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alstry (36.08)

An Unsolvable Problem????

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August 12, 2008 – Comments (4)

At the end of the day, a bank's, insurance company's, and pension plan's assets are primarily loans that the institution depends on getting paid to generate income.

Many many banks are leveraged 3, 4, 5 to one and more.  In other words, if it has $100 dollars in deposits, it may have loaned out $500 or more depending on capital.

Here is the problem, if only 25% percent of its outstanding loans default, all of the deposits could be wiped out.  Right now, most bank debt is focused on residential and commercial real estate debt.  Many smaller banks have the majority of their outstanding loans dependant on commercial real estate debt.  This area is really beginning to heat up as far as defaults go.  In the next few days you will likely be reading about a few more banks failing.

Most of our country's assets is debt.  In order to hold its value, debt must perform.  The problem is as income falls at faster and faster rates....more and more debt is defaulting at the municipal, corporate and individual level.

As debt defaults, banks can't lend causing even more defaults.  As the spiral grows, the economy slows as business after business shuts down and job after job is eliminated.

At this point, lots of people are sitting there wondering what is going to happen next.  Never in our nations history have so many been unable to meet their obligations......and we are just beginning.

How do you finance $40 Trillion in debt with only $5 Trillion in the bank and not enough revenues to service the debt?

Not only that, we have a huge wave or people retiring thinking they will be supported by the few below them who are going broke............very interesting times indeed.....no wonder Paulson seems beligerent every time he speaks....

 

4 Comments – Post Your Own

#1) On August 12, 2008 at 5:23 PM, DemonDoug (35.21) wrote:

if the ratio was only 5 to 1 banks would probably be okay.  the problem is banks are leveraged at 20 to 30 to 1, this is really bad, and people defaulting are killing banks.  New Century and other guys like that were leveraged like over a 100 to 1.  Bad bad bad.

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#2) On August 12, 2008 at 5:52 PM, alstry (36.08) wrote:

I know...but I like to be conservative in my analysis.  Here is one for you and just look at what there are calling "safe:"

APPLE VALLEY — After aggressively pursuing home construction loans during boom years, High Desert Federal Credit Union is now reeling from the weak real estate market.


The credit union is coping with 20 percent of loans at least two months delinquent and income losses totaling nearly $4.7 million for the first six months of this year, records show.


While the figures are sobering, credit union officials and independent credit union analysts say the institution remains solvent and safe and that deposits are federally insured by at least $100,000. Individual retirement accounts are insured up to $250,000.


“The real estate market has really had an adverse effect on banks and credit unions alike, and obviously High Desert was not immune to that,”said Ralph Ramirez, a spokesman for the Apple Valley-based credit union. “We’re taking each loan, each member, case by case, because each member has a different story to tell, and we want to do everything that we possibly can to meet their needs to help them recover.”


The rate of accounts delinquent by at least two months reported by the credit union has more than doubled since March, from 8.7 percent to 20.45 percent, which leaves the institution with $24.7 million in delinquent loans, according to NCUA records. Meanwhile, the amount in foreclosed and re-possessed properties has jumped from $340,155 in June 2007 to over $4 million in June 2008, the records show.


The credit union has taken several actions to improve the situation. In addition to cutting expenses across the board by 12 to 15 percent over the past seven months, High Desert Federal Credit Union downsized its full time workforce from 82 in December 2007 to 65.5. The company has also set aside $3.6 million for loan losses, up from the $600,000 set aside in February. About $2.8 million of the loan loss provisions are due to home construction loans, where members who built custom homes became overextended or could no longer afford to make payments, Ramirez said


The current capital ratio for High Desert Federal Credit Union is at 9.01 percent, slightly up from its June 2008 report of 8.85 percent. But it is still below the 10.62 percent first quarter average for California credit institutions, according to Terrin Griffiths, economist for the California Credit Union League.

http://www.desertdispatch.com/news/percent_4041___article.html/rate_apple.html

"Independent" credit union analysts call this institution safe??????????????????  Can you imagine what the unsafe instititutions must be like???? How long can the American public be lied to?????

 

Here is the problem Demon....the bank is reserving only $3.6 million for almost $25 million of delinquent loans.  Most of those delinquincies is for construction loans probably worth pennies on the dollar.  Not only that, the defaults have more than doubled in one quarter.

Just by looking at the trend the outlook is terrible.....but if you marked your delinquencies to market.....the financial picture of this institution would be very very different.

My guess is that there are thousands of banks and credit unions employing the same behavior.  The regulators know this and are trying to avert a panic.

Everyone is just sitting there with their thumbs up their backside hoping things don't get worse as conditions deteriorate every day.  At this point, I don't think you can conceal it much further....it will likely be very very ugly.

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#3) On August 12, 2008 at 8:37 PM, rd80 (97.59) wrote:

Same article states the average delinquency rate for credit unions across California is 0.93%.  That's delinquency, not default.

99.17% of California credit union loans are current.  Maybe the world isn't ending after all.

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#4) On August 13, 2008 at 7:38 PM, jegr5347 (< 20) wrote:

"Many many banks are leveraged 3, 4, 5 to one and more.  In other words, if it has $100 dollars in deposits, it may have loaned out $500 or more depending on capital."

Please review a bank's balance sheet before making an irresponsible statement like this. It is impossible for a bank to lend 5x deposits. A bank needs to be overcapitalized, meaning its capital exceeds deposits by 5x in order for that formula to work. If that were to happen, the entire management and board of directors would be fired because ROE would be nill. How can a bank lend 5x deposits if its physical availability of cash is limited to the money you and I deposit in checking and savings accounts and that shareholders contribute to capital.

For example, Suntrust Banks had $119 billion of deposit liabilities and $124 billion of net loans (assets) at 6/30/08.

 

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