Bill Black: U.S. Using Really Stupid Strategy to Hide Bank Losses
Posted Aug 11, 2010 02:14pm EDT by Peter Gorenstein

109 U.S. banks have failed so far this year, 23 in this quarter alone. These failures may not cost depositors, but they do come at a steep cost to the FDIC. As discussed here with ValuEngine’s Richard Suttmeier, the FDIC Deposit Insurance has already spent $18.93 billion this year, “well above the $15.33 billion prepaid assessments for all of 2010.”

The situation is likely even worse than the FDIC portrays, says William Black Associate Professor of Economics and Law at the University of Missouri-Kansas City.

“The FDIC is sitting there knowing that it has both the residential disaster and the commercial real estate disaster [and] knowing it doesn’t have remotely enough funds to pay for it,” he says.

What the FDIC should really be doing, Black argues, is raise its assessments to better reflect the true state of the banking system. However, that would turn an already precarious position into crisis as it would cause more banks would fail. The other option, though not politically plausible, would be to ask the Treasury Department or Congress for more funds.

Therefore, we’re left in our current situation. “That also means we’re following a Japanese type strategy of hiding the losses,” he says. “This is a really stupid strategy and it’s ours.”

It’s also not a money-making strategy for stock investors. Black reminds us Japan’s Nikkei is still worth about 75% less than it was before their bubble burst in late 1989.