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I’ll Gladly Pay You Tuesday…

Posted by Larry Doyle on December 3, 2009 9:26 AM |

Postponing losses in hopes that one can trade out of them is a game very rarely won. In similar fashion, not acknowledging losses in hopes that the situation improves and the loss is mitigated is also a recipe for disaster. All one needs to do is look eastward to Japan to realize that. Ultimately, a loss not only must be realized, but paid. “I’ll gladly pay you Tuesday for a hamburger today …” may be cute in cartoons, but in the real world that approach never works. That said, this ‘delay to pay’ is the exact approach being utilized by Uncle Sam and, in large measure, by private industry.

Bloomberg’s Jonathan Weil once again distinguishes himself and provides great insight on this dynamic in writing, Fudging Losses is Easy When the FDIC Does It Too:

No wonder so many banks are delaying their losses. The Federal Deposit Insurance Corp. keeps showing them how, by doing the same thing with its own.

Last week the FDIC, led by Chairman Sheila Bair since 2006, said its insurance fund’s liabilities exceeded assets by $8.2 billion as of Sept. 30. That marked the first time since 1992 that the industry-financed fund had shown a deficit. There’s plenty of reason to believe its financial health is much worse.

How much worse?

Here’s how the numbers break down. The FDIC said its fund’s latest deficit included a $38.9 billion reserve for future bank failures, as of Sept. 30. By comparison, the agency reported $30.7 billion of such losses for the previous year.

The credibility of that reserve figure gets shaky when you consider how much the number of troubled banks has risen lately. The FDIC last week said the tally of banks on its “problem list” more than tripled during the past year. The list consists of banks that, in the agency’s view, exhibit “unsafe or unsound” lending practices or financial conditions. (The FDIC doesn’t name the banks.)

Specifically, the FDIC said there were 552 banks with $345.9 billion of assets on its problem list as of Sept. 30 — almost 7 percent of all U.S. banks. That was up from 171 banks with $115.6 billion of assets a year earlier.

The upshot: The FDIC says it expects only a modest increase in losses from bank failures during the next four quarters, while it also says the number of banks on the brink of failure has skyrocketed.

The analysis here is simple. The number of problem banks and problem assets increases by 300%. The reserve fund increases by 30% or 1/10th the rate of increase.

While Wall Street banks are supposedly racking up mega-profits and readying to pay extraordinary bonuses, the American taxpayer will be receiving a bill on Tuesday for the hamburgers the industry is eating today.

Thank you, Jonathan Weil.


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