Wednesday, November 04, 2009

Chart of the Day

From econ prof Mark Perry:


source: Carpe Diem via FDIC

On the Enterprise Blog, Perry further says:
This first graph displays annual bank failures (data here) from 1930 to 2009, showing the two most serious banking crises in U.S. history, the Great Depression (9,146 banks failed from 1930-1933) and the S&L Crisis (2,935 banks failed from 1980-1994). Compared to those two periods, 106 bank failures in a single year out of more than 8,000 banks in total appears pretty inconsequential. . .

Further analysis shows that the assets of the 106 failed banks in 2009 totaled $106 billion (FDIC data here), which represents only 8/10 of one percent of the total U.S. bank assets, currently $13.301 trillion (data here). During the peak of the S&L crisis in 1989, failed bank assets were 3.5 percent of total bank assets, or more than four times the current level.

21 comments:

suek said...

That looks like good news - except if you check into this blog, it says(if I understand it correctly, and I may very well _not_)that the reason for so few bank failures is the due to two things...over valuation of the assets(mortgages defaulted but not listed as defaulted) and the fact that the FHA is now carrying some monstrous amount of defaulted mortgages. There's also the "mark to market" thing that I haven't figured out yet - at least how it affects various financial balances.

In other words, the low number of bank failures may be due to financial sleight of hand. Or not. I keep trying to get it figured out - I'll probably get there when everything comes toppling down...!

http://market-ticker.denninger.net/

MaxedOutMama said...

Jest you wait. They're coming. At least 350 more.

They lag.

OBloodyHell said...

> Further analysis shows that the assets of the 106 failed banks in 2009 totaled $106 billion (FDIC data here), which represents only 8/10 of one percent of the total U.S. bank assets, currently $13.301 trillion (data here). During the peak of the S&L crisis in 1989, failed bank assets were 3.5 percent of total bank assets, or more than four times the current level.

I think this stat is more telling, because of the possibility that the banks are more aggregated than they were before. I'd also think the number of people affected (esp. any amounts not covered by FDIC) would be relevant, too.

> Jest you wait. They're coming. At least 350 more.

Yeah, but even if so, that's still far below the former numbers, unless they're the big ones in amounts.

> There's also the "mark to market" thing that I haven't figured out yet - at least how it affects various financial balances.

From what I've seen of it it's a disaster. It essentially requires an otherwise solvent bank/organization to value its assets in a fire-sale manner, which make it catastrophically unpredictable what something is actually worth -- the market collapses on something, and suddenly it's worth nothing, and you have to treat it exactly like that even if you're not desperate for cash, and even though it's quite blatantly far undervalued due to the market collapse, which means you don't get the obvious option of sitting pat and waiting for the market to recover. It has value as information to the consumer/peer business as to how stable an organization's 'worth' is for continued investment and trust, but it's insane as an actual valuation technique.

The value of an asset isn't entirely what it is worth this instant, it's the value of the asset when you choose to or are forced to sell it. The two are related but not equivalent, and financial recording techniques should grasp that -- if you are not in a situation where you are likely to be forced to sell something, then its value is not the same as mark-to-market. Not by a long shot.

suek said...

Re: mark to market.

That sounds reasonable (explanation, not necessarily policy) and may explain why they don't want to report the defaults...

As for number of bank failures...

Most of the banks in the Great Depression were pretty small ones by comparison to today's banks. Most if not all were local, I think. I suspect that the number of failures today might not be able to be compared to banks of that period. I hope we don't find out - but I'm concerned about the larger picture - the Federal Bank.

By the way...dumb question...if a bank closes its doors, what happens to the contents of the safety deposit boxes? I remember my Mom telling me how she rushed to deposit a paycheck minutes before her bank closed its doors - for the last time! The indication was that when it was closed, it was closed. So....? Any ideas?

MaxedOutMama said...

Sue - that is not a dumb question. When banks are "closed", it is extremely rare that their doors are closed. The closure relates to the entity that owns and runs the bank. Usually, for depositors there is almost no change. You can use your checks, go in and transact your business, and everything remains as is.

