Better late than never, as they say. The so-called experts, the media, are all starting to come around on this issue.
The banks are not as healthy as people would like to think they are.
Four months ago I warned that banks were creating paper profits and that their actual cash profits were in fact cash losses. For instance, Citigroup used creative accounting and reporting techniques to turn a billion dollar loss into a billion dollar profit.
Well, lo and behold, we are now seeing banks starting to fold like bad poker players. So far, 84 banks have closed up shop this year with many waiting in the wings to do the same.
Most notably these banks include BankUnited Financial in May, and Colonial BancGroup and Guaranty Financial Group in August — which collectively cost the FDIC $10.7 billion. As of the last report in June 2009, the FDIC only had $10.4 billion cash on hand.
So with the FDIC almost completely wiped out by just three bank failures, it’s going to be tough for the FDIC to absorb any more bank losses.
But more bank losses are a coming.
Banking expert Dick Bove of Rochdale Securities estimates that there will be an additional 150 to 200 banks that will close by the end of the year. And he’s not the only one.
BankUnited CEO John Kanas believes that there will be 1,000 more bank failures over the next two years.
Because of the current status of the banks, the FDIC has placed 416 banks on its problem list of banks that could fail. These banks have a combined $299.8 billion in assets.
To be fair, there are over 20,000 banks in the United States, so 416 banks represents 2 percent. But let’s face facts, $299.8 billion is $299.8 billion.
Although most people have been mesmerized by the billions and trillions that are being thrown around by the Obama administration, $300 billion dollars of losses doesn’t just vanish into thin air.
Eventually, somebody has to pay for it.
To pay for the $10.7 billion that BankUnited, Guaranty Financial, and Colonial BancGroup cost the FDIC, the FDIC will impose special assessments against the banks.
Guess who pays that $10.7 billion? You guessed it. You and me.
Did you think that the banks will just absorb the $10.7 billion dollars in FDIC fees and just call it a day?
Of course not. What will happen is that the banks will start charging higher fees. Overdraft fees may become $40 to $50 instead of $30 to 35. Wire fees may become $40 instead of $20 to $30. ATM fees may go from $1 to 3 all the way to $3 to $5.
And all of that is assuming that a single bank doesn’t fail for the rest of this year and all of next year.
If we see that $300 billion of problem banks or even a small percentage of those banks go under during that time frame, who knows what could happen and what type of fee increases we could see across the banking sector.
But some people might say, well Dan, you are assuming that the current 416 banks on the FDIC’s problem list will all go bankrupt; those banks may not go bankrupt so things could look rosy in the banking sector.
That’s a good point. But you have to dig a little deeper to say that the outlook for the banking sector is positive.
What will destroy the banks is loan losses. I am sure that everyone who is reading this article has either themselves or knows someone who has been in foreclosure, has done a short sale, or someone who is not currently paying their mortgage, either because the mortgage payments are too high or because the house is only worth a fraction for what they originally bought it for.
When you don’t pay your mortgage or sell your home for less than what you owe on the mortgage, the bank takes a hit.
U.S. bank loan losses shot up to $66.9 billion in the second quarter this year, a 32 percent bump from the $50.4 billion in losses in the second quarter of 2008.
And it’s only going to get worse. Mortgage interest rates are going up, unemployment is rising, and more people are starting to realize that they have the ability to not pay their mortgage and get away with it.
Truth is, while some may say that the U.S. recession is over, and that’s debatable, the recession in the banking sector has got a long way to go. I wouldn’t be surprised if all of a sudden we saw some of those record bank profits that have been reported over the last two quarters start to dip, and some banks, dare I say it, start to report losses as opposed to using clever accounting techniques to show a profit when there is really a loss.
Without a doubt, the banks are not as good as advertised, and investors who may be lured by some of the bank profits in the last two quarters should remember the phrase caveat emptor — buyer beware.
Get Dan Mangru in your e-mail inbox — Click Here Now
© 2023 Newsmax. All rights reserved.