The FDIC is Broke

When Colonial Bank failed on Friday, the 77th bank to fail this year, very few people noted that it was the largest bank failure of 2009. Even fewer people noted that the cost of cleaning it up required more capital resources than the FDIC had.
The total losses of Friday's five bank failures, according to the FDIC, would be $3.67 Billion. The problem is that the FDIC had less than $650 million in its Deposit Insurance Fund at the time.

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Back on May 22, the FDIC decided to impose a special levy on solvent banks in order to replenish its DIF. The smaller, more prudent banks of America screamed about how unfair it was that they were being asked to bail out a few irresponsible banks, but their complaints went unheeded.
The special levy won't be collected until September 30, which brings us back to the depleted DIF.

Ah. Now we have a reasonable explanation for why the FDIC has been dragging its feet and not shutting down the numerous banks that are already bankrupt, yet still operating.

It can't afford to.

Dragging its feet? The FDIC has closed down more than twice as many banks as last year, and the year is far from over.

Believe it or not, there are two major banks practically begging to be shut down right now, but the FDIC has shown no rush to do it.
For instance, Guaranty Bank, the second-largest bank in Texas, had this to say in a recent filing with the SEC.

Based on these adjustments, the Bank’s core capital ratio stood at negative 5.78% as of March 31, 2009. The Bank’s total risk based capital ratio as of March 31, 2009 stood at negative 5.52%. Both of these ratios result in the Bank being considered critically under-capitalized under regulatory prompt corrective action standards.

In light of these developments, the Company believes that it is probable that it will not be able to continue as a going concern.

Normally that sort of language is made by regulators, not by the banks themselves. In case you still didn't understand it, critically under-capitalized means bankrupt.

The same thing can be said for Corus Bank, where 2/3rd of its loans are non-performing.

[T]he Bank reported negative equity capital as of June 30, 2009. As such, the Bank expects to be notified by the OCC that it is “critically undercapitalized” within the meaning of PCA capital requirements.

Under the FDI Act, depository institutions that are “critically undercapitalized” must be placed into conservatorship or receivership within 90 days of becoming critically undercapitalized...

Fortunately 90 days from the filing brings us to September 30.

One thing the FDIC learned from the S&L Crisis is that the longer they waited, the bigger the taxpayer losses became. Thus this foot-dragging by the FDIC may allow it to put off an embarrassing taxpayer bailout for a while, but it also ultimately pushes up the bill that the taxpayer will have to pay.
It's penny-wise, pound-foolish.

This element can already be seen in the FDIC bailouts that have already happened.

On January 1 2009 the FDIC reported it had $17,276 million in the DIF and according to press releases for each failed bank, the estimated total costs for FDIC’s DIF during Q1 amounted to $2,146 million, leaving $14,997 million in the fund. However, according to the latest FDIC Quarterly report the fund counted $13,007 million at the start of Q2, – a difference of $1,990 million.

In other words, the estimated spending on failed banks during Q1 was $2,147 million, but the bill ended up around $4,137 million instead.

The ultimate bill was nearly twice the original FDIC estimates, 92% greater. (So the $3.67 Billion bill for last Friday will probably end up costing something north of $6 Billion). Why is this happening?

However, we have detected that DIF costs/bank assets have steadily increased under the period of discussion.

We believe the main reason for this lies in a de facto relaxation of accounting standards, even before the FASB 157 amendment on March 15 earlier this year. Basically the relaxation allows banks to write-off the parts of their losses caused by the slowdown in the market - but it does this by allowing them to decide what a fair price in a ‘normal’ market would be.

Allowing banks to control how they mark-to-market their assets, will likely backfire and when they ultimately end up failing, imply greater closure costs for the FDIC. From the graph above one can infer that the average yearly DIF costs/bank assets have increased at an alarming rate to almost reach 31% in 2008 and 2009.

Once again, the relaxation of the accounting standards for banks has come back to bite us. Banks are lying to themselves and to the regulators. Once the lies can no longer be covered up, the total bill turns out to be far higher than anyone is estimating.

It's interesting to note that insured deposits recently declined for the first time in at least a decade (probably more). It undermines the idea that the American consumer is saving money as fast as he/she can. Instead, the America/consumer is either paying down debt or defaulting on it.

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Possibly, just maybe, the public doesn't want their savings tied up in a failed bank while the FDIC finds a way to pay up on its guarantees. Or maybe the American consumer just doesn't have any money to put in there. Either way that means that the capital base for banks will get thinner and more unstable, which will lead to more bank failures.



Or maybe people are moving their money to credit unions.

Oh, don't worry the banks will be able to earn their way out of this mess. Oh, don't worry we are not like Japan in 1990's. Oh, don't worry we don't TARP will be enough to take care of the problem.

Financial sector is broke. It was broke when TARP passed and its broke now. But Washington and Wall Street don't want to recognize it. Why? Because it will mean pissing off the financial oligarchy. - Financial Information for the Rest of Us.

bankrupt Citigroup

They are one of the most "underwater" TARP recipients from the stress tests. Just send them to liquidation, recapture the TARP funds and then redistribute among some small banks, who through no fault of their own are going under and mainly because the middle class is going under with record foreclosures and loans in distress.