In some cases deposits are sold to one bank and loans (assets) are sold to another, in which case the location will still be open.

In certain cases, some failing branches will be shut. In that case depositors SD boxes and vault contents will either be moved to a new location under armed guard, or in many cases the persons will be contacted and given a certain number of months to clear their boxes.

Usually even if a branch location is closed, it is not closed immediately. Instead it remains open until whatever organization bought it figures out what to do.

There are times when the complexity of the institution and its size are such that no one can be found to buy deposits and loans (often because they can't be valued). In that case, FDIC takes over and forms a new bank. Then it runs that bank for a while until everyone knows what is going on, and finally finishes the process by now selling deposit accounts and loans to other banks. In most cases, the branch location will remain open. In very large organizations, some branches might be shut, but again, this does not happen overnight.

I am describing current practice, not the legal requirements Legally, even though your deposit may be insured, the FDIC has five years to give it back to you with no interest.

After a bank has been shut and all of its accounts and other assets have been distributed, the vault contents and any other proceeds from the sale of the accounts are divided among the creditors (including uninsured depositors).

The contents of an SD box belong to the depositor, and are not assets of the bank, and therefore cannot be seized for resolution.

MaxedOutMama said...

OBH - if you are not in a situation where you are likely to be forced to sell something, then its value is not the same as mark-to-market

Traditionally, the method of valuing assets held for investment has not been mark-to-market. It could be discounted purchase price or cash flow, but not the market price.

It is the proposed change in FAS rule that is causing some of this problem, and I don't think it will ever be fully implemented.

suek said...

Uh-oh. Somebody was tuning in on my thoughtwaves!

http://thecomingdepression.blogspot.com/2009/11/government-claiming-safety-deposit.html

So, although I always listen to MOM, there's a possible problem here.

And who's going to insure the FDIC these days?

In other words, what you're saying is what is _supposed_ to happen...but I'm thinking that in the direction we're going, all bets may be off.

suek said...

How do you prove what you had in your safe deposit box? I could claim that I had pounds and pounds of gold...

There was an article somewhere about deposit boxes in London being seized due to criminal activity of some box holders, and those who claimed articles had to prove the legal source of the contents. That is, that the contents of their boxes had been obtained legally. I'll try to find the link...

That was a different situation - including what appeared to be privately owned security box businesses, as opposed to banks - but normally there is no written record of the contents of a SD box...so...if there's corruption, if there's dishonesty...you're up a creek, I think.

suek said...

This is _not_ supposed to be the way it works...!

FHA "renting" defaulted homes

OBloodyHell said...

> This is _not_ supposed to be the way it works...!

Don't be silly. This is exactly how Hope-n-Change actually works.

Like most government policy, it is carefully written to ignore the effect of overwhelming perverse incentive.

It makes you hope for a change in the Administration as soon as possible.

OBloodyHell said...

MOM, I realize it's not the traditional means, either -- I worded my comment to reflect that I can understand how the current actual, at this moment, fire-sale valuation of a company's assets might have relevance to and value to an individual or financing organization considering investing in a firm.

I think such information should be readily available to anyone considering investing in another organization. I just think that it is at least a part of the cascade failures we had starting early last year. From what I read, multiple organizations who could have ridden out the situation even with the toxic assets they had obtained wound up in dire straits thanks to M2M forcibly devaluing their portfolios and putting them in a precarious financial position that standard mechanisms would not have caused, AND would have allowed them to hunker down, sit pat, and ride out. And when that company failed, it caused another to follow suit because of interlocking financial measures.

I think the problem of M2M is that it makes risk estimation for any asset next to impossible. One unexpected, highly volatile market swing and BAM! you're in deep doo-doo.

And this could be caused by a total fabrication --suppose someone announces, say, a truly insanely cheap form of energy, and the media picks up on it and runs with it, along with appropriately believable and distorted quotes from their scientist talking heads.

The talking goes on long enough that people start to think it might be seriously true -- suddenly, the price of oil and coal plummets.

So what if it turns out a year later to have been another Cold Fusion?

