Beginning to Understand

Beginning to Understand

I actually think people are beginning to understand what i am talking about, but there are a couple of things that i think might help with that understanding.  First of all the definition of NPA (non-performing assets) and how they are reflected on a bank’s balance sheet.

Here is something i just wrote one of my cohorts, who said he thought he was beginning to understand.  It might help others, too.  Like i have said all along, none of this is “rocket science”, and that is coming from someone who at one point in his life was a “nuclear engineer”.

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I am sure you understand it, P–.  It just comes down to the fact that bank loans are recorded as bank assets.  Loans that are not getting paid (i.e., delinquent loans–30-day, 90+ days, etc.) are Non-performing assets.  In other words, if you subtract NPA (nonperforming assets) from your assets on your balance sheet, you have to reduce Equity to keep your balance sheet balanced.

That is why you compare NPA to Equity.  If NPA is greater than Equity, the bank is theoretically in trouble.  Assuming that all NPA = 0 value (an extreme case, but fundamentally conservative) and that all Equity = 100% of its value (which is probably not necessarily true, considering that goodwill adds to equity, but just the same. . .).

Unlike the banks that the FDIC is shutting down, Equity for the banks “too big to fail” are in the 10-11% range and their NPA is in the 2-4% range.  And it always has been throughout this whole debacle.  In the past (pre -Great Recession) NPAs generally represented about 0.5% of Assets as a comparison.

It’s just a statistical fact that smaller banks tend to fall outside of the norm more than the big banks because of numbers–that is why most of the banks that the fdic shuts down are smaller banks (i.e., less than $1 billion in assets).

Overall, this recent recession, i estimate to be between 2-3 times worse than the S&L crisis (adjusting for inflation), but it is and has been a far cry from what the Great Depression was.  Once people finally figure that out, i think you will see the U.S. stock market moving upwards again.  In fact, i think it is already starting in that direction.

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And P–, another cohort asked me about the “banks yet to be shutdown”.  I have gone through my Quanta List, and put a table together that shuts down 47 banks a quarter (about the average for the FDIC for the last 5-6 quarters after they got their staffing in place).  At that rate all the rest of the banks will be shutdown over the next 8 quarters.  In my own analysis, i shutdown the banks with the worst NPA-Equity first.  During the first quarter of my next eight quarters, the loss rate is in the 18.6% rate, but by the time i shutdown the banks in my last quarter, i am in the less than 1% loss rate.  And if i total all the losses of those banks, i only come up with an overall loss of about $11 billion for $200 billion of assets.

Pretty interesting, huh?  In other words, Plotting out the next eight quarters of banks shutdowns?  Who else is doing that?

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