The Banking System Is Insolvent http://market-ticker.denninger.net/archives/1476-The-Banking-System-Is-Insolvent.html Following up on the quick mention now that I have a story to cite from Amherst: Cure rates for these distressed loans remain low. Amherst noted a near 0% cure rate of all loans in foreclosure, 0.8% for 90 plus days delinquent, 4.4% for 60 days delinquent and 26.5% for 30-day delinquencies. All told, Amherst expects 12.42% of units (from the 13.54% of properties delinquent and in foreclosure) to eventually liquidate. Let's put some numbers on this. There are roughly 125 million single-family homes in the US. Of those, roughly 30% have no mortgage on them at all. This leaves 87.5 million single-family homes with mortgages. Let us assume the average outstanding balance is $200,000 across the entire set and will take a 40% loss severity. This is less than S&P has estimated for subprime loans and only assumes a roughly 20% market deficiency in the home price (the rest is from legal, rehabilitation and marketing expenses.) These numbers are, with a high degree of confidence (90%+) low - that is, losses will exceed these estimates, perhaps dramatically so. It is, for example, quite reasonable to believe that due to the concentration of defaults in higher-priced areas (e.g. California and Florida) that the average outstanding balance could be close to double that $200,000 value and the loss due to negative equity higher. From this we can develop a "cocktail napkin" view of the losses to be taken in home mortgages for single-family homes (remember, this does not include condos, apartment buildings and similar "commercial" paper.) $200,000 X 40% = $80,000 loss per foreclosure. 87.5 million homes with mortgages X 12.42% = 10,867,500 foreclosures. 10,867,500 x 80,000 ============= $869,400,000,000 or $869 billion in losses remaining in single-family mortgages alone. What if the average outstanding is higher and negative equity greater than 20% (which is likely)? Losses will almost certainly be well north of a trillion dollars. The entire banking system and likely The Fed, given the quantity of Fannie and Freddie paper it has been and is "eating", is insolvent. These facts are why the government is lying - they're well-aware of the near-zero cure rates and know that these facts mean that the banking industry has nowhere near sufficient capital to withstand these losses without folding like a paper cup getting stomped on by an elephant. (Remember that these numbers do not include any commercial real estate losses and we have found that banks are frequently over-stating their claimed values for these loans by 50% or more - as was seen with Colonial.) It gets better. The FDIC has a negative balance both in its fund balance and the reserve ratio projected for the end of the quarter, which is, big surprise, tomorrow. Oh, and there is this pesky problem that the FDIC has - contrary to its mandate - been issuing bond guarantees for banks, so if and when that banking insolvency is recognized the FDIC will implode into a gravity well also, since it is on the hook for the entire deficiency of those bonds that were issued with its "guarantee" should they default. Care to argue with the math folks? asks Karl Denninger... Can you guys pitch in... is he over the top or is his math correct... or? thanks...
The math is likely correct. Real life doesn't conform to math, though. If it did, this crisis would never have happened. Huh? There's many a slip 'tween cup and lip. If you really think that volume of foreclosures would ever be allowed to happen in any world inhabited by power brokers and the politicians who feed off of them, well, you're young. The US didn't get to where it is by letting a bunch of formulas from nerdy wonks get in the way.
Alright, that's just the housing problem. Add credit card defaults into the mix and the Fed is going to have to dig deep and come up with a couple more trillion to hand over to its buddies.
You're assuming the politicians have the power to stop this tidal wave. I know a lot of people that are walking a fine line between paying their bills and falling into the abyss. If enough go at the same time it could get ugly. But sheeet, the stock market don't seem to bothered.