Showing posts with label bankruptcy. Show all posts
Showing posts with label bankruptcy. Show all posts

May 17, 2010

Bank on the Run

Let's dive into the development of banking failures......

How many banks are on the run?

The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress to maintain stability and public confidence in the nation's financial system by (1) insuring deposits, (2) examining and supervising financial institutions for safety and soundness and consumer protection, and (3) managing receiverships.

Just have a look at the reported (half May 2010) FDIC Bank Failures (words don't apply):

Things ain't getting better, I'll leave a 2010 Bank Failure forecast to the imagination of your actuarial mind.

Let's hope for the best...

"Thought of giving it all away
To a registered charity
All I need is a pint a day
If I ever get out of here
If we ever get out of here"

Related Links/ resources:
- The Big Picture: FDIC Bank Failures (5.15.10)
- FDIC Failure Stats

Jan 7, 2009

Unfair Value

How can you be against something that's fair, like "Fair Value"?
What could be wrong, valuating a company at market value?

IceComp Case
Let me take you along in a story about IceComp, a fictitious ordinary wholesaler in ice creams.

The daily demand for ice creams turns out to be in line with the outside temperature. In an average summer, with an average temperature of 16°C (about 60°F), IceComp sells 10 million ice creams a year. Annual turnover the past 10 years, $ 20 million with a net margin of 10%.

In order to regulate demand and to maximize profit, IceComp defines the daily ice cream selling price (P) in line with the market by the formula:


So at 32°C an ice cream will sell at $ 4 and at 16°C it will sell at $ 2 a piece. To always deliver on time, IceComp keeps an average stock of about 2 million ice creams. Based on on the average selling price of the last 10 years, this stock is valued in the balance sheet at $ 4 million, resulting in a fair and trustworthy P&L, that reflects the actual sales level at current prices.

Two years ago, inventory (stock) valuation based on market prices ('fair value'), i.e. the price daily selling price of an ice cream, became mandatory. From that moment on, things started to go wrong.

Consistent with the daily temperature, the daily inventory value starts to oscillate heavily, with explosions and variations up to $ 6 million per month. To the 'surprise' of all stakeholders, equally strong alternating monthly gains and losses are reported. It's crystal clear, the company is no longer 'in control'.

The national supervisor interferes and demands extra securities (funds). Now the monthly P&L of IceComp starts to oscillate even more, as the investment results of the extra securities, that principally do not have anything to do with the core business of IceComp, also start to vary on basis of 'fair value' (market prices) valuation.

Ultimately, lack of confidence from share- and stakeholders drives IceComp into bankruptcy.

What was meant to be 'intentional Fair', turns out to be 'Unfair' in practice. Valuing balance sheets on bases of daily prices is like playing 'Russian roulette'. It can be compared to making 'climate statements', based on the daily weather forecast.

The analogy to banking, pension and insurance business may be clear. Don't base valuation methods on daily prices, but on a, per product or market defined, 'moving average market price' for a fixed chosen period (depending on product or market cycle).

The current (credit) crisis calls for development of new valuating principles by auditors and actuaries.

Dec 17, 2008

Credit Crisis Predicted

Lyndon LaRouche, economist, long-range forecaster, risk manager 'avant la lettre' and one of the initiators behind the SDI-project (Strategic Defense Initiative) in the 80s.

With firm quotes like "there has been no economic growth on this planet, since the end of the 1960s. None, if you measure the right magnitudes", he takes stand in the sometimes overoptimistic and misleading world we've created.

Back in 1995, in Germany, he stated "We are at the end of an epoch".

He warned that a global financial bankruptcy and collapse would be under way and introduced in an econometric form his 'famous' "Typical Collapse Function" or "Triple Curve"to illustrate that power statement.

In his daring view, he describes the interplay of the three curves (non mathematical directionalities) that characterize the collapse process:
  1. Physical-economic input/output (bottom curve)
    The productivity and functioning of the physical economy, upon which all human existence depends;
  2. Monetary aggregates (middle curve)
    The increase in monetary aggregates (approximately represented by money supply measures; injections)
  3. Financial aggregates (upper curve)
    Growth—which can become hyperbolic growth—in financial aggregates of all kinds: run-up of debts and other obligations, speculation in currencies, stock markets, futures (derivatives), etc.

As in the case of a "typical collapse function," the interaction of the upper two curves sucks the underlying physical economy dry.

But at a certain critical point (around 2000 in the USA), no matter how much money is injected in the economy, the financial bubbles cannot be kept aloft! The rate of rate of growth of monetary aggregates becomes higher than the rate of rate of growth for financial aggregates. In graphical terms, this is the "inevitable crossover" point of the middle, monetary curve, breaking up through the top financial curve.

Although this looks like intuitive econometric science, LaRouche illustrates this with some striking examples.

In the year 2000 LaRouche stated that compared with a worldwide GDP of about $41 trillion, the total amount of financial aggregate in short-term obligations was over $400 trillion. In other words, at least 10 times the amount of the total annual product of the world as a whole at that time. "

In 2008 he publishes in 'The Time Has Come for a New System':
  • We are a credit system, not a monetary system.
  • Outstanding obligations: $1.4 quadrillion, derivatives, short-term obligations of speculative nature
  • This mess is coming down.
  • System will be put into bankruptcy, by governments

And than to realize that there are still leading prominent professionals that like to make us believe that it's just some limited subprime issue. Regretful, it's the other way around. Subprime will just turn out to be the proverbial little stroke that'll fell the great oak.

Read more about LaRouche Writings

Let's hope that LaRouche is a pessimistic man....