Banks: Still too big, Still can't fail (so much for financial reform)

The biggest banks are bigger than

they were before the last crisis.

The Wall Street Journal
March 5, 2011

The 2010 Dodd-Frank law was sold as a way to prevent future bank bailouts. But so few people believe it that Sheila Bair, chairman of the Federal Deposit Insurance Corporation, has embarked on a campaign to convince the markets that next time really will be different.

On Friday Ms. Bair sent a letter to Standard and Poor's, the giant credit-ratings agency. S and P, like most of the financial community, suspects that Washington will open the checkbook again when Wall Street stumbles. Therefore the firm has given the largest financial institutions higher credit ratings to reflect this potential government support.

Ms. Bair's note assures S and P that she will put the wood to big banks and their creditors if they end up in the FDIC's new resolution process for systemic firms. Therefore, she argues, the giant banks should no longer receive higher ratings, because Uncle Sam isn't coming to their rescue.

We guess the financial crisis really is over when a senior federal regulator feels confident urging downgrades of big banks. And on the merits, if Ms. Bair were the only Washingtonian with a say in this matter, investors might start to believe that the freedom to fail really has been restored.

But investors are still expressing a different belief. Recent data from the Federal Reserve and Ms. Bair's FDIC confirm that the biggest banks still enjoy advantages over their smaller rivals, and by some measures these advantages have been growing since the July enactment of Dodd-Frank.

The FDIC data show how much banks pay to borrow money. One would expect that if Dodd-Frank really eliminated the possibility of government assistance for the largest banks and their creditors, then such creditors would be no more or less willing to lend to the big banks than to their smaller competitors. But in the second half of 2010, right after the passage of the law, banks with more than $100 billion in assets clearly enjoyed a lower cost of funds than banks in every other category.

While the FDIC collects data on banks, the Federal Reserve collects data for bank holding companies. Its data only go through the third quarter, but they also show a funding advantage for the biggest players. And an analysis by Mike Mayo of Credit Agricole Securities (USA) shows that for all of 2010, the 10 largest bank holding companies, on average, paid 29 basis points less on interest-bearing liabilities than the next 40 bank holding companies.

The FDIC concedes that big banks enjoy funding advantages, but not because the government will bail them out. The agency says the product mix at large firms helps them do especially well in low-interest-rate environments like the current one.

The FDIC has a point. The big banks also enjoyed particularly cheap funding relative to competitors in the 2002-2004 period of very easy money. And whereas academic research once suggested that banks couldn't draw much additional benefit from economies of scale once they had grown to a few hundred million dollars of assets, more recent data suggest that even the biggest banks can gain efficiencies as they grow and deploy automated systems across vast territories.

But the big guys have been enjoying free money for years since the crisis, and the benefits of scale for even longer. If Dodd-Frank was really working as advertised, wouldn't the loss of special government protection create at least a competitive speed bump? Some claim that mandated capital raises after the crisis have made them a safer investment, but those changes were underway long before last summer's passage of Dodd-Frank.

What's remarkable about the FDIC data is that the biggest banks seem to be accelerating through the first months of Dodd-Frank. Looking at the FDIC's data on non-deposit, interest-bearing liabilities, the big guys' funding advantage over the other banks in the second half of last year was even larger than in the first half—before the great "reform" was enacted. The funding advantage enjoyed by banks with more than $100 billion in assets over those in the $10-$100 billion range rose from 71 basis points in the first quarter to 78 basis points in the third quarter, which began with President Obama signing the bill and proclaiming an end to too-big-to-fail. The advantage increased to 81 in the fourth quarter. It's good to be the kings of banking in a Dodd-Frank world.

In a Wednesday visit to the Journal, Kansas City Fed President Thomas Hoenig said that the banking giants' "huge" edge over their smaller rivals is due in large part to government support.

Yes, there is new authority for Ms. Bair's FDIC to resolve large institutions, but will it even be used? In a recent speech, Mr. Hoenig noted that "there are important weaknesses with this framework. In particular, the final decision on solvency is not market driven but rests with different regulatory agencies and finally with the Secretary of the Treasury, which will bring political considerations into what should be a financial determination."

