Back in the 1950s there was an infamous novel written called An Anatomy of a Murder (later made into an historically well-regarded movie) that dealt frankly with issues such as rape and murder that were viewed as being rather unseemly subjects for the time period in which the storyline was brought forward.
In recognition of that ground-breaking novel and movie, I feel it is time to lay the foundation for a new story covering somewhat different, but still unseemly issues, of our more contemporary time period (the 2000s).
And in so doing, with this article I propose to call this new story, An Anatomy of a Banking Crisis. As a preview of An Anatomy of a Banking Crisis, I offer Exhibit 1, which I have called Anatomy of a Banking Crisis Thru the Accounting Eyes of Provisional Losses and Charge-offs.
Now yes I know, that’s hardly a title grabber, but bear with me—regardless of how dull the terms I use may be, I think its best to stick with the terms that the accountants give us. Besides, who ever said a story dealing with Banks should be sexy anyway?
Now check out Exhibit 1.
Exhibit 1 shows the actual amount of Quarterly Loss Provisions and Loan Loss Charge-offs reported prior to the current banking crisis through to the present and then with future estimates projected. Now using Exhibit 1, here are a few things that you can learn from this first part of An Anatomy of a Banking Crisis.
One, the current Banking Crisis began to show itself in mid-2007, more than a year before TARP and even a long before we learned through President Bush in the summer of 2008 that “Wall Street had been getting drunk”.Early in 2007 the amount of bank loans that fell behind on their monthly payments (called non-performing assets-or NPAs) had already begun to rise.
Two, when loans fell enough behind in their monthly payments (typically around the 90-plus day delinquent period), banks began to set monies aside to cover for estimated future losses associated with these NPAs. These set aside funds, called Provisions for Losses, were recorded as such as “expenses” on the bank income statements.
Three, Loss Provisions are projections for losses and they lead the accounting for actual “real” Loan losses in the form of Charge-offs. Thus, although delinquent non-performing loan assets still remain as assets on the books of the bank, the losses associated with those assets have already generally been accounted for on the income statement as Loss Provisions before they are removed for good off the books.
Loan Loss Provisions for non-performing loans that have yet to be foreclosed and actually written off the books, thus essentially go into a “reserve account” called Loan Loss Allowances (or LLAs), a contra-asset account, reducing Equity. Then when the loan is actually foreclosed upon or otherwise actually written off the balance sheet, the real loss is taken and the Loan Loss Allowance contra-asset account is reduced appropriately. Most mathematicians looking at Exhibit 1 would thus be interested in the area below the two curves shown in the Exhibit.
Because the area below the two curves, once you subtract away an appropriate amount to cover for the amount of pre-crisis losses expected per quarter, offers a way to measure the magnitude of losses taken by the Banks during the entire crisis.And it should not matter which curve area you look at—both should come up with the same result. OK, so what if we actually performed this mathematical wizardry on Exhibit 1? What would it tell us? What it would show is that the total “anatomical weight” or “direct amount of losses to the banks” for the current banking crisis is projected to be $581 billion.
Whether this number is higher or lower than the reader’s expectations is not a mathematician’s concern—it is based upon actual accounting records and reasonable future projections. OK, let’s move on to another introductory chapter in An Anatomy of a Banking Crisis.As an intro to this new chapter, however, I feel it is necessary to mention that my company, Quanta Analytics (QA), in conjunction with Yates Management (Ymgt), has been evaluating the portfolios of 115 banks listed on the stock market exchange in an effort to better understand the operations between the “good bank guys” and the “bad bank guys”.
And although our work is still in its preliminary stages, some of our early findings are still deemed suitable to share. With that said, I offer the reader Exhibit 2.
Exhibit 2 shows the aggregated amount of current non-performing assets (NPAs) and the amount of Loan Loss Allowances (LLAs) by different categories: (1) as an industry whole; (2) the combined portfolio of the Big Four banks—JP Morgan/Chase, Citigroup, Bank of America, and Wells Fargo; (3) the combined portfolios for the other QA/Ymgt 111 stock market banks under evaluation; (4) the combined portfolio of all other 7,500 plus FDIC-insured banks; and then finally (5) for each of the Big Four bank portfolios separately.
One of the more important anatomical findings we can glean from Exhibit 2 is that the banking industry as a whole has currently set aside (thus taken losses) of 64 cents for every dollar of current non-performing (or loan delinquent) assets on the books.
Now why is this important? It is important because if “actual” losses end up costing less than 64 cents per current NPA dollar then the banks are going to be able to recover some of the projected $581 billion of losses shown in Exhibit 1. And if the “actual” losses end up becoming greater than 64 cents per NPA dollar then total bank losses are likely to be greater than otherwise projected. So which way will it go?
Based upon my own gut and previous banking crisis experience, my bet is that total banking losses for this latest crisis will actually end up being less than the $581 billion projected. But regardless, I also know, based upon the above and other anatomical banking research that I have done that: (1) not all banks are created equal, and (2) as shown if you look at the some of the more detailed findings of Exhibit 2, that not all banks have been doing the same form of loss estimating and accounting for their non-performing assets.
And with that said, I believe that is enough Anatomy for a Banking Crisis today. But just in case the reader is interested in some additional head work and would like to see the list of the 400 plus Banks that Quanta Analytics feels are truly in trouble for 2011 and beyond, that list, sorted in worst troubled bank order, is freely available in the banking section of the Quanta Analytics website (quanta-analytics.com).
Since putting the QA list out in early December 2010, the FDIC has shutdown 31 banks and 28 of those were on the QA list. The order sequence of those FDIC shutdowns on the QA list follow: 1, 2, 3, 5, 6, 9, 10, 11, 12, 13, 14, 17, 18, 20, 22, 27, 28, 31, 32, 35, 40, 51, 67, 155, 178, 184,and 247.
And for those of you who doubt, I believe that should tell you something about both the FDIC and Quanta Analytics. And I think it also should tell you something about Quanta Analytics knowledge of banking anatomy.