Deficits, Dollar, Individual v. Collective, Live and Learn

Good News from the Latest FDIC Bank Reports

Have loan delinquencies peaked?

By Jim Boswell, author of Crush Depth Alert

Yesterday (Tuesday) the Federal Deposit Insurance Corporation (FDIC) made public the bank-reported financial information for the second quarter 2010, and if you did not hear the good news from them, then now you can hear it from me. The news may be counter to that of the doomsayers, but nonetheless, every bit of good news should count in these days of negativity and doubt.

As reported for the period ending June 30, 2010, the banks have crossed a significant threshold. From here on out, expect things to get better.

For those of you who are not familiar with tracking delinquent loan information, Exhibit 1 shows the reported history of all the delinquent loans (residential, commercial, credit card, etc.) for all the banks who are insured by the FDIC from the fourth quarter of 2001 to yesterday’s reported second quarter of 2010.

Exhibit 1:

Let's hope a downward trend materializes.

For the first time since this Greatest Recession Since the Great Depression (GRSGD) began, bank delinquencies on the books of the more than 7800 banks that report to the FDIC are on the decline.  And Exhibit 1 shows the first point on what should continue to be a downward trend as loan delinquencies return to pre-GRSGD levels over the next few years.

Skeptical?  Then consider that this decline holds for every category of delinquency reported, which includes loans 30-90 days delinquent, loans more than 90-plus days delinquent, and loans essentially that are in foreclosure or will need to be written off.  Previous history (e.g., S&L crisis) shows us that as a result of a financial breakdown delinquencies rise, but there is a subsequent decline in somewhat the shape of a normal curve, and yesterday’s new data point is the first sign that the downward trend is beginning to take place.

Still skeptical?  Then consider that the sum total of the loan loss reserves as reported on all the banks’ balance sheets declined this past quarter, as well as the net income loan loss provisions and net charge-offs. This is the first decline in the loan loss reserves since those reserves started rising in the second quarter of 2007, and it is the second quarter in a row that loan loss provisions and net charge-offs have dropped.

Six month (year-to-date) income for the banks as reported yesterday is $40 billion and up for the second quarter in a row.  Although this level of income generation is only a little over 50% the level of the average quarterly composite net income prior to the GRSGD, it is significantly better than the total negative $8 billion in income that the banks reported for the entire nine quarter period prior to this calendar year.

With this FDIC supplied information we can now begin to calculate the true cost to the banks for the mistakes they made and which helped lead us into the GRSGD.  Considering that prior to the GRSGD the banks were on track to make a little less than $40 billion a quarter, then the losses to date have been approximately $400 billion.  Considering that most of these losses have already been accounted for and that bank net income is on track to return to pre-GRSGD levels, I estimate total bank losses will end up being approximately $500 billion.

Add to that the losses attributable to AIG, Fannie Mae, and Freddie Mac and the total cost to the major players involved in the housing financial fiasco (including the taxpayer) will come in under, but probably close to, $1 Trillion.

Now I do not mean to play down the significance of $1 Trillion in losses; however, compared to the doomsday projections that were being made early on in the GRSGD, we should be happy that the bill is no larger than it is.  Compared to the S&L crisis, the GRSGD is about 2-3 times worse after inflationary effects are factored in.  So yes, the GRSGD deserves its title, but the numbers do not justify continued panic or concern, and it is time we quit referring our current situation in relative terms to the Great Depression.

The only reason for a “double-dip” recession is if we concede to fear and negativity—generated and promulgated by the doomsayer economists who seem to love to babble about history that took place nearly eighty years ago and has no relevance to today’s globalnomic environment.

One trillion dollars?  That’s a lot of wasted money, but the bill is already mostly paid.  We don’t need to pay it a second or third time.  And based upon yesterday’s facts, I say it is time to move on America.  Things are going to get better.  Yes, we have some other debts to be paid, and it is time we start paying them.  But don’t get discouraged.  Believe it or not, life is good, and so are most of our businesses—large and small.

The United States still operates the most powerful economy in the world and it is long past time that we start taking that responsibility seriously—something we cannot do if we are fearful and constantly complaining and negative.

So with that being said, I will leave with a few additional tidbits of good news relating to the FDIC information provided yesterday. The total Equity to total Asset ratio (11.40%) for the banks is higher than any prior period in this last decade.  Subtracting Nonperforming Assets from Equity results in a still somewhat low ratio when compared to Assets  (7.51%), but that is a significant improvement of more than 0.5% from just the quarter before.  And the banks “too big to fail”?  Well they all have been making money as well.  In fact, the four largest banks in the United States (JP Morgan/Chase; Citigroup; Wells Fargo, and Bank of America)  accounted for a little more than half of the $40 billion in year-to-date banking profits.

But despite all the above, if you still want to look at the darker side of things, feel free to ask for my list of problem banks for 2010 by emailing me at quanta.analytics@gmx.com.  There are still quite a few banks that still need fixing.

And you can take all of this to the bank and deposit it.

Jim Boswell has an M.B.A. degree from The Wharton School (University of Pennsylvania), an M.P.A. from School of Public and Environmental Affairs (Indiana University), and a B.A. degree from Hanover College. His recently published book, Crush Depth Alert, Fourth Lloyd Productions, explains in detail with supporting exhibits, graphs, and tables the factors that led up to the recent financial crisis while offering solutions on how to move forward.

You can purchase Crush Depth Alert here.

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