothing. Worst of all, players counting on winnings from one side of their bets to cover losses in offsetting bets are also wiped out. The whole network crumbles — a systemic meltdown.

Emphasis added by me.

This is precisely what we are facing. This is what I saw face to face on January 1st!

What have I been saying? Exactly this:

As I warned at the outset, at some point in the not-too-distant future, governments around the world may have no other choice but to declare a global banking holiday — a shutdown of nearly every bank in the world, regardless of size, country, or financial condition.

What could happen in the banking holiday? In the past, we’ve seen some financial shutdowns that eventually helped resolve the crisis. And we’ve seen others that only made it worse. Often, savers are forced to leave their money on deposit, giving up a substantial portion of their interest income for many years. And, in other cases, the only way they can get their money back sooner is by accepting an immediate loss of principal. But no matter how it’s resolved, when banks have made big blunders and suffered large losses, it’s the multitude of savers that are invariably asked to make the biggest sacrifices and pay the biggest price. No one else has the money.

Emphasis added by me.

Have any of you stopped to wonder what happened to people who had more than the FDIC-insured $100,000 (now $250,000) on deposit in one of the banks that have failed? It’s easy to not care about them at a distance because we don’t have that kind of money. But I’m not blind to the fact that money could have been made honestly and through hard work and even a few smart (but not greedy!) investments. Those people took a hit and who cried for them? Where’s their bailout? Do you think the FDIC came back to them later on, after raising their limit, and said, “Oh, here’s another $150,000?”

This is where he and I sharply part company. This is his advice:

Question #4. “Throughout history, many governments have defaulted on their debts in a more subtle way — by devaluing their currency. Why are you recommending Treasury bills, which are denominated purely in dollars, if one of the consequences of this disaster could be a decline in the dollar?”

The trend today is toward deflation, which means a stronger dollar. But even if that changes, the solution will not be to abandon the safety and liquidity of Treasury bills. It will be to separately set some money aside and buy hedges against inflation, like gold or strong foreign currencies that tend to go up in value when the dollar falls.

Emphasis added by me.

That’s an illusion. It will look like deflation for a while. But when that hyperinflation kicks in, we’re the United States of Zimbabwe. There is absolutely no escaping the vengeance of hyperinflation. Economic orthodoxy demands that, just as economic orthodoxy (rightly) demands 1 + 1 = 2.

There is no safe place.

And there is only one way out.

The only question that remains is, How long before they recognize that?

Bank Collapse Watch: ALL OF THEM!

November 25, 2008

Does this finally make the point any clearer?

Citigroup’s Uneasy Victory

Federal regulators got a fresh inside look at Citigroup’s books over the weekend—and it wasn’t pretty.

The result: a new $306 billion federal bailout for the bank. On the one hand, it provides more clarity as to the lengths the government will now go to shore up the U.S. financial system. On the other hand, investors continue to be wary about whether Citi was worth saving from oblivion. Worse, some of them worry that if a bank with one of the highest capital ratios nearly went under, who’s next?

“You had a tremendous amount of people looking inside at Citi in the last few days to figure out how bad it was, and they came away thinking that the capital markets can’t handle this,” says David Ellison, manager of the $185 million FBR Small Cap Financial Fund. “So, Citigroup wasn’t a going concern. What does it tell you about the industry and everybody else all around the world that has the same assets?”

Emphasis added by me.

When does the light bulb come on? When does the dawn break? When it is as clear as glass?

Every bank in the entire world is bust. The contamination is global. This is Game Over!


We are being carted off in metaphorical boxcars to the concentration camps of Depression 2.0 and Hyperinflation. Total and utter systemic destruction of the entire world we have known.

Every dollar being thrown at this is being deflated down to about ten cents. And that’s me being optimistic. The pessimistic side of me believes every dollar tossed is actually going negative. Not only isn’t a dollar destroying debt, it’s creating brand new debt. In exactly the same way Michael Lewis detailed in The End.

Read between these lines, dammit:

Under the guarantee, Citi will assume any losses on the $306 billion portfolio up to $29 billion on a pretax basis — meaning the government will assume 90% of any losses.

According to people familiar with the negotiations, the government struck a plan to “ring-fence” around about $300 billion in questionable assets, which will remain on Citigroup’s books. That was the only group of assets for which the feds and Citi could agree on a potential value, sources say. That amounts to just 15% of Citi’s total assets, which are a shade over $2 trillion.

The plan is not only good for the system, say those sources, but it provides cheap insurance for the government compared with the costs of a financial system in meltdown mode.

Sources also say that the calculations on the value of the portfolio were made on the “very unlikely event” that the U.S. economy has a downturn as severe as the Great Depression. The values of the assets in that $300 billion pool were based on projected cash flows for the life of the assets and not on their current and fluctuating distressed prices.