Well, the energy firms across the board are likely to have eaten it, big time, with M2M rules in play. A company worth billions is suddenly in receivership because, hey, all those coal and oil assets they'd used as collateral are worthless in the distorted market.

That's kind of a presumably unlikely scenario, but you could see it happen in other industries/trade formats, too.

Suppose someone found something seriously dangerous about swine, far above and beyond the current issues. What happens to pork producers? "What, oh, yeah, we were all wrong about that. It cost your company billions of dollars and you went out of business? Gosh, sorry."


M2M is valid info for investors and creditors. It is not a rational way to value a company outside of those considerations, particularly not without somewhat more esoterically experienced eyes judging the weight applied to it.

:-/

.

Carl said...

This is outside my area of expertise, and I'm feverish and fatigued besides, but, questions:

1) I believe M_O_M that bank failures lag. Yet, as OBH said, adding 350 more would still be a small number. And, as he said, the ratio of failed-to-safe assets is more important and is low at present. Does anyone expect that number to rise significantly? Above 1989 levels?

2) How do the FASB proposals differ from its April 2nd decision (neither of which I read in any detail)? M_O_M, what is the problem with the proposal?

3) I thought that the absence of mark-to-market accounting was identified as prolonging Japan's banking crisis years ago. And the SEC said that mark-to-market didn't "play a meaningful role in bank failures occurring during 2008". So why, OBH, do you say that M2M makes valuation next to impossible?--it recognizes that the market will assign a value. Certainly, M2M better reflects actual value as compared with historical cost. And as long as the rules are in-place and transparent, investors and insurers can make appropriate assumptions.

Sure, M2M will tend to deepen a downturn. But is it better in the long run quickly to recognize and account for distressed assets, rather than falsely presuming they remain part of a bank's capital assets?

4) I don't like the FHA or any government-guaranteed lender. I'd get rid of them. But they exist, and two administrations decided that the appropriate response to the financial crisis was to preserve liquidity and temporarily to relax pressure on would-be defaulted home owners. In that light, Sue, is householder bankruptcy, followed by FHA liability and bailout, a better option then renting to current owners?

suek said...

>>is householder bankruptcy, followed by FHA liability and bailout, a better option then renting to current owners?>>

I have no idea. I'm reasonably intelligent, but I have to admit - the whole financial mess has me completely confused.

So...we have houses. They have to be owned by someone, right? if we foreclose and there are no qualified buyers, houses stand empty. They deteriorate, they may be occupied by squatters, they are capital sitting fallow - at the very least. In addition, we have that capital being held by the FHA. Of course, that's no problem for them, they can print more dollars to make up for it. But what about the people? Where are all these people going to go? It certainly makes sense for the owner (the FHA) to rent to the occupants - at least they have _some_ return. On the other hand (I've probably run out of hands long since!)being in a business that deals with maintenance people, I have to wonder who's going to be responsible for the maintenance on these FHA owned homes? FHA? are they now going to be in the real estate management business?

I don't have answers - I only have questions. It really is a mess.

By the way - are you aware that the military has sold their housing - or the rights(I'm not sure what the deal is - long term leases?) to civilian companies who are then responsible for maintenance of the houses, and are then recipients of the housing allowances military personnel receive? Another interesting development, which is the result of a reduction of military forces and budgets.

In the local city, they've just leveled and are in the process of completely rebuilding some 200 housing units, that had been originally built in the 1940s. That's a lot of capital tied up - you have to wonder...

OBloodyHell said...

> So why, OBH, do you say that M2M makes valuation next to impossible?

I am talking from my own "feel" for the flow of reliable information. While studies such as whatever the one you suggest are to be considered relevant, I suggest that the source must always be considered for something like that. Some bureaucrat's ass was likely on the line, so my guess is if it had said otherwise someone less important's ass would have been on the block. Somewhat along the lines of Lincoln's "Big Fee, Big Swear".

M2M makes reliable determination of an asset's worth difficult to impossible. It increases the risk, no matter how you look at it -- at any point, the market could get more volatile through the release of some outside, currently unknown information, and that means you could be in fine financial situation one day and bankrupt the next (hyperbole, but you can get the point).

