The true cost of closing failed banks

The FDIC's true cost of closing failed banks into receivership is much higher than initially calculated, thanks to the FASB's "pretend and extend" false accounting methods. This "cooking of the books" throws out GAAP "mark to market" accounting, and overstates the value of toxic assets, in an attempt to feign bank solvency. In the final analysis, this will just be another larger burden on the US taxpayer.

Jim’s Mailbox

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Information released by the FDIC in connection with each new bank closing has been giving us a peek into the real condition of U.S. banks one year after the Financial Accounting Standards Board (“FASB”) suspended fair value accounting requirements. Across the board, we are seeing that banks have radically over-valued their least liquid assets on the basis of a fantasy called “hold to maturity.”

Banks’ fantasy valuations are put to the test when it becomes incumbent upon the FDIC to close the bank and protect depositors’ assets. At that stage, the FDIC has to find a willing buyer for the assets and fair market value is established. As a result, it is now costing the FDIC unprecedented amounts to close banks.

The problem actually goes one step further. As we know, the government’s current economic policy is one of Manipulation of Perspective Economics (“MOPE”) and Pretend and Extend. MOPE does not permit too much bad news to be released at any one time, and Pretend and Extend puts problems off to the future on a presumption that conditions will be quickly improving.

It would be too much bad news all at once to let it be known what banks’ fantasy-valued assets are actually worth. Therefore, instead of selling off banks’ assets “as is” and taking its lumps all at once, the FDIC is now routinely entering into loss-share agreements as to virtually all the assets sold. That allows the FDIC to not have to book the full extent of its losses at the time each bank is closed, but is also leading to the FDIC taking on the risk of huge future losses.

The FDIC is already broke, so any future losses it takes on are liabilities of the U.S. public. The combined policies of MOPE and Pretend and Extend are once again making it inevitable that quantitative easing must continue indefinitely.