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.


  • elaine

    Larry, I don’t see how the FDIC can run out of money when they can always borrow from Treasury. Bair so far has declined this, instead demanding banks pay a higher percent into the insurance fund…what am I missing here? Won’t Treasury just print more money if necessary?

  • Peggy Sue

    I’m at a loss at this point to understand the what and why of these decisions. Is it delusional? The Hope Fairy will save us. Or deliberate? Ride the game for as long we can? Or absolute terror because we’ve already passed a no-return point and they know the rage is already building?

    I understand 5 or 6 more banks failed this week [hardly a peep from the press]. All we get is the happy spin. Although I did get a kick out of the Bloomberg article, reporting that the Wall Street banksters are arming themselves. Seems they’re a tad worried about those mega-bonuses being posted, while growing numbers of Americans are out of work and getting restless.

    Shoot’em out at the Ok-corral, perhaps? I know whose side I’m on.

    Thanks for another update, Larry.

  • mountainaires

    Sheila Bair can promise the “full faith and credit” of the United States to back up FDIC assurances on people’s money. But, what happens when we hit the tipping point, and the costs grow to $500 Billion, a $Trillion?

    Bair may be sincere, but at some point, people are going to stop believing that this government can back up the FDIC promises. At that point, there will be massive panic, runs on the banks, chaos.

    They’re extending and pretending that they are in control; are they really? With more costs on the horizon for Afghanistan, Health Care Reform, Cap and Trade [is that dead yet?], lower revenues from taxes, and unemployment benefits for life, we’re walking along the cliff, one misstep from falling over the edge, aren’t we?

    I’m a gloomy old bear, but honestly, I don’t know if we can rescue the patient.