'too little too late'

Martin Weiss and Michael Larson of the independent research company said in their data and analysis submitted to the United States Congress last week that Congress should disregard data based on the list of troubled banks maintained by the Federal Deposit Insurance Corp.

"The FDIC's list has 117 institutions with $78 billion in assets. However, based on a broader analysis of recent FDIC call-report data, we find institutions at risk of failure include 1,479 FDIC member banks and 158 thrifts with total assets of $3.6 trillion, or 36 times the assets of banks on the FDIC's list," they said.

Given the proposal for a $700-billion bail-out, it is clear that administration officials tacitly recognise that the FDIC list understates the problem. There are many more financial institutions at risk.

Weiss Research believes that of the FDIC members at risk of failure, 1,479 are banks with total assets of $2.4 trillion and 158 are savings and loans with $756 billion in assets.

These numbers indicate the $700 billion could be severely inadequate.

The research also said that the private sector and local governments also own residential mortgages in substantial quantities.

The bail-out package should also have to cover the issuers of asset-backed securities, now holding $2.1 trillion in mortgages, non-bank finance companies ($426 billion), credit unions ($332.4 billion), state and local governments ($159 billion), life-insurers ($61.6 billion), plus private pension funds, government retirement funds and households. "There should be no illusion that the $700-billion estimate proposed  will be enough to end the debt crisis. It could very well be just a drop in the bucket," they said.

Congress is advised to look beyond mortgage-backed securities held by investors and seriously consider the data regarding non-performing mortgages themselves.

These data show that among institutions with $5 billion or more in assets, 61 banks and 25 thrifts are overexposed. Thus, any attempt to reform these loans, or the mortgage pools that are based upon them, is likely to cause severe additional losses to these overexposed institutions.

Commercial mortgages are going bad as well. The current debate tends to focus exclusively on residential mortgages. But at many regional and super-regional banks, much of the risk is currently in the commercial mortgage sector, where recent data denotes many of the same difficulties as the residential sector. To truly get to the root of the problem, the administration and Congress cannot exclude these, the report said.

There is $2.6 trillion in commercial mortgages outstanding in the US. These are also dispersed widely beyond the banking sector — $644 billion held by issuers of asset-backed securities, $263 billion held by life insurers, $65 billion at non-bank finance companies and $37 billion at real-estate investment trusts.

Mortgages are less than half the problem.

The debt crisis has multiple and varied roots, with excessive risk-taking in credit cards, auto loans and virtually every other form of private-sector debt.

Note: This is the first of a two-part summary of Weiss Research's report to the US Congress, the Senate Banking Committee and the House Financial Services Committee.