Archive for the 'Bank bankruptcy' Category

Date: December 9th, 2007, Filed under Bank bankruptcy, Foreclosure, Mortgages, bailout

Zion, IL
By A.B. Dada
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I can’t seem to wrap my head around any possible situation that can save many of the top tier banks in the U.S. and the rest of the world. There’s a problem that the Old Media is still ignoring, a problem that has the possibility to effect cash flow and the middle class more than the so-called “credit crunch” that we’re facing today. This problem is the absolute illiquidity of the big banks due to the pending litigation and fallout from the mortgage frying pan many have played with over the past few years.

As some of the regular readers know, the mortgage industry was a big game with big profits. The banks would happily loan money to people who had no credibility in their ability to pay that loan back. Because the banks thought that “housing prices always go up,” they felt they could loan money out to anyone, even the credit score poor, and if they had to foreclose, they’d make money on the foreclosure since “property values always go up.”

The banks didn’t have the money to make all these loans, which may number in the tens of millions of individual loans. Because this idea that property values always go up was so rampant for the past 3-4 years, banks took their loans, packaged them together, and sold them to a hungry bond market in the form of CDOs and MBSes. Basically, a bank could take 10 or 100 mortgages, and sell them for a nice commission to investors who also thought their money was safe. Many of these CDOs have fallen in value, some as much as 90-100% (meaning they’re worthless or near that). The investors will lose all or most of their money, is the thought. The banks profited by taking a nice chunk of a commission for producing the mortgage before it was sold off.

Here’s the catch, though, the saving grace for the CDO or MBS buyer-investor: many of these bond issues have contractual wording that protects the investor if the loan origination had any fraudulent activity. If the bank loaned money for a mortgage and the investor can find any fraud within that origination, their purchase is contractually invalid. If that situation comes true, and it seems it may in some cases, the bank would have to refund the investor 100% of their original investment, basically buying back the mortgage onto their own books.

Many loans are coming out as fraudulent. Mortgage brokers and agents accepted “stated-income” statements from borrowers, who inflated their incomes double or triple in value from reality. Some brokers and agents even inflated the borrowers’ incomes without the borrower knowing. Appraisals may also have been fraudulent as some mortgage brokers/agents shopped for appraisers who would give the mortgage lender a number that would maximize their profit. Many in the industry thought the fraud would be overlooked as the housing prices escalated. With the recent downturn in housing expected to continue (severely, still), those frauds are becoming evident.

If a bank has to buy back their loans, they will need cash (liquidity) to reimburse the investor who was defrauded. Many of these investors are fearful of redepositing these refunds back into banks (fearful that the money will be used to bail out other defrauded investors), so the banks can’t rely on their refunds coming back as deposits, to be refunded again. The banks up to now have been able to use some of their mortgages as collateral to borrow short term from the Federal Reserve, but the collateral is declining in value, so their ability to generate new liquidity from the Federal Reserve is becoming more difficult.

As the fraud involved in some (or many?) mortgages comes to light, more and more CDOs will be returned. Banks will be desperate for money, pushing interest rates on CDs and savings accounts up as they need to borrow from millions of small savers versus borrowing from the Federal Reserve. Higher rates on deposit accounts means higher interest rates on loans and credit, which will increase the cycle of foreclosures and home owners feeling the pain: as loan interest rates go up, housing prices tend to fall.

The banking cartel, centered around the fractional-reserve banking system, is in trouble. The money that was created by the Federal Reserve for the past decade is not being redeposited in the banks, so their cash capital is declining. As more people find themselves upside down on their mortgages, more will face foreclosure. As the foreclosures increase, the fraud on the books will come to light, forcing the banks to buy back more mortgages.

No Federal bailout can save the banks without utterly destroying the U.S. dollar. No investor will risk putting their money into banks if the banks may go bankrupt. The FDIC only insures the first $100,000 of a deposit, so those will millions of dollars to save or invest will stay away from the deposit accounts.