And I think you've already made the point, and I concur with it wherever it comes from -- volatility is bad for the market. Creditors need to be able to access the risk to their capital, and if they cannot rely on a company being worth what it is when they invest -- if its valuation could plummet due to totally unpredictable outside forces -- then you have increased that risk, thereby increased the expense of credit, and therefore decreased the free flow of money.

Now there's always a certain amount of "unpredictable outside forces" -- a fire could take place, a meteor could fall from the skies. But those are things we, if not have control over, have a track record that helps identify the likelihood of them.

But now you're adding market volatility to that list, and that's something we have far less background data on and far less comprehension of. Investing in anything anywhere M2M applies is like investing in Latin America, where there's a junta around every corner. You could defacto lose your assets almost overnight.


I think that M2M is adding a form of positive feedback loop into the system. And that's not a positive thing, such loops inevitably lead to systems that oscillate out of control.

OBloodyHell said...

> Certainly, M2M better reflects actual value as compared with historical cost.

It reflects the instantaneous value of the object. This is relevant to anyone who is thinking of investing in the company, as the company might be attempting to get a cash infusion to stave off the inevitable.

Suppose you bought comic books during a market high. Suddenly, there's a huge, crash in the value of comics, they drop to the point where they are 5% of what you paid. Now, you know, with experience, that that's ridiculously undervalued most of the time -- that, while it might be a LONG time before the value gets back to where it was, in two years, the value should be back to half to 2/3rds of what you paid for it. At that point, selling them might hurt but it wouldn't be ruinous.

If you have no reason to sell, would you choose to sell then at that 5% price? Of course not!

But it's clear that is what happened with M2M and many of the assets when the market crashed.

Suddenly, companies which had some of these assets were valued instantaneously as worth far less than their outstanding credit. The fact was that they had operating capital to continue in business (or did not require much), and could have continued operating through the downswing under the old rules until the value of those assets got back to something "unpretty, but not ruinous", with very low risk to anyone and everyone involved.

Instead they were legally bankrupt, and had no choice but to sell off their assets all at these firesale prices. Someone got damned friggin' rich by having ready cash available.

I think, as I've said -- M2M is a valuable piece of information on a company if I'm considering giving them more of my money. It means they can't claim they have a million and a half buggy-whips valued at the selling price of $3 each, and tell me that's $4.5 million in assets.

I can look at that, and say, "That's never going to be worth that ever again", and so not consider it in my calculations as to whether or not the company will recover.

But if they have land that they paid $60 million for, is probably (by my estimate) worth $35 million in a standard market that I expect to apply in 2 years, but right now is only worth $10 million, then I can value it appropriately and choose to give them credit to continue in business.

But if they have to go to the courts because that missing $25 million means their assets are worth 1/3rd what they need to be to stay out of receivership, then that company is just f***ed.


In short, in volatile circumstances, M2M has NOTHING to do with "fair market value"... because it's not a fair market at the moment.

Suppose I'm flush with cash, I buy a mfg-grade drill press for $3,000. Then I get desperate for cash due to being out of work for months, as is everyone else. If someone offers me $50 bucks for it, and I can't get any better offers due to the moment, is that "fair market value", or is is an unrealistic and highly atypical fire sale price? How would you list that press's value in an insurance appraisal -- by the momentary value of $50, or by some far higher value that would represent what such things typically sell for?

That's why M2M isn't a good indicator, and has potentially nothing to do with "fair market valuation" of an asset. It's valuable info to a creditor because it tells them if the company does go under, what their risk is. But it's not a good representative component of the overall state of a company in many situations due to market volatility.

OBloodyHell said...

P.S. this country is looking more and more like the Wiemar Republic.

I hope that's wrong but the result will not be pretty if it's even vaguely close.

OBloodyHell said...

> But is it better in the long run quickly to recognize and account for distressed assets, rather than falsely presuming they remain part of a bank's capital assets?

I'm not saying it should not be available information. If they really are worthless assets, then the creditors won't credit and the company will go into receivership as it should.

