There were seven bank failures today: Partners Bank, American United, Hillcrest Bank Florida, Flagship National Bank, Bank of Elmwood, Riverview Community Bank, and First Dupage Bank. None of these are particularly large; these are failures 100 though 106 for the year. Karl at Market Ticker is very annoyed that Partners Bank was allowed to degrade so severely before being taken over, and explains why: "the FDIC not only allowed all of the firm's Tier Capital (that is, their EXCESS CAPITAL) to be wiped out, but then allowed the bank to continue to operate until its asset base was destroyed to the tune of 43% of "face value" before stepping in and closing the institution. Prompt Corrective Action - a LAW, not a suggestion - is supposed to prevent this outcome."
FDIC Chairman Sheila C. Bair took the opportunity today to reassure everyone that they're still there, but curiously states that "We are the government... we cannot run out of money." She also talks about the advance in FDIC insurance payments from banks and the "line of credit" they have with the Treasury.
Tonight, I'm trying to take a stab at the actual nonborrowed reserves of banks. As many of you may recall, the BOGNONBR series I used to follow became useless when the Fed conveniently redesignated a lot of borrowed reserves (from the Fed, et al) as nonborrowed. This is what we in the business call "lying." It's on top of a second lie, in that in a very real sense these taxpayer-funded loans aren't really loans. As you can see in these tables, the actual data is... essentially nonsensical. All this has had a lot to do with the various efforts to audit the Federal Reserve, because we genuinely have very little idea what it's really doing.
But if you include all the "nonborrowed" yet "borrowed" yet "not really borrowed" money, you see the banks are stacking up cash at a phenomenal rate - the 21 October preliminary number (not seasonally adjusted) is over US$781B, and total "reserves" (including actual borrowed) is around $1,046B, or nearly$1.05 trillion with a T dollars. Take out the "nonborrowed" "borrowed" money that we know about in very rough terms, and we're still looking at US$80B or so in reserves, a number that looks frankly like peanuts at this point. But for comparison purposes, I point you to the long-lost time of 2007, before all this started to implode, and you can see that the banking system is supposedly at nearly twice the level of actually non-borrowed non-borrowed reserves as normal. At lowest, you're looking at 1.6 times normal. Yet rather than looking at an actual wind down, the Treasury is looking for an unlimited bailout power, with unlimited ability to draw on taxpayer funds.
This ain't right.
Hedgie doesn't think it's right either. He's going at it from the Fed Balance Sheet Assets side, where it looks even stranger. He has a similar amount of total bank borrowings as I do. (His number is a little higher, just over US$1T.) But it's stranger than that. To let Hedgie explain in his own words:
Total bank reserves with the Fed hit an all time high, surpassing $1 trillion, as banks continue to hoard cash. The amount of extra lending that could have taken place but didn't was $65 billion week over week, or a $130 billion increase in just the past month. Keep in mind this is a very confusing datapoint especially in light of recent reports that the Fed's $100 billion reverse repo test was a failure, meaning despite the $1 trillion in cash presumably with the Fed, any liquidity slack in the system does not exist.Emphasis added. This probably indicates in part that many bank book assets are still marked-to-myth, or rated at values they'll never sustain in order to avoid bankruptcy, but... I don't think that this is all. Partly because the numbers are still climbing.
I think it might have to do with the Commercial Real Estate failure wave that's about to hit. Seattle is the worst in the US, with a 32.7 percent delinquency rate for construction and land loans. We sat out about half the housing bust; we may not do so well in CRE. But everyone knows this is coming; why are so many banks in such a hurry right fucking now to get cash in house?
It might also be commodities. Dr. Roubini at RGE Monitor thinks oil is overpriced, but more importantly, that this is part of a speculative commodities bubble fuelled by the US dollar carry trade, and it'll pop badly, soon. There are persistent rumours that banks have been heavily involved, particularly in oil - as they were a year and a half ago - but we don't know.
This isn't the only way banks are trying to acquire hard cash. I already posted about Citibank and Infibank's shenanigans earlier today, but they aren't alone. Bank of America plans credit card annual fees for borrowers who pay off every month. (Side note: Interestingly, it looks like BoA CEO Ken Lewis lied to the feds to get $20B not to cancel the Merrill Lynch merger. That's fun.) And Citigroup has started levying fees on some cardholders who don't charge $2400 a year or more. Both of these banks have very high exposure to "riskier credit card borrowers," but both also just want a lot more cash any way they can and are willing to lose a lot of customers to do it.
Everybody's preparing for something. I just don't know, exactly, what.
Anyway, here are other items to follow for the weekend. Enjoy:
US Dollar Update:
US dollar bulls, here's your thesis, by Ambrose Evans-Pritchard of the Telegraph. The third attempt by the US dollar index to break substantially below 75 failed, by the way. The Telegraph article talks about Britain being one of the Sick Men of Europe; that's certainly validated by the shock third quarter economic decline in the UK.
Dollar bears, please enjoy Lazard Asset Management dumping the US dollar entirely in favour of Pound Sterling. Oh, and some Latin American countries have put together a regional currency called the Sucre for inter-state trade; The Australian (newspaper) says the "move echoes the European Union's introduction of the euro precursor, the ECU, an account unit designed to tie down stable exchange rates between member states before the national currencies were scraped." This isn't considered a big deal for the US dollar, but I note it.
Sales of existing houses jumped sharply in September as people rushed to meet the tax credit deadine for purchases. (NAR press release here.) Some call the median price falling to $174,900 the bad news hidden in the report; I don't, since that's getting kinda-sorta close to historical average as a multiple of income. I call that good news. The bad news is that the shrinking reported months of inventory ignores the seven million houses in the foreclosure queue. Everyone's expecting sales to drop though the floor again after tax credit expiration (c.f. auto sales after the end of Cash for Clunkers) so you're seeing calls for an extension and expansion. (See also here.) Next month will be interesting, obviously.
Delinquencies on existing mortgages continue to rise, with Freddie Mac's September delinquency rate at 3.33%, up from 3.13% in August, and from 1.2% in September 2008. Hedgie has more to say on this topic here.
Union Pacific notes that rail traffic has stabilised, but "at very low levels." Still, "not going down" anymore is good.
Mish Shedlock looks at the weekly unemployment claims report, and thinks we're solidly past peak for this cycle - but are still far above the level yet needed to see reductions in even the official unemployment rate.
60% of small businesses report cash flow issues, which is above one year ago. Part of this is decreasing credit availability, part of it is larger firms changing payment schedules from 30 days to 120 days. This is all worse than one year ago.
And that's all for now. Be careful out there, people, and good luck.