I have no idea what to recommend for those without millions. I believe that gold and silver is still the safest form of savings, but in a deflationary economy, which we may experience, the gold-dollar ratio and silver-dollar ratio will fall (although I believe the buying power of gold and silver will rise).

Markets will crash. Banks will shut down. Millions will be hurt financially. The question is: what will the powers that be, the powers that created this problem, do to try to save the system that is built on fraud and monetary value destruction?

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Date: October 5th, 2007, Filed under Bank bankruptcy, Foreclosure

Zion, IL
By A.B. Dada
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Fresh news this morning as the FDIC reports on another bank, the third one in this credit bubble crash, going under. Miami Valley Bank, in Ohio, is now in receivership with close to US$90 million in deposits. According to the Reuters report, the bank has deposits totaling over US$14 million that don’t qualify for FDIC insurance due to being over the US$100,000 cap on deposit insurance per depositor. This is a lot of money for people left holding the bag, who become “creditors” instead of depositors. If you’ve ever had a borrower declare bankruptcy on a loan you’re holding, you know how much you usually end up with: zero.

For the average depositor, this means as much as 19% of their deposit value wiped out. For the rest of us, it could mean a hit in our own deposits if the Fed needs to print away to cover the losses. Usually, when the FDIC declares a bank insolvent, other member banks pick up the loss and cover it themselves. If we continue to see banks go under, we might see member banks unwilling or unable to pick up the hundreds of millions, or even billions, in losses that could flow out of the insolvency.

I’m not a fan of FDIC insurance. It creates an undue burden on well-run banks to pick up the trash of the badly-run banks. This means that investors in a well-run bank have their return decreased from the premium of the bank having to worry about being forced to be the first step insurer to other banks who go belly up.

When you put money in the bank, rarely are you a depositor. A depositor puts money into an account to secure it: in a full reserve banking system, this means that you specifically tell the bank to protect your money, not to loan it out. Today, even your checking accounts and small saving accounts are not deposits, but investments. The bank quickly finds a short term to medium term loan product for you so that they can make money, and giving you a piddly 1-1.5% return for your risk. Most “depositors” are unaware that fractional reserve banking defrauds them of their security in a deposit, with the bank making the profit and the depositors having to spend countless hours worrying about how much of their deposit is insured, and how much that insurance is actually costing them.

We don’t have any full reserve banks in the world today, because they are uncompetitive. If a bank told you they’d charge you 1% a year to secure your deposit, you likely wouldn’t go near them, even if they’re really just putting your cash in a vault. You’d rather deal with a 0.5% return than pay someone to watch your money. Most of us would feel wiser with the cash under our mattress than lose 1% plus whatever loss inflation puts on the value of our money.

In a full reserve bank, banks would give you two choices: pay them to secure your savings (they wouldn’t re-invest them), or accept some risk and let the bank invest your money in a variety of loan or credit products. I believe a full reserve bank makes the best sense for a free and truthful society, because the owner of the money has full control over how that money is used. You may be willing to give up 1 year of access to your money so the bank can make a 1 year loan to a business or homeowner — this would give you a nice return if the bank was charging 8% for that loan, with competitive forces giving the investor 5-6% of that profit back. Many banks could exist just fine on a 1-2% profit, considering the billions that would accrue that small percentage.

The Reuters report is just a drop in the well, with a future fear of torrents of banks going insolvent due to bad loans and risking too much for too little. When you include the derivatives market, there is an even bigger fear of massive loss.

Here’s a question, though: when a bank goes insolvent, it goes under because borrowers can’t pay them back for money they borrowed. The money they borrowed was spent, so it exists, somewhere. When billions of dollars worth of value get wiped out, we still have to understand that the money exists SOMEWHERE: maybe a home developer, maybe a kitchen rehabber, maybe a car manufacturer, or a furniture retailer. The money is there, it isn’t destroyed and it surely isn’t lost forever, never to be seen again. This means that another bubble, somewhere, is waiting to rear its ugly head.

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