Denninger: The banking system is insolvent

The latest from The Market Ticker's Karl Denninger, on the banking situation. Key conclusions:

... The entire banking system and likely The Fed, given the quantity of Fannie and Freddie paper it has been and is "eating", is insolvent. These facts are why the government is lying - they're well-aware of the near-zero cure rates and know that these facts mean that the banking industry has nowhere near sufficient capital to withstand these losses without folding like a paper cup getting stomped on by an elephant.

(Remember that these numbers do not include any commercial real estate losses and we have found that banks are frequently over-stating their claimed values for these loans by 50% or more - as was seen with Colonial.)

It gets better. The FDIC has a negative balance both in its fund balance and the reserve ratio projected for the end of the quarter, which is, big surprise, tomorrow. Oh, and there is this pesky problem that the FDIC has - contrary to its mandate - been issuing bond guarantees for banks, so if and when that banking insolvency is recognized the FDIC will implode into a gravity well also, since it is on the hook for the entire deficiency of those bonds that were issued with its "guarantee" should they default.

Care to argue with the math folks? [emphasis omitted]

Read it all here for the analysis and supporting source links.

More insanity, FDIC edition

From The Market Ticker's Karl Denninger, on the latest iteration of financial legerdemain, whereby "healthy" banks will lend money to the FDIC to provide money so the (almost broke) FDIC can insure ... wait for it ... bank deposits:

Who would have thought that a government agency would actually contemplate paying the insured party for the coverage on their own risk?

In a world where we had a rule of law this would be identified instantly as what it is: rank, outrageous fraud.

But we don't live in such a world.

In the world we live so-called "government officials" of the FDIC feel free to engage in such sham transactions, smug in the knowledge that The American Sheeple, along with their handmaidens in Congress, can be counted on to allow a blatantly-fraudulent exercise such as this to be consummated - where the banks that are beneficiaries of FDIC insurance (and whom have also issued literally billions of dollars in covered bonds on an issuance-insurance program that has no legal basis in the foundational principle of the FDIC in the first place) not only do not have to pay for the insurance coverage they enjoy, but actually get paid to have it instead. [emphasis in original] ...

Read about it here. The government is no longer even pretending to hide their financial insanity. The whole system is like a house of cards at this point. A single failed wall will bring the whole thing crumbling down, dramatically.

The FDIC asking banks for a loan to insure the banks' deposits is like your insurance company asking you for a loan so that it can afford to issue you a homeowners policy. Even if you're getting more in loan interest from the insurance company than the cost of the insurance premiums, that's probably not an insurance company that you want to insure your home, because when you have a claim you'll likely discover that the insurance company can't pay. Because it's broke. Duh.

Will the madness never end? Let me rephrase that: When the madness inevitably ends, it will end horrifically, and badly. Prepare accordingly.

FDIC now bankrupt?

Apparently so, according to Mish's analysis here.

Karl Denninger also wonders whether the FDIC is still solvent.

Another reminder to not have all your eggs in one basket. Have more than one bank, and spread your cash around. Yeah, the FDIC insures your deposits up to $250K (until the end of this year, unless extended, then the coverage reverts back to $100K), but you've got to trust that the FedGov won't change the rules due to, e.g., an accelerating and cascading wave of bank failures.

For those with safety deposit boxes, another reminder not to keep anything in them that you can't live without. And for those with precious metals, remember that during the last Bank Holiday and Gold Confiscation Extravaganza of 1933, those with gold in safety deposit boxes had their gold involuntarily "exchanged" at government gunpoint ("We're from the government, and we're here to help! Now hand over your money.").

Even in "normal" times, safety deposit boxes aren't all that "safe":

Banks and the FDIC: The noose tightens

Today's financial reading: the refreshingly straightforward Karl Denniger questions whether the FDIC is broke and covering it up.

An excerpt:

Finally, we have Colonial. I made a nice chunk of coin shorting and PUTting that turkey last year, when their CEO (and a lot of other people) said they were "very conservative." Uh huh. My read of their balance sheet said they were (like many other regional banks) massively over-exposed to condo construction loans in..... you guessed it.... Florida (which incidentally is what killed Corus.) Oops. But here's the money quote on Colonial:

If the FDIC were to seize Colonial, it would be the sixth-largest seizure, by assets, in American history. Such a large failure could strain the bank safety net. Colonial has $20 billion in deposits, while the FDIC insurance fund has dropped below $15 billion. The FDIC wouldn't have to cover every dime, but when Florida's BankUnited, with $12.8 billion in assets, failed earlier this year, it cost regulators nearly $5 billion.

Add all three of these up and tell me what you think is going on?

These three are not small banks. They are significant regional institutions, unlike the tiny little banks that we hear about every Friday after the close of business.

Here's the nut to the story above: When BankUnited was seized note that the total loss on assets was some 40%. They were not in the hole by anywhere near that much according to their so-called "accounting." Neither was IndyMac, but they also created an enormous loss.

So what's going on here?

Simple: An enormous number of banks are holding loans at or close to "par" that really aren't. They're holding mortgages at massively-inflated values, even on defaulted properties, and this is why you are not seeing more foreclosure sales - that is, why inventory is being held back. If they sell it the accountants will force recognition of the loss, which will render them instantly insolvent, but so long as they "extend and pretend" they are marking these loans way, way above recovery value. The upshot of this is that these firms' balance sheet claims on asset values are massively inflated, regulators know it, and they're intentionally ignoring it. ...

Read the rest here, then read his follow up article here. The government and the banks are betting on a quick magical recovery to reflate the housing and commercial real estate bubble, so that all those losses (in the trillions?) that they have failed to recognize on their books suddenly disappear. Of course the problem is that those losses cannot be hidden forever. You can hang on a precipice by your fingers only so long, and when failure of the weakest fingers starts it tends to spread rapidly to the rest, with gravitationally predictable results.

Should the hoped for recovery not occur (and the signs don't point to a quick recovery at all), we could see a rapid cascade effect as the continuing bank failures (when the losses become too large to hide anymore) and loss of confidence in all banks' accounting spreads and wreaks havoc with the market. The exact scope of the damage may be uncertain, but will likely prove severe (and potentially catastrophic), especially if the FDIC is broke and has to tap their $500 billion credit line with Treasury (the "FDIC Bailout" plan). In that case, a massive run on the banks doesn't seem all that implausible. Can you say "Indefinite Bank Holiday"?

(Depression era bank run)

You don't have anything you can't do without in your safe deposit box, right?