Emphasis added by me.

CitiGroup is a stinking Tower of Shit!

— from Sinfest

Let me repeat the key sentence:

Worse, some of them worry that if a bank with one of the highest capital ratios nearly went under, who’s next?

One of the highest capital ratios! And that capital is supporting nothing but shit!

And the government could only agree on a Depression 2.0-valuation of fifteen percent of that shit!

The rest of it is such shit that it should be called Shit 2.0!

CitiGroup has one trillion dollars off the books. Is that Shit 2.0 — or is it even worse: Shit 3.0?!

How much clearer does it need to be? Look at this:

There’s only one reason to agree to such terms, says Ellison: to stay alive. “There are capitalists all over the place, but no one wanted to do the deal,” he adds. “This is chemo. They need this capital to stay alive.”

By one measure — tangible common equity to tangible assets — Citi already was on life support. The ratio is a strict definition of shareholder capital (setting aside infusions from TARP or the government) compared with the book value of a bank’s assets. It’s not a number that necessarily defines the overall financial health of a bank, but it’s one gauge to measure capital adequacy. A bank that ranks low on this measure doesn’t necessarily rank low on other measures. For Citi, that ratio is 2.4% vs. a more typical ratio for big banks of 5% to 6%.

That means a 1% decline in the value of Citi’s assets, or $20 billion, would reduce common shareholders’ equity by about 42%. Says Bill Mann, financial analyst for Motley Fool: “What’s scary is that it wouldn’t have taken much for the bank to be wiped clean.”

Emphasis added by me.

What are CitiGroup’s assets?! Shit! And Shit 2.0! Securities based on fraudulent mortgages for homes which are plummeting in value. The Government could see the price of homes going into the toilet — they had to have shared that news with all the banks prior to making it public. That had to force CitiGroup’s hand! CitiGroup did the numbers and they came up COLLAPSE!

The true bottom line:

If Citi was in dire need of government intervention, what about other big banks? Joel Cohen, co-CEO of Sagent Advisors, a financial advisory firm and former co-head of global mergers and acquisitions at Donaldson, Lufkin & Jenrette, isn’t encouraged: “There’s still a lot of this bad stuff on banks’ balance sheets.”

Emphasis added by me.

Go ahead, try to put that figure into a spreadsheet: “a lot”.

It’s already been quantified: One quadrillion dollars. That’s one thousand trillion dollars.

How long will we have to wait for that to pass through the intestines of economic orthodoxy? How much more pain will that create — and to how many? And who will be left holding a bag of Shit 2.0 in the end? We will — as our nation (as well as other nations) throws our current and future tax dollars into this new Toilet 2.0.

Are we going to get to one thousand bank failures? Only twenty-two have been seized thus far. How long for the nine-hundred and seventy-eight others to fall?

This is not the end. This is only the beginning of things.

How long before everyone recognizes the one way out?

Bank Collapse Watch: CitiGroup 3

November 24, 2008

No, I’m not removing CitiGroup from Bank Collapse Watch status. The government sponsorship is a sham.

What The Citi Deal Doesn’t Do

Citigroup’s stunningly complex rescue deal with the federal government buys it enough time to restore confidence, but leaves many issues unresolved.

The company still faces surging credit costs, potential losses from loans on its books and a massive restructuring project aimed at eliminating 53,000 employees by the spring. Its management remains intact even after the government rescue, but it is still unclear what the Citigroup of the future will look like.

Chief Executive Vikram Pandit wants to shed $500 billion of unwanted assets (he’s 35% of the way there), exit unprofitable businesses and redirect Citi, all at a time when profits from its mainstay corporate and investment bank are hurting from the softening economy.

Emphasis added by me.

Ever been behind in rent to landlord? Ever bought extra time, hoping you’d come up with the back rent — but you currently had no way in the world to do that? This is the position of CitiGroup.

The government will buy $20 billion in preferred shares in Citi, nearly doubling its equity investment in the company since October. It is also guaranteeing losses on $306 billion of assets in exchange for a $7 billion fee. Citi has to cut its dividend to 1 cent and will absorb the first $29 billion of losses on the troubled mortgage and other assets, with the government stepping in after that.

The guarantee is believed to cover most of an estimated $314 billion of residential and commercial mortgage loans and securities and some of $9.4 billion in related hedges, according to analysts at CreditSights. Those assets have weighed on Citigroup all year as the credit markets seized up.

But that leaves unguaranteed another $362 billion of credit card and consumer loans and $428 billion in corporate loans, asset-backed securities, derivatives and other assets. “We believe these assets are not guaranteed by the U.S. government for the most part and are not immune to weakness in the overall economy,” CreditSights says.

