We’ve been saying this for about 18 months now, but it’s nice to have our analysis confirmed by somebody who appears to know what he’s talking about. Karl Denninger at Market-ticker.com does some cocktail napkin math and calculates that the losses from homes that will eventually go into foreclosure is around $870 billion, and may well be over $1 trillion.
What does this mean?
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.
The FDIC’s response is to borrow ahead, proposing that banks prepay assessments three years in advance (about $45 billion) to keep the deposit insurance program funded. As Vox Day notes, this is the banking equivalent of “Cash for Clunkers” — spending tomorrow’s money today in hopes of staying alive until the recovery kicks in.
Except that the recovery won’t get here before the FDIC is tapped out. Simple mathematical illustration: 870 > 45.