Where to begin? For starters, Dear Leader provides proof positive of exactly how bad things are, reiterating that “we have nothing to fear but fear itself“. The comments are not very Presidential and are sure to shake the confidence of both the American people, institutions, and our global partners.
Bush’s dire words will have consequences. For starters, there’s this little bit of great news from China [Reuters] followed by a swift reversal/denial [also Reuters]:
Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis, the South China Morning Post reported on Thursday.
The Hong Kong newspaper cited unidentified industry sources as saying the instruction from the China Banking Regulatory Commission (CBRC) applied to interbank lending of all currencies to U.S. banks but not to banks from other countries.
“The decree appears to be Beijing’s first attempt to erect defences against the deepening U.S. financial meltdown after the mainland’s major lenders reported billions of U.S. dollars in exposure to the credit crisis, the SCMP said.
A spokesman for the CBRC had no immediate comment.
Preliminary indications are that neither Congress, a healthy number of economists, and the American people are not falling for cheap parlor tricks.
The nation’s chief bookkeeper from the Congressional Budget Office suggests that the intervention may actually make things worse [WaPo]:
During testimony before the House Budget Committee, Peter R. Orszag ” Congress’s top bookkeeper ” said the bailout could expose the way companies are stowing toxic assets on their books, leading to greater problems.
“Ironically, the intervention could even trigger additional failures of large institutions, because some institutions may be carrying troubled assets on their books at inflated values, Orszag said in his testimony. “Establishing clearer prices might reveal those institutions to be insolvent.
In an interview later yesterday, Orszag explained using the following example: Suppose a company has Asset X, whose value is recorded on the books as $100. Because of the current economic decline, Asset X’s real value has dropped to $50. If the company takes part in the government bailout and sells Asset X for $50, the company has to report a $50 loss on its books. On a scale of millions of dollars, such write-downs could ruin a company.
Such companies “look solvent today only because it’s kind of hidden, Orszag said. “They actually are insolvent already, he said.
It doesn’t help any that Paulson and Bernanke view this crisis as a liquidity event and not a solvency event. They appear to believe that additional capital will dissolve the solvency problem. The fact that the amount $700,000,000,000 was just pulled from the air does not lend much confidence either.
The crisis is not just limited to investment brokerages and their exotic financial instruments. Your local retail bank may be in trouble too, and the FDIC is still undercapitalized as to insurance [Bloomberg]
It won’t take many more failures before the FDIC itself runs out of money. The agency had $45.2 billion in its coffers as of June 30, far short of the $200 billion Whalen says it will need to pay claims by the end of next year. The U.S. Treasury will almost certainly come to the rescue.
[...]
Emergency federal funding of the FDIC could swell the cost of government rescues of failed financial institutions to more than $400 billion — not including the $700 billion general Wall Street bailout now under discussion in Congress.
That number would be even higher if the government were on the hook for uninsured deposits — which amount to $2.6 trillion, 37 percent of the total of $7 trillion held in the U.S. branches of all FDIC member banks.
Currently 117 banks are on the “bad bank list”. 12 have failed this year alone; 2008 was the worst year for bank failures since the Savings & Loan Scandal in the 1990s.
By the end of 2009, about 100 U.S. banks with collective assets of more than $800 billion will fail, predicts Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California-based firm that sells its analysis of FDIC data to investors.
“It’s not going to be Armageddon,” says Mark Vaughan, an economist and assistant vice president for banking supervision and regulation at the Federal Reserve Bank of Richmond, Virginia. “But it’s going to be bad.”



