This if the first of four articles that I have written exclusively for Business Insider that will do much to explain the financial and operating impact on the banking industry since the industry first began to recognise at the beginning of 2007 the cost attributable to their misguided ways.
The findings that are provided herein come from the compiled analysis of the standardized call reports submitted quarterly by each of the more than 7,300 FDIC-insured institutions to the Federal Financial Institution Examination Council (FFIEC) and the Office of Thrift Supervision (OTS).
The findings herein are based upon an eighteen-year historical analysis of those call reports by my newly formed “think tank” and consulting firm, Quanta Analytics.
A wise man, Hyman Rickover, one said: “Sit down before fact with an open mind. Be prepared to give up every preconceived notion. Follow humbly wherever and to whatever abyss Nature leads or you learn nothing. Don’t push out figures when facts are going in the opposite direction.”
Now with that being said, I am going to provide you with the facts that go against some of the figures and theories that many of the doomsayer economists and pundits like to throw out in the hopes that maybe the world and the United States will in fact go to hell and they might just get their “fifteen minutes of fame” for predicting that dismal future. So here goes:
The bank bill is in at $550 billion. The worst is over and the full bill has already been paid by the banking industry.
How did Quanta Analytics (QA) come to this conclusion and this definitive $550 billion figure? The easy answer is: QA came to this conclusion by performing generally accepted standard, fundamental accounting and financial analysis on comprehensive reliable data. The more detailed answer follows:
When looking for losses in business, the first place one should look is at the history of income as reported in the income statements of the business or industry. Gains and losses hit the income statement before the balance sheet. Before actually “writing off” losses on the balance sheet, banks first take those losses as “provisions for losses” on the income statement.
Not surprisingly, when QA analysed the compiled income statements of the banking industry and compared it against historical trends, it noticed that not only could it determine the amount of the banking bill by looking at “provisions” and “write-offs”, but that it could also determine how the banking industry paid the bill. And to date, since the beginning of 2007, the banking industry has accounted for $550 billion of provisions.
Of that $550 billion of provisions, approximately $380 billion has been already written off of the balance sheets of the industry books, and the other $170 billion now sits in what is now a total accumulated pot of reserve funds on the balance sheet, called “Loan Loss Allowances”, that will cover “all the real” future losses associated with the “now declining amount” of delinquent loans on the books of the banks.
Yes folks, delinquent loans on the bank books are declining. In fact, they have been declining for nearly three straight quarters now and in all loan categories–whether we are talking about 30-90 day delinquencies, 90 plus day delinquencies, or delinquencies in the foreclosure process—or whether we are talking about delinquencies relating to real estate, commercial, farmland, or individual loans. I will talk about this more tomorrow as I explain in detail in what loan categories the $380 billion of losses have already been written off and in what loan categories most of the future write-offs will take place.
But Jim, you said the banks have already paid the $550 billion bill. That’s a little hard to believe. How in the world could they have done that already–$550 billion is a lot of money?
Here is how. Firstly, over the last four years since the beginning of 2007, the banks have managed to increase the interest rate spread between the money they lend and the money deposited or borrowed, increasing their revenue stream by $214 billion. Secondly, over the last four years, the banking industry has paid $191 billion less in dividends than would otherwise have been expected from pre-crisis norms. And thirdly, the banking industry has paid $137 less in taxes as their net income declined. Total them all up, and guess what? You will see that the bill has already been paid.
Still can’t believe it? Then look at total Banking Industry Equity. Total banking industry equity as reported in the call reports as of the end of the 3rd quarter 2010 is $1.52 Trillion. Total banking industry equity, using the same source, for the end of the 4th quarter 2006 showed $1.25 Trillion.
Jim, I hear you, but you are living in a fantasy world. You can’t put any value to what those call reports are telling you—everyone knows that the banks are escaping the truth by not using mark-to-market accounting.
OK doomsayer, you have me on that one. But let me tell you something that you might not know. Mark-to-market accounting as you would like it implemented is a big fat joke.
90-five per cent of all the loans the banks have made are current and they have been current throughout this entire fiscal crisis. Most of those loans that you want to question or write down are owned by people who are still working in the same jobs or ongoing businesses that they were in before the financial crisis began. Those loans that those people made are actually safer loans today than they were back when the financial crisis first raised its ugly head.
So as a mark-to-marketer are you telling me that you don’t think the bank should count those loans at their loan value, but instead, write them down at some “unknowable, value that is changing every day” using some kind of esoteric accounting procedure that does not take into account the fact that people will do almost anything to stay in their homes or keep their credit rating credible?
If so, count me out of your own craziness. I am sorry, but I worked through the Savings & Loan crisis and your mark-to-market logic just lacks practicality and common sense. In other words, I accept the accounting of a loan at its face value, and I will stand behind QA’s analysis with confidence, knowing that in the long-term my statements will hold.
And for those of you who are interested in more banking industry facts, stand by for tomorrow’s article which will break down the banking industry’s losses with further detail.
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