Thursday, August 28, 2008

More Media Outrage

From the Desk of Joe Rollins

I saw some outrageous headlines on the Internet last night that forced me into writing another rant. One particular headline – practically jumping off the screen with its boldfaced type – exclaimed that the “FDIC says U.S. Problem Banks rise 30% to 117.”

I have written extensively on this blog about the media’s dramatization of our current economy. It seems that journalists are on a mission to make the daily financial news seem more and more spectacular, and after reading the headline noted above, I decided it was time for me to give you the facts on this subject.

It’s true that the FDIC reported that the number of troubled banks increased from 90 in the first quarter to 117 in the second quarter of 2008. But it’s important to realize that this really isn’t all that significant. How, you may ask, can that be true?

There are actually 8,500 banks in the United States, and 117 of those banks, or 1.4%, are in a problematic state. Let me emphasize to you that these banks have not failed; they are simply on the FDIC’s "watchlist" of problem banks. So far in 2008, a total of nine banks in the United States have failed.

The FDIC reports that the total assets of these 117 troubled banks are $78 billion. At the end of the first quarter, when there were 90 banks on the agency’s watchlist, the combined assets were $26 billion. This is a $52 billion increase from the first to the second quarter, but it should be put into perspective that $32 billion of that increase was from one bank being put on the watchlist – IndyMac Bank Corp. – which ultimately failed in July.

Without question, $78 billion is an enormous amount of money. However, as banks go, this amount is practically insignificant. I see so many self-purported “experts” on the Internet giving their opinions on how many banks they think will fail in the United States, and numerous articles refer to "BIG BANK" failures.

Bank of America alone has $1.2 trillion in loan receivables. Comparatively, the $78 billion in combined assets of the U.S.’s problem banks is only a small percentage of the total of only one bank’s assets.

The reason bank failures draw the media’s interest is because it’s a relatively rare occurrence. In fact, there have been very few bank failures in the United States since 1934. For the media to assert that nine bank failures and 117 problematic banks represent a financial crisis belies the statistics issued by the FDIC itself.

There have only been two years since 1934 – in 2005 and 2006 – when there hasn’t been a single bank failure. The fact that not even one bank failed in 2005 and 2006 is even more amazing when you consider the fallout from September 11, 2001. In 2007, only three U.S. banks failed, and so far in 2008, nine banks have failed.
While hardly any U.S. banks have failed since the year 2000, compare that with the years 1988 and 1989 when there were over 1,000 U.S. bank failures: The rate at which banks were failing during those two consecutive years was two every single business day. Interestingly, the U.S. was still able to absorb those massive bank failures without falling into a recession.

Unfortunately, a big part of the problem banks are facing today stems from mandates set by those in my profession – accountancy. Accountants are requiring banks to reserve and write-down assets well beyond their reasonable valuations. For example, for the most recent quarter, U.S. banks set aside $50.2 billion in loan loss provisions, which is more than four times what they set aside as potential losses in the second quarter of 2007. Again, these are potential loan losses, not actual loan losses.

With the Federal Reserve’s current low interest rate extended to banks, and with the relatively high interest rate these banks subsequently charge their customers, banks are earning potentially mind-boggling profits. Once we get through all the write-downs and adjustments of loan losses, I think we’ll see bank earnings rebound to a staggering level in 2009.

In spite of my positive forecast on bank earnings above, the financial media continues to report concern regarding what they are touting as poor financial circumstances in the U.S. banking industry. The FDIC, by its very nature, is conservative beyond definition. If U.S. banking in America was as bad as the financial media would like for you to believe, you can bet that there’d be significantly more problem banks on the FDIC’s watchlist than the 117 of the 8,500 banks on it today.

In a recent blog, I wrote that this past July 15th would be the bottom of the bank stocks. After that time, banks rallied – in some cases over 50% – but have subsequently fallen back in price nearly to the lows of July 15th. In the elapsing time, however, banks have become more profitable and more stable than ever.

I hope that my rants help you realize how important it is for you to think objectively when you hear reports of gloom and doom in the media. If you simply accept the financial news reports without analyzing exactly what the facts represent, you’re likely missing a lot of important details that would undoubtedly provide a more balanced, positive picture.

Lastly, and on a different subject, I’ve come to a fundamental disagreement with both candidates running for President over the last few days. They both speak of higher taxes and higher governmental spending, and I see projections of deficits running in the half trillion dollar range for 2009 and $5 trillion for the first four-year Presidential term.

It is especially distressing to me that neither of these candidates is talking about cutting governmental spending. Each wants to spend more, give more credits, and provide more governmental resources, but neither wants to cut government and reduce spending to accommodate whatever revenues they currently receive. I hope that at some point, one of them takes on fiscal responsibility and recognizes that our government is big enough. The focus should be on balancing the Federal budget – not with increased taxes, but with decreased expenditures.

Of course, all of this is just my opinion – and I could certainly be wrong…

Source: Federal Deposit Insurance Corporation (FDIC)