Emphasis added by me.

So we’ll wind up eating another third of trillion dollars?

Because no way no how is this going to work.

And still in the shadows, lurkling still unmentioned, is that one trillion dollars of off-the-books stuff CitiGroup is scared to death will come to light.

You think with this, CitiGroup is finished begging at the public trough?


There will be a second round.

Chronicles Of Depression 2.0: #437: Global

November 24, 2008

The world’s central banks must buy assets

The world economy is suffering from a Keynesian shortage of demand. Worse, it is trapped in a dangerous downward spiral of falling asset prices, rising bankruptcies, foreclosures and unemployment feeding into more of the same, along with falling commodity and now goods prices. Since no country is exempt, international co-ordination is needed and made easier because of the obvious common interest. The rapidity of the current contraction also means that fiscal solutions, though helpful, are not timely enough and create obvious free rider problems.

That is why monetary policy should be the first line of action. But conventional monetary policy has gone almost as far as it can in the US and Japan. The failure of the European Central Bank and the Bank of England decisively to respond in October was very damaging, but that is now history. Policy rates will fall further in December, but may make only a modest contribution to stabilising demand, given the further decline in bank balance sheets and rising levels of fear. It is therefore time for unorthodox policy, but one that is far better than Milton Friedman’s helicopter drops of money, because it is reversible.

Emphasis added by me.

This is the first article I’ve encountered calling for cooperation on a worldwide scale.

Why continue to throw bad money after good?

If demand is the problem, it can be created on a scale never before witnessed in the history of mankind.

This guy’s “unorthodox” solution is merely orthodoxy writ larger.

Why call for worldwide cooperation and coordination for just that paltry effort? It wouldn’t work anyway.

Chronicles Of Depression 2.0: #436: HYPERINFLATION!

November 24, 2008


Bloomberg: Fed Pledges Top $7.4 Trillion to Ease Frozen Credit (Update1)

Nov. 24 (Bloomberg) — The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

Emphasis added by me.

God Almighty!!!

It gets worse:

“The thing that people don’t understand is it’s not how likely that the exposure becomes a reality, but what if it does?” Issa said. “There’s no transparency to it so who’s to say they’re right?”

The worst financial crisis in two generations has erased $23 trillion, or 38 percent, of the value of the world’s companies and brought down three of the biggest Wall Street firms.

The Dow Jones Industrial Average through Friday is down 38 percent since the beginning of the year and 43 percent from its peak on Oct. 9, 2007. The S&P 500 fell 45 percent from the beginning of the year through Friday and 49 percent from its peak on Oct. 9, 2007. The Nikkei 225 Index has fallen 46 percent from the beginning of the year through Friday and 57 percent from its most recent peak of 18,261.98 on July 9, 2007. Goldman Sachs Group Inc. is down 78 percent, to $53.31, on Friday from its peak of $247.92 on Oct. 31, 2007, and 75 percent this year.

Emphasis added by me.

Twenty-three trillion! Poof! GONE!

Worse still:

The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages.

Emphasis added by me.

That $24,000 is on top of the existing debt.

Even more worse:

The commitment of public money is appropriate to the peril, said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. and a former economist at the New York Fed. U.S. financial firms have taken writedowns and losses of $666.1 billion since the beginning of 2007, according to Bloomberg data.

Emphasis added by me.

Near three-quarters of a trillion! Poof! GONE!

And yes, even worse:

Bernanke’s Fed is responsible for $4.4 trillion of pledges, or 60 percent of the total commitment of $7.4 trillion, based on data compiled by Bloomberg concerning U.S. bailout steps started a year ago.

Emphasis added by me.

Thank you, Bernanke, for turning us into the next Zimbabwe!

OK, here’s the fatal shot to the head:

Requiring the Fed to disclose loan recipients might set off panic, said David Tobin, principal of New York-based loan-sale consultants and investment bank Mission Capital Advisors LLC.

“If you mark to market today, the banking system is bankrupt,” Tobin said. “So what do you do? You try to keep it going as best you can.”

“Mark to market” means adjusting the value of an asset, such as a mortgage-backed security, to reflect current prices.

Emphasis added by me.

There! It’s been said! The house of cards has collapsed. Economic orthodoxy is over.

What is not being said: This is going to destroy us. Under economic orthodoxy, Bernanke has just set the stage for a lethal hyperinflation crisis next year. That is the consequences of a Central Bank printing massive amounts of funds. There is no escaping that. Nation after nation has suffered this inevitable consequence. We are not immune from it.

And let me remind everyone again: $23 trillion is nothing. There’s a quadrillion total out there. That’s one thousand trillion dollars.

There is now only one way out.