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ThatDamnedPanda -> RE: "FDIC warns US bank deposit insurance fund could tank" (3/5/2009 10:42:38 PM)
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Here. In case anyone wants to read a little more about what I'm saying, I found one of the articles I saw about this. Actually, this one is over a month old, so the numbers may have changed since then. But if they have, I doubt they've changed for the better.
quote:
The math is not complicated. Bank losses from the write-offs of bad loans and busted derivatives tally up to $1.5 trillion so far. In addition, $5 trillion to $10 trillion worth of off-balance-sheet businesses such as structured investment vehicles -- leveraged lending vehicles used by big banks to fatten their profits in boom times -- are being forced back to banks' balance sheets by regulators. Rules require banks to keep a base of real shareholder capital amounting to 10% of those funds. So banks need to find up to $1 trillion within the next year to meet that objective. Add the $1.5 trillion in losses to $1 trillion in needed new reserves, and you can see that banks need as much as $2.5 trillion in new capital to remain solvent under current rules. I know that we throw around words like "trillion" like they're nothing, but that is a lot of money. Consider that the entire world banking system had only $2 trillion in shareholder capital in 2007, before everything blew up.
In aggregate, therefore, the entire system is simply insolvent, as liabilities are greater than assets. Governments aren't forcing banks to admit this, but investors are, and that is why big banks' shares have lost half of their value this year. Governments, meanwhile, are trying desperately to help banks plug the gap, but they're coming up short. When you add the $500 billion from sovereign wealth funds to the $500 billion from the first tranche of the Troubled Assets Relief Program, it's only $1 trillion. That's already been provided. So that leaves a gap of $500 billion to $1.5 trillion.
The easy way to fix this problem, of course, would be to change the rules: Tell the banks they don't need to keep 10% capital reserves. But that sort of glib solution only sounds good, and the reality is that in any normal business sense most of these businesses are ruined. ...
The best course of action, which would have been the most painful in the short term but beneficial in the long term, would have been to force banks to open all their books to regulators and investors, allowing us to see which were solvent and which were not. Then the Federal Deposit Insurance Corp., which is sort of a mini-nationalizer, could have closed the bad banks and merged their assets into strong banks, and we would be halfway through the crisis by now.Instead, the previous Treasury secretary, Henry Paulson, decided on this disastrous course of putting insolvent banks on life support at public expense, which has only led to a massive waste of money and time.
Gloom and Doom
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