Jim Sinclair

Dear Comrades In Golden Arms,

Please read this as you must understand the serious nature of what is taking place.

Regards,
Jim

Dear Jim,

The following are some additional thoughts on the seven bank failures announced by the FDIC on Friday, April 30, 2010.

1. Perspective on Losses

This week's losses were extremely serious, a fact belied by the virtual absence of press coverage. They were the largest in any single week since the failure of IndyMac Bank on July 11, 2008.

IndyMac had assets of about $32 billion and deposits of $19 billion. Its failure cost the FDIC an estimated $8 billion.

The seven banks that failed this week had combined assets of about $25.8 billion and deposits of $19.6 billion. These failures cost the FDIC an estimated $7.33 billion.

Prior to this week, the FDIC's estimated losses from 57 bank failures in 2010 stood at about $8.6 billion. This week's failures practically doubled that figure, to $15.93 billion.

This information cannot be reconciled with the MOPE that states the banking sector has recovered. To the contrary, these failures speak of deeply-rooted problems in the banking sector that appear to be getting worse over time.

2. Status of the Deposit Insurance Fund

According to an AP article posted Friday (cited below), the FDIC's deposit insurance fund "fell into the red last year, hitting a $20.9 billion deficit as of [Dec. 31, 2009]." With this year's losses, the fund's deficit has grown to at least $36.8 billion. In addition, the FDIC has a huge exposure for worse-than-expected losses on some $165 billion of assets taken over by acquiring banks.

That pretty much wipes out the $45 billion the FDIC announced it was going to raise by requiring banks to pre-pay premiums for the period, 2010 through 2012. Obligations of the FDIC will soon become obligations of the U.S. taxpayer, adding billions of dollars each year to already out-of-control federal deficits.

3. More FASB-Blessed Fantasy Valuations

Each of the FDIC's press releases provides vital information about the true market value of the failed banks' assets versus the values assigned them by bank management. This gives some insight into the extent of over-valuations across the banking sector in the wake of the Financial Accounting Standards Board ("FASB") having suspended fair value accounting rules last year.

The FASB's capitulation has given bank management far too much leeway to value assets at levels far beyond what they could fetch in the open market, resulting in banks' balance sheets becoming increasingly less reliable indicators of their true financial health.

Looking at the five largest failures this week:

Westernbank Puerto Rico of Mayaguez, Puerto Rico, had stated assets of $11.94 billion and deposits of $8.62 billion. On paper, it was an extremely healthy bank; yet the FDIC's loss estimate for its closure is $3.31 billion. Based on that estimate, the real market value of its assets is only $5.31 billion. Bank management had over-valued these assets by 125%.

R-G Premier Bank of Puerto Rico of Hato Rey, Puerto Rico, had stated assets of $5.92 billion and deposits of $4.25 billion. The FDIC's loss estimate for its closure is $1.23 billion. Based on that estimate, the real market value of its assets is $3.02 billion, and had been over-valued by 96%.

Frontier Bank of Everett, WA, had stated assets of $3.5 billion and deposits of $3.13 billion. Its loss estimate is $1.37 billion. Based on that estimate, its assets are really worth $1.76 billion, and had been over-valued by 99%.

Eurobank of San Juan, Puerto Rico had stated assets of $2.56 billion and deposits of $1.97 billion. Its loss estimate is $744 million. Based on that estimate, its assets are really worth $1.226 billion, and had been over-valued by 109%.

CF Bankcorp of Port Huron, MI, had stated assets of $1.65 billion and deposits of $1.43 billion. Its loss estimate is $615 million. Based on that estimate, its assets are really worth $815 million, and had been over-valued by 102%.

Here again, these bank failures are being reported free of any allegations of fraud or even negligence on the part of bank management. Absent any such allegations, it stands to reason that these over-valuations, ranging from 96% to 125%, are considered to be in line with reasonable accounting practices sanctioned by the FASB at the time it suspended fair value requirements.

4. AP Article Covering Failures

Linked below is an AP article that provided some better-than-average coverage of this week's failures and the status of the FDIC's finances. Interestingly, the article was originally published at about 8:15 pm EST on Friday, April 30, 2010, but had to be re-posted at 10:00 pm EST following the FDIC's release of additional information late in the evening.

Focusing on the three banks that failed in Puerto Rico, the AP noted they "together held more than one-fifth of the total bank assets on the U.S. Caribbean territory."

Here's some food for thought. Puerto Rico's GDP is about $76 billion, about 21% of the size of Greece's ($356 billion). What is more relevant to the concerns of U.S. citizens, the fact that Greece is experiencing budget problems, or that FDIC-insured banks controlling one-fifth of the value of the assets on Puerto Rico failed in one week?

What possible explanation could there be for the fact that the Greek "crisis" has been dominating headlines in the U.S. press for months, while matters such as these horrendous bank failures and the impending failures of the majority of U.S. States barely get a mention?

Can you say, Manipulation of Perspective Economics?

Respectfully yours,
CIGA Richard B.

Banks closed in Puerto Rico, Mich., Mo., Wash.
Regulators shut down 7 banks in Puerto Rico, Mo., Mich., Wash., brings total to 64 this year
Marcy Gordon, AP Business Writer, On Friday, April 30, 2010, 10:00 pm

WASHINGTON (AP) - Regulators on Friday shut down shut down three banks in Puerto Rico, two in Missouri, and one each in Michigan and Washington, bringing the number of U.S. bank failures this year to 64.

The Federal Deposit Insurance Corp. took over the banks: Westernbank Puerto Rico, based in Mayaguez, with about $11.9 billion in assets; R-G Premier Bank of Puerto Rico, based in Hato Rey, with around $5.9 billion in assets; and San Juan-based Eurobank, with $2.5 billion in assets.

The FDIC also seized CF Bancorp, based in Port Huron, Mich., with about $1.6 billion in assets; Champion Bank, of Creve Coeur, Mo., with $187.3 million in assets; BC National Banks, of Butler, Mo., with $67.2 million in assets; and Frontier Bank, based in Everett, Wash., with $3.5 billion in assets.

Banco Popular de Puerto Rico agreed to acquire Westernbank's deposits and about $9.4 billion of its assets. The FDIC will keep the remainder for eventual sale. Scotiabank de Puerto Rico agreed to buy all the assets and deposits of R-G Premier Bank. And Oriental Bank and Trust is acquiring all the assets and deposits of Eurobank. The three healthier acquiring banks are based in San Juan, the Puerto Rican capital.

The three failed banks together held more than one-fifth of the total bank assets on the U.S. Caribbean territory. They had struggled to stay afloat during Puerto Rico's grinding, four-year recession.

It was Puerto Rico's largest bank consolidation in more than two decades as well as one of the FDIC's biggest resolutions of failed banks in the financial crisis that struck in fall 2008.