Mr. Hoenig reminded us that the biggest institutions are even bigger than they were before the financial crisis, and that he expects more bailouts of financial giants in the next crisis, regardless of "who the Secretary of the Treasury is." That sounds right to us, which is also what the market is saying. Dodd-Frank is making the big banks bigger and more protected than ever against failure.

Mike Mayo on CNBC:

Do you truly believe the banks

will not need another bailout?
Well...???

Grandpa believe Mr. Mayo could experience

some acid reflux from his bullish call

on Bank of America...time will tell...

FDIC throws a dart and bank failure losses reduced by $8 billion and Sheila Bair caved in to the banksters

The obvious reason why Sheila caved in to her banksters

(taken directly from the FDIC Restoration Plan):

The FDIC has concluded that given the continuing stresses on the earnings of insured depository institutions and the additional time afforded to reach the reserve ratio required by Dodd-Frank, that it will forego the uniform 3 basis point increase in initial assessment rates scheduled to take effect on January 1, 2011.

By Victoria McGrane

Of Dow Jones Newswires
10/19/10 

WASHINGTON (Dow Jones)--The Federal Deposit Insurance Corp. Tuesday killed a scheduled rate hike for bank deposit insurance after new projections show bank failure losses will be less than previously thought.

In a sign that the effects of the financial crisis are starting to mediate, FDIC staff said that they now expect $52 billion in losses to the fund through 2014, down from the $60 billion predicted in June.

SAY WHAT!!??

Since their June guess (a.k.a. analysis), the banks are in a heap of hurt and unkown foreclosure fraud liability territory and no one has any clue of the impact of this fradulant mess.

As a result, staff recommended the FDIC board forgo levying a three-basis-point increase in assessment rates, slated to go into effect Jan. 1. Without the rate increase, staff predict the insurance fund will still reach a reserve ratio of 1.15% by the end of 2018.

The Dodd-Frank financial regulation law requires that the FDIC devise a plan to bring the insurance fund's reserve ratio to 1.35% by Sept. 30, 2020.

But the FDIC put off until 2011 a decision on the method it will use to make sure small banks aren't hurt by recapitalization of the insurance fund, a protection required by the Dodd-Frank law.

Banks welcomed the decision to halt the rate increase. The move will save banks about $2.5 billion a year, according to an estimate by the American Bankers Association.

"Simply put, the FDIC's decision to forgo the premium increase means that banks will have $2.5 billion every year that can now be used for loans in their communities," said James Chessen, ABA's chief economist.

In a separate action, the board approved an initial plan to set the deposit insurance fund's long-term designated reserve ratio at a minimum of 2% ahead of a possible banking crisis, significantly above the 1.35% minimum specified in the Dodd-Frank Act enacted in July.

The minimum designated reserve ratio was 1.15% prior to Dodd-Frank.

The FDIC wants a larger fund to avoid having the deposit insurance fund plunge into negative territory during a crisis as it did in the 1990s and again in the recent crisis, when it hit a record low of negative $20.9 billion in December 2009.

In exchange for having a higher reserve ratio, banks would get more stable, predictable premiums as opposed to being hit by high assessments when they can least afford to pay such rates, FDIC officials said.

The FDIC assesses member banks a fee to back the deposit insurance fund, which in turn guarantees the safety of depositor funds.

Under the proposed plan, the FDIC would also lower assessment rates when the reserve ratio hits 1.15%. And instead of issuing dividends when the fund reaches a certain size, the FDIC would continue to adopt lower rate schedules when the reserve ratio reached 2% and again at 2.5%. FDIC officials said that would cause average rates to decline about 25% and 50%, respectively.

"While it is difficult to make long-term projections, we are trying to give the industry greater certainty regarding what rates will be over the long run," FDIC Chairman Sheila Bair said in a statement. "The trade off we are proposing is lower, more stable and predictable premiums, but a higher reserve."

FDIC staff estimated that the fund's reserve ratio could hit 2% by 2027, but stressed that the projection is far from solid given how far in the future it required them to look.

There is likely to be push-back against the FDIC's goal of growing the fund's reserve ratio larger than 2%. While there's consensus that the fund should be larger, some banking industry officials argue that going bigger than 2% is unnecessary, especially since higher capital standards in Dodd-Frank are supposed to make insurance fund losses less likely in the future.

