Diversions To "The Special" Continue

The Market Ticker ^ | 8/31/09 | Karl Denninger

[FromLori]

Welcome to the FDIC's version of "let's screw the consumer" (again):

To encourage banks to pick through the wreckage of their collapsed competitors, the Federal Deposit Insurance Corp. has agreed to assume most of the risk on $80 billion in loans and other assets. The agency expects it will eventually have to cover $14 billion in future losses on deals cut so far. The initiative amounts to a subsidy for dozens of hand-picked banks.

Uh huh. And how are these "hand-picked" banks picked?

Oh, that will never be disclosed, right? There will never be an open process on that, will there?

The big issue here is that the so-called "loss projections" are, in my opinion, hopelessly optimistic.

Take Colonial. BB&T thinks the real valuation is somewhere around 37% off "face". The FDIC's assumption of 14 billion in loss against 80 billion in guarantees is 17% of face. Someone's wrong, and I'm willing to bet its not BB&T - after all, there has never been a penalty for making unrealistic projections of loss (or cost) in Washington DC, but when you do it in private enterprise you tend to get punished severely in the capital markets.

Never mind that BB&T has to love that deal. They can lose $500 million while the FDIC can lose fourteen and a half billion, should the entire portfolio prove worthless. That's a hell of a deal - for BB&T.

The FDIC claims that this is "cheaper" than assuming and selling off the assets itself. But is this true? Perhaps, under current conditions.

But those conditions - banks lying about asset values - are part and parcel of the FDIC's own making! Remember that John Dugan is on the FDIC's board (and is Comptroller) while John Bowman is the acting director of the OTS - both organizations directly responsible for banking regulation.

So where has that regulation been? Missing, that's where. Mark-to-fantasy has not only become a calling cry from the Congress, it has become a permitted action under the OTS and Comptroller - even though both, as regulators of the banks and thrifts, are empowered to stop it.

Now, having been derelict in their duty of supervision, the FDIC (which claims not to be a "regulator" per-se) comes in and offers what amounts to a government backstop on losses which should have never developed in the first place.

Let me be perfectly clear: In April of 2007 I wrote about Washington Mutual's payment of dividends not from current income but from capitalized interest, noting that the future collection of that money was a purely speculative bet - and a bad one, given the overheated state of the housing market. Colonial was also highlighted during the spring and summer of 2007 in The Ticker.

OTS, OCC and The Comptroller did nothing, and as a direct and proximate cause of these regulatory agencies allowing banks to get into seriously-negative equity positions, we have this mess - a mess that continues to this very day, with these very same regulators still refusing to do their damn job and shut down institutions that under any reasonable fair-value standard are and have been insolvent for more than a year.

It is time to stop pussy-footing around with the revolving door and interlocked nature of these institutions. The FDIC and its board is and has been directly responsible for these losses due to their refusal to follow the law - "Prompt Corrective Action" - along with an utter lack of common sense.

[AliVeritas]

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