And the Losses Continue

Today's entry is about misalignment and its costs. In an article from this morning's Wall Street Journal, the newspaper reports that the FDIC has shelled out nearly $9bn for failed U.S. banks since the financial crisis. This loss is shared among 165 banks so far, all of which were sold to stronger institutions during the crisis. In acquisition arrangements, the FDIC is still liable for nearly all future potential losses of the banks on $160bn in assets. It is estimated that the government agency will shell out another $21.5bn through 2014 even as some deals cover losses for the next ten years.

So how did get to paying out so much to failed banks? This is just another reminder of what went on in the years leading to the crash. The American homeowner was told to go out and get a house - anyone could afford it. Mortgage salesmen and their sponsors had no position in the mortgages they sold. Investment banks made money and were bailed out when the money machine stopped. Hedge funds asked for more all along the way in the form of mortgage-backed securities, collaterized debt obligations, and credit default swaps. Everyone benefited enormously. Citizens were put into houses they could not afford, even as they lied about income or credit worthiness and even when the banks turned their eyes away, and the bankers made money on every side. When things turned against them? Government stimulus and government guarantee result. The cost to the FDIC for this alignment? $9bn; I repeat, $9bn - and we're only just getting started.

To see the original article in WSJ, click here.