The initial proposal is now open to public comment for 30 days, and subject to future changes by the FDIC.

The Publilc has already commented Sheila!

FDIC to decide who might still get a bailout...wait a minute, Obama stated 'There will be no more tax-funded bailouts—period,"

The Wall Street Journal
10/3/10

Read my lips

"There will be no more tax-funded bailouts—period," said President Obama on July 21, the day he signed the Dodd-Frank financial reform into law. This week, the board of the Federal Deposit Insurance Corporation will use the new powers it received under Dodd-Frank to decide which bank creditors will receive . . . tax-funded bailouts.

On July 21, Mr. Obama said that "there will be new rules to make clear that no firm is somehow protected because it is 'too big to fail,' so we don't have another AIG." But under the new law, firms deemed too big to fail by the new Financial Stability Oversight Council can be protected from bankruptcy, if regulators so desire, and instead put into an alternative process managed by the FDIC. The idea is to provide the firm with taxpayer cash that would not be available in a bankruptcy, and then try to recover the taxpayer's money over time from sales of the company's assets.

If the taxpayers don't come out whole, Plan B is to seek money from the firm's other creditors after the crisis has passed. Failing that, the government will assess fees across the financial industry, including firms that had nothing to do with the failure. Regulators and the bill's authors have unanimously agreed not to call this a bailout program.

Let's see...whom do I choose?

The issue for the FDIC board this week is the pecking order for creditors of companies undergoing FDIC resolution. During the Congressional debate on Dodd-Frank, we warned about the discretion afforded the FDIC to discriminate among such creditors, offering bailouts to some while punishing others.

Last week, FDIC Chairman Sheila Bair confirmed that the problem exists, though she still won't use the word "bailout." Ms. Bair said, "The authority to differentiate among creditors will be used rarely and only where such additional payments are 'essential to the implementation of the receivership or any bridge financial company.'"

She was quoting the Dodd-Frank law, and the question is which creditors to a failing firm will be considered "essential" and therefore eligible for a bailout. Backers of the FDIC process have promoted the idea that taxpayer money flowing into the failed business will be used to pay the electric company to keep the lights on or vendors of basic office supplies. But who else will enjoy the coveted "essential" status? The opportunities for political favoritism are enormous.

Ms. Bair promised last week that "long-term bondholders, subordinated debt holders, and shareholders of a financial company" will never be considered "essential." That's nice, and from her we even believe it. But why not simply say that "all financial counterparties" will never be considered essential? Is the FDIC Chairman saying that short-term bondholders, however defined, may get a rescue?

We eagerly await the public release of information from the FDIC. But leaving the door open for a rescue of, for example, lenders due to be repaid within six months or a year would only encourage the short-term funding model that helped destroy Bear Stearns and so many other firms in 2008. Rather than eliminating moral hazard, it will simply concentrate it in a particular category of financial instruments.

We don't mean to pick on Ms. Bair, who deserves credit for at least trying to rule out certain bailouts. We suspect she is facing the usual pressure from the Treasury Department to keep all options open when it comes to rescuing unwise lenders from the consequences of their decisions.

Whether Washington calls firms "essential," or "systemic," or "nationally recognized" as in the case of credit-ratings agencies, the government always goes wrong when it anoints particular firms for special favors they can't secure in the market or before a judge. Repealing ObamaCare has captured the public imagination for obvious reasons, but the next Congress should also repeal the new system of bailouts enabled by Dodd-Frank.

FDIC Problem Bank List Rose to 829 in Q2 2010 and Sheila Bair on Spin Cycle

Sheila Bair's Spin Cycle Headline

Earnings of FDIC-Insured Institutions Increased to

$21.6 Billion in the Second Quarter of 2010

FDIC Earnings Spin

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $21.6 billion in the second quarter of 2010, a $26 billion improvement from the $4.4 billion net loss the industry posted in the second quarter of 2009. This is the highest quarterly earnings total since the third quarter of 2007. Despite the improvement, earnings remain below historical norms.