But most of these things are properties, land, and buildings. Their value is hardly likely to be 10% on the dollar, which was what many of them were valued at at the bottom. And if they are, that's the creditor's jobs to best assess, isn't it? If they think it's accurate, they won't grant credit to the company, and the company will go under without m2m forcing them under.

If they can continue to swim or float, that's ok. I see no reason to fill the pocket of their cargo pants suddenly with lead sinkers.

There was also the cascade issue -- the companies had lots of intersecting financial valuation, so one company went under, so another company, which had shares in that company suddenly went under, which made a third, then a fourth, then a fifth go under.

That was part of the reason for the terror out there and why the Fed almost had to step in, to stop the hysteria. Suddenly NO company could be trusted, and the financial system locked up like someone in an epileptic seizure.

It was like the banking crisis back in, what, 1931, when lots of completely solvent and well-run banks went under solely because the panic created a run on the industry.

I think that's a key part of it -- it's one thing to see one company go under, but when that many go under or are threatened with going under all at once, you should not just assume "bad management". It may be "bad operating procedures" -- and who controls all of that?

Can you say "F E D"? I knew you could... (well, perhaps with your headcold, maybe not)...

bobn said...

Mark Perry uses the single feeble statistic of the *number* of bank failures to minimize the problem.

This is not unusual. As an even more spectacular example, see here for a spectacularly lame econ blog post ever. (Short refutation: said post uses technological progress [and the single scope of the Sears catalog] to cover up the fact that today's 20-somethings face a very bleak future in general.)

This guy just has no clue of the clusterf**k we face, which if anything is worse than what we faced in fall of 2008 - Obama/Geithner continuation and "enhancement" of the worst of Bush/Paulson policies, combined with Obama's own liberal deficit-exploding, energy-taxing wackitude, has postponed the enevitable a little more, while making it more inevitable.


The real problem, however, is that the biggest banks, whose failures would be nukes relative to the firecrackers now going off, have been propped up - through FRB guarantees, "loans" against the dodgiest of collateral and guarantees; through FDIC guarantees of debt issuance; through the money-laundering operation that was the AIG bailout, which funneled $12 BILLION to Goldman-Sachs alone; all these have masked the true problem - using taxpayer money in the present and the future to do so.

We didn't like the diagnosis, so we touched up the x-rays, then placed the patient on life-support involving tubes in and out of every natural orifice, plus a few more openings made for the purpose - and we congratulate our selves on the patients condition - and now Mark Perry uses the single feeble statistic of the *number* of bank failures to minimize the problem.

Carl said...

bobn:

I think you mis-read this piece. I posted Perry's chart precisely because he backed his optimistic conclusions with percentage-of-failed-assets data. As previous comments to this post address in some detail, that number is comparable with prior recessions and do not falsely "minimize" anything.

bobn said...

Well, other than the fact that Perry used *2* silly, irrelevant statistics instead of one, I stand by my post. The banks that are being allowed to fail are small fry. The big problems are being swept under the rug - including on the FRB's balance sheet, about which you display such interesting dis-interest - as well as guarantees of toxic sludge by both FRB and FDIC. Oh and FHA is getting ready to blow too.

I will say this - since Obama was sworn in, I agree with you on just about everything else. Hell, even Sean Hannity sounds sensible, most of the time, these days.

bobn said...

OBH said:

But most of these things are properties, land, and buildings. Their value is hardly likely to be 10% on the dollar, which was what many of them were valued at at the bottom.

Actually these things are tranches of MBS which were theoretically secured by the physical assets you note. Because of the arithmetic involved in the tranching, relatively low deliqnecy rates can completely wipe out many of the non-super-senior tranches completely. And the drop in real estate prices means these are no longer secured loans. I believe that you are too rapidly dismissing the market's judgement on these securities - many of them are complete garbage.

Suek, I've been reading Denninger a lot. Although he occasionally goes over the top, I believe he is mainly right. His recent graphs, showing the S&P 500 movements as the direct inverse of dollar movements, are fascinating and frightening. Jesse has a slightly different but related take here. Note that, once denominated in gold instead of dollars, that the rally is quite anemic *and* how much earlier the crash started when viewed this way.