Category: Money

From the FDIC press release:

Financial results for the second quarter are contained in the FDIC’s latest Quarterly Banking Profile, which was released today. Among the major findings:

Provisions for loan losses continue to be the main cause of falling earnings. Rising levels of troubled loans, particularly in real estate portfolios, led many institutions to increase their provisions for loan losses in the quarter. Loss provisions totaled 50.2 billion, more than four times the11.4 billion the industry set aside in the second quarter of 2007. Almost a third of the industry’s net operating revenue (net interest income plus total noninterest income) went to building up loan-loss reserves.

Noncurrent loans are still rising sharply. The amount of noncurrent loans and leases (90 days or more past due or in nonaccrual status) increased by 26.7 billion (20 percent) during the second quarter, following a26.2 billion increase in the first quarter and a $27.0 billion increase in the fourth quarter of 2007. Almost 90 percent of the increase in noncurrent loans and leases in the last three quarters consisted of real estate loans, but noncurrent levels have been rising in all major loan categories. At the end of June, 2.04 percent of all loans and leases were noncurrent, the highest level for the industry since 1993.

Assets of insured institutions declined. Total assets of FDIC-insured institutions declined during the quarter for the first time since 2002. The 68.6 billion (0.5 percent) decline was caused by a reduction in trading assets at a few large banks. Assets in trading accounts, which increased by135.2 billion in the first quarter, declined by 118.9 billion (11.8 percent) in the second quarter. In addition, the industry’s holdings of one- to four-family residential mortgage loans fell by61.4 billion (2.8 percent). Real estate construction and development loans declined for the first time since 1997, falling by $5.4 billion (0.9 percent).

The FDIC’s Deposit Insurance Fund reserve ratio fell. Due to a significant increase in loss reserves, including reserves for failures that have occurred since June 30th, the DIF balance fell to 45.2 billion at the end of the second quarter, down from52.8 billion at the end of the first quarter. While insured deposits rose only 0.5 percent during the quarter, the decline in the fund balance caused the reserve ratio to fall to 1.01 percent as of June 30th from 1.19 percent one quarter earlier. Because the reserve ratio is now below 1.15 percent, the Federal Deposit Insurance Reform Act of 2005 requires the FDIC to develop a restoration plan that will raise the reserve ratio to no less than 1.15 percent within five years.

This is a big deal, folks. A scant 1.01% reserve is all that stands between you and massive runs on banks.

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Here is a dead simple solution for foreclosed houses: offer these at cut rate auctions to affordable housing developers like CASCAP in Cambridge, MA. These agencies can use the properties, otherwise fated to decay, for affordable housing for the poor and homeless.

Why we won’t embrace this solution:

Few businesses understand the sunk cost fallacy. Banks and mortgage holders cling desperately to assets that continue to decline in value in the vain hope that they’ll be worth something close to what they paid.

Remember this: a bag of gold, no matter how valuable, will kill you if you’re trying to stay afloat.

Give people about a month after their subprime mortgage payment balloons to obscene proportions and it’s not hard to guess that in some cases, that will lead to divorce and broken homes. The next big wave of resets begins in March 2008, based on the CSFB data in the chart above.

Buckle your seatbelts and unplug the popcorn machine. 2008 is going to be a rough year.