Seriously, Citigroup also lobbied for and won so much bad policy which has hurt the economy...if the entire thing burned to the ground I'll bring the marshmallows.

So much for our previous analysis that the FDIC would not run out of money from the Great Depression numbers!

welcome Minyanville readers

It appears Minyanville is picking up our news feed. (that's good!)

Nationalization is the only workable option at this point

I hate to say that I was shocked to read your post title here.

Shocked because I should have seen this coming.

I don't know if you've ever read any of the "Varieties of Capitalism" literature that deals with the institutional differences between the advanced industrial economies.

One of the big advantages that European industry has is that finance capital is bank based, not shareholder based. And banks are much more heavily regulated, they are treated like public utilities, and managers have social obligations under the law. A major consequence of this is that industrial investment in Europe is made with a long term view on creating value, not immediate profits.

It seems that the iron is hot for the US government to strike now by nationalizing these underwater banks and reshaping the national finance system. With a centralized Bank of the United States that handles interbank transfers and major cross-state loans, and a number of locally based in which equity is held by a mix of local governments, depositors, and a greatly limited shareholder base that must fall below a 1/3 threshold.

Mandate the banks to make handle loans and their investment function on a local basis, so that they must receive approval from the national Bank of the United States in order to make a loan outside of the geographic area that they are commissioned to operate in.

They make stupid mistakes over there too

Shareholder based or not. Nationalization here in the good ol' US of A really means "how can I get taxpayer money to help my friends' pockets who then fill mine up." I hate to be the cynic here, but that seems to be the case everytime in the past decade. You will continue to see the same mess appear over and over again so long as you have an accomidating Federal Reserve that is about as independent as old JP Morgan was a Communist.

Secondly, and forgive me ManfromMiddletown because I think this is really the first time I'm disagreeing with you here, every institution is shareholder based. It just depends on who the majority shareholder is. I have no problem treating banks like public utilities, indeed reintroduce Glass Steagal as well.

How would a "centralized" Bank of the United States (our third, I believe) be any different than the Federal Reserve? You'll still end up with fiat money. And that is one of the biggest problems here. So long as you have fractional reserve banking and money not backed by anything, you will have the same problems. It won't matter if the shareholder is Uncle Sam or Goldman Sachs or individual investors, the temptation for cheap loans and mal investments will still be there until you fix the two ills I just mentioned.

The European banks aren't as altruistic as you think they are. Indeed, if I may, my good man, point you in the direction if Islamic Finance. Everything from social obligations to long term profits are just about basic requirements under Islamic banking. Under such a system, even on a loan for a car, it is forbidden for the bank (actually there are cases where this isn't true and they do just rewording it, to be completely honest) to even collect interest. You don't have to change your religion (if you have one). There are many great books on it. And no, incase you're wondering, I'm not a Muslim, but I am an econ nerd like the rest of you on this site and study alternative systems as well.

I'd recommend Muhammad Ayub's book for starters, or Mahmoud El-Gamal's book (I have this on the kindle, infact, start with this one). There are other religious based finance as well in operation now or in the past. The general themes have been:

1)Controled usury, that is nothing excessive (though that term is subjective).
2)Established benefit for the user beyond luxury
3)Investment for some sort of production
4)Scrutiny based on a moral code or religious text
5)Dissuation towards the development of a consumer culture

Once more, I'm not advocating theocracy or something. I know Seebert has hinted on a similar topic. You can strip away, for example, #4 on that list above. The early 18th Century, just prior to the Revolution, you had a similar financial ethos in many of the colonies. Also, if you can, find the book "The Merchant Class of Medival London", by Sylvia Thrupp.

Get Blair out of the FDIC

It is no wonder they are out of money. Blair seemed to think early on that she should be leading the mortgage reform efforts and used FDIC funds to modify mortgages. I would like to know how much she wasted on this effort and why she didn't have the brains to realize that it was just beginning it was going to be hard to keep the FDIC in the green. Another example of a incompetence.

Did CIT get bailed out by the fed or not? There is no coverage of it at all but it appears that the fed did come to the rescue with tax payer dollars. I guess CIT execs will be getting million dollar bonuses next year...

FDIC restructures its asset sales

These FDIC deals were and still are despite this "clawback" very sweet to buyers - assets purchased at a deep discount and FDIC guaranteeing a good portion of any losses. That is why private equity firms want in on these deals. All upside very little downside.

FDIC knows eventually it will have to assume some the losses but FDIC is broke so we, the taxpayer, will be assuming the losses. So in an effort to avoid "political fallout" it has introduced a new provision, at least in the most recent deal with the sale of Colonial bank assets to BB&T.

If losses on Colonial assets are less than $5 billion, BB&T has agreed to pay some money to FDIC.

In case you are wondering about the downside:

FDIC agreed to reimburse BB&T for 80% of the first $5 billion in losses and 95% of further losses up to a ceiling of $14.3 billion

Oh yeah, BTW, BB&T bought the assets for $21.8 billion.

FT link - Financial Information for the Rest of Us.

FDIC