On the positive side, one in five institutions reported a net loss for the quarter, compared to 29 percent a year earlier. Grandpa: Sheila you neglected to mention that 8,195 institutions reported results during Q2 2009 versus 7,830 during Q2 2010. How many of the 365 fewer institutions are no longer in business to report a loss? And, the average return on assets (ROA), a basic yardstick of profitability, rose to 0.65 percent, from negative 0.13 percent a year ago.

As long as economic conditions remain supportive?

"This is the best quarterly profit for the banking sector in almost three years," said FDIC Chairman Sheila C. Bair. "Nearly two out of every three banks are reporting better year-over-year earnings. As long as economic conditions remain supportive, most institutions should maintain profitability and increase their capacity to lend." Sheila, please define supportive and "should" screams noncommittal ergo I am covering my behind.

She added, "Without question, the industry still faces challenges. Earnings remain low by historical standards, and the numbers of unprofitable institutions, problem banks and failures remain high. But the banking sector is gaining strength. Earnings have grown, and most asset quality indicators are moving in the right direction."

FASB Mark-to-Model Mission Accomplished

The primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses. While quarterly provisions remained high, at $40.3 billion, they were $27.1 billion (40.2 percent) lower than a year earlier. Gee Sheila, you closed 118 banks in 2010 with 45 closed in Q2. Might this impact the total amount of loan loss provisions? Net interest income was $8.5 billion (8.6 percent) higher than a year ago, and noninterest expenses were $1.5 billion (1.5 percent) lower.

The FDIC noted signs of improvement in asset-quality trends as the amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) fell for the first time since the first quarter of 2006. Insured banks and thrifts charged off $49 billion in uncollectible loans during the quarter, down $214 million (0.4 percent) from a year earlier. This is the first time since the fourth quarter of 2006 that net charge-offs posted a year-over-year decline.

Total loans and leases declined by $107.5 billion (1.4 percent) during the quarter. Total assets fell by $136.2 billion (1.0 percent).

Financial results for the first quarter are contained in the FDIC's latest Quarterly Banking Profile, which was released today. Also among the findings:

Loan-loss reserves declined for the first time since the fourth quarter of 2006. Although almost two out of every three banks (62.1 percent) increased their loan-loss reserves in the quarter, the industry's total reserves declined by $11.8 billion (4.5 percent), as a number of large banks reduced their loan-loss provisions. FASB without the "standards" is just FAB! The industry's ratio of reserves to total loans and leases fell from 3.50 percent to 3.40 percent during the quarter, but this is still the second-highest ratio in the 63 years for which data are available. "Particularly given economic uncertainties, we believe all banks should continue to exercise caution and maintain strong reserves," Chairman Bair said.

The industry's "coverage ratio" of reserves to noncurrent loans improved for a second consecutive quarter, from 64.9 percent to 65.1 percent, as the decline in noncurrent loans outpaced the reduction in loss reserves.

The number of institutions on the FDIC's "Problem List" rose from 775 to 829. However, the total assets of "problem" institutions declined from $431 billion to $403 billion. Also, while the number of "problem" institutions is the highest since March 31, 1993, when there were 928, it is the smallest net increase since the first quarter of 2009. Sheila, you are spinning again. 829 problem banks represents 10.5% of reporting institutions. 928 problem banks in Q2 2009 represents approximately 7% of the 13,221 reporting institutions year end 1993.

Forty-five insured institutions failed during the second quarter.

DIF Balance Grows Thanks to Mark-to-Model

The Deposit Insurance Fund (DIF) balance improved for the second quarter in a row. The DIF balance - the net worth of the fund - improved from negative $20.7 billion to negative $15.2 billion during the second quarter. The improvement stemmed primarily from assessment revenues and from a reduction in the contingent loss reserve, which covers the costs of expected failures. The reserve declined from $40.7 billion to $27.5 billion during the quarter.

The FDIC's liquid resources - cash and marketable securities - remained strong. Liquid resources stood at $44 billion at the end of the second quarter, a decline from $63 billion at the end of the first quarter. The decline in cash balances reflects previously anticipated outlays, primarily related to three bank failures in Puerto Rico on April 30th.

"As we expected," Chairman Bair said, "demands on cash have increased this year. But our projections indicate that our current resources are more than enough to resolve anticipated failures."

Total insured deposits declined by 0.7 percent ($39 billion) during the quarter.