All You Need To Know About Bank Balance-Sheet Fraud

[AllentownJake]

I am constantly amused by those people who claim there is some vast "conspiracy" in this country when it comes to banks, balance sheets, and fraudulent lending and accounting.

There is no conspiracy.

It is, in fact, "in your face" fraud.

The FDIC does us the courtesy of explaining it virtually every Friday night, right on their web page.

I am simply going to take last night's bank closures, which numbered four. One of them has no "deposit insurance fund" estimated loss available, because they didn't find someone to take the assets - they're just mailing checks. But the other three do.

* Waterford Bank, Germantown MD: $155.6 million in assets, $156.4 in insured deposits. They were "underwater" by $800,000, right? Wrong: Estimated loss, $51 million. That is, the assets of $155.6 million were overvalued by approximately 30% at the time of seizure.

* Bank of Illinois, Normal IL: $211.7 million in assets, $198.5 million in deposits. They were "underwater" by $13.2 million (which is why they were seized), right? Wrong: Estimated loss $53.7 million. That is, the the assets of $211.7 million were overvalued by more than 25% at the time of seizure.

* Sun American Bank, Boca Raton FL: $535.7 million in assets (so they claimed anyway), $443.5 million in total deposits. Heh, why did you seize them - they have more assets than liabilities? Oh wait: Estimated loss: $103.8 million, so the actual assets are worth $443.5 - $103.8, or $339.7 million. That is, the assets of $535.7 million were overvalued by a whopping 37% at the time of seizure.

This isn't new, by the way. In August of 2009 I went through Colonial Bank's failure based on BB&T's presentation to its shareholders on the "merger" - and gift it was given by the FDIC. It too showed that Colonial had been carrying assets on their books at a ridiculous 37% above where BB&T ultimately marked them as a whole.

Folks, your bank is being assessed deposit insurance premiums to pay for these losses. You are paying these losses through increased fees and interest expense on your credit cards and all other manner of borrowing.

More at link

http://market-ticker.denninger.net/archives/2049-All-You-Need-To-Know-About-Bank-Balance-Sheet-Fraud.html

Under Sarbanes Oxely, if these banks have shareholders, the executives should be in handcuffs.

[AllentownJake]

1. Come on

No one has anything to say about what the hell is going on with bank fraud in this country right now?

[Go2Peace]

2. No fraud there, just a bunch of lazy evil govment handout consumers

and a bunch of executives who "never thought it could happen". The execs are innocent I tell ya, even the thousands that walked away with millions in their bank accounts. It was all just a big misunderstanding!

/Sarcasm

[AllentownJake]

3. The entire world economy is now an auditing case study in 20 years nt.

[Gin]

4. would regular audits uncover the inflated asset numbers?

[AllentownJake]

6. You have to provide proof your assets exist

and are worth what you say they are in the course of an audit.

[Greyhound]

5. Sorry Jake, you keep posting about things that matter and none of it is "good",

so it ain't playing.

Post-season TeeVee is so boring...
:kick: & R

[AllentownJake]

7. Around September, October, and November

I expect a lot of shocked, I mean absolutely shocked people when this stuff is blowing up worse...why that time period...when congress critters are out whoring for votes, it generally is a good time to blow-up.

They are not rational normally, crisis in the midst of elections turns them into panicked 3 year olds.

[Greyhound]

8. That sounds about right. Fear and greed seem to be all that motivates us anymore. n/t

[AllentownJake]

9. Divided government is good for fraud

I mean don't get me wrong, the blue dogs have done their job in slowing down Health Care Reform to a 15 month process, and slowing down financial regulatory reform to non-existent process.

However, in order to make the great escape you really need two parties really yelling obscenities at each other over budgets and funding and what not.

Lots of chaos to make your final escape.

[On the Road]

10. I'm Not That Familiar with the Banking Industry,

but to me, most of the sins are committed when the loans are written. After the bank starts to get into trouble, there is actually a significant downside to some supposedly honest practices.

Take the mark-to-market rule, for example, in which a company's securities have to be valued at market prices rather than the original purchase price. During a panic like 4Q08, when the value of some financial stocks dropped by 90%, the resulting writedowns can actually force a company into balance sheet insolvency even when they have been otherwise responsible. Accounting rules are conventions and are not always supposed to reflect market values. Balance sheet assets are supposed to be the same as market capitalization.

Something similar goes on with nonperforming loans. Banks estimate future losses from uncollectibles, and in the heady days of the real estate bubble had overly optimistic percentages. Once the economy crashed and foreclosures exceeded even prudent estimates, the banks were faced with balance-sheet insolvency if they raised allowances to current levels.

The Calculated Risk economics blog had a couple of good articles on the liquidity and sovlency issues that banks have been going through the last year or two.

I actually have a certain amount of sympathy for companies trying to stay in business during a crash as extreme as the one we went through. Short of pulling every accounting lever they could, most of the banks in the US could have gone under, leaving the US in the position of Iceland now, or Argentina/Indonesia/South Korea in the late 90s. The results wouldn't have been good for any of us.

Where I think most of the blame should fall is on writing the loans in the first place, and the gross negligence exhibited in evaluating loan applicants. Some mortgage divisions instructed their employees to push through as much business as possible regardless of risk or creditworthiness, and some took on loans from mortgage brokers with no questions asked, even when it easy to falsify some of the applicant information. Departments that encouraged those abuses not only took down their employers in many cases, but almost took down the whole country.