FDIC Chairman Sheila Bair dropped a small bomb on CNBC last night. She said, “Commercial real estate will be more of a driver of bank failures.” What! You mean more than the imploding residential real estate market? Oh… at that point I felt a little sick at my stomach. There already is a huge unrelenting problem in housing. (see my post from last week “Real Estate at a bottom?…Not!”) Now there is going to be an even bigger drag on the banks! It will be a colossal second wave of commercial property defaults that will kill bank balance sheets. I have to admit, Larry Kudlow did a good job of pressing Bair for a true picture of the banks’ financial health both big and small. When she started mentioning “full faith and credit,” she looked nervous to me. Just give it a look right up until they start talking about the “Super Regulator.” (This is kind of long so you can also just skip it and read on after the video.)
The Federal Deposit Insurance Corporation has about 4.5 trillion in insured deposits with only 10.4 billion in net worth. Said another way, that is 10.4 billion to insure 4,500 billion dollars. No wonder Bair looked nervous. The FDIC does have a direct line of credit to the Treasury of 500 billion. There is no doubt she will be tapping that money to pay depositors in this next wave of commercial real estate collapse. There are about 3.5 trillion in commercial real estate loans held by banks. Commercial property owners are defaulting at rates not seen since the 90’s. Banks are getting stuck with malls,office buildings and industrial sites. Add the ongoing residential real estate meltdown to the equation and you have big losses and inevitable bank failures. The question is how many and which ones? “The bottom line: Defaults are exploding,” said Richard Parkus, an analyst with Deutsche Bank. “It’s terrible. It’s going to be worse than in the early ’90s.”
Then, there is this wrinkle. Earlier this year, Congress and the big banks got the Financial Accounting Standards Board or FSAB to change the rules. Instead of “mark to market” accounting where a bank is required to value an asset at the price you can sell it today, banks can price assets at what they might get in the future. I and a few other people call it “mark to fantasy.” I also think it’s government sanctioned accounting fraud. There is no way for the government, an investor or a depositor to really know the financial health of the banks. That is sad and a little scary. Remember it was about a year ago that Treasury Secretary Hank Paulson told members of Congress that if he did not get the TARP money, there would be a “systemic” failure. There is simply no way of knowing how bad this could get or if the government can keep things under control. So what can you do? I check my bank every 6 months. Here is a free link to The Street.com Banks and Thrift Screener. This is a fast simple way to see if your bank is headed for trouble.
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Greg is the producer and creator of USAWatchdog.com. The site’s slogan is “analyzing the news to give you a clear picture of what’s really going on.” The site will keep an eye on the government, your financial interests and cut through the media spin. USAWatchdog.com is neither Democrat nor Republican, Liberal or Conservative. Before creating and producing the site, Greg spent nearly 9 years as a network and investigative correspondent. He worked for ABC News and Good Morning America for nearly 6 years. Most recently, Greg worked for CNN for shows such as Paula Zahn Now, American Morning and various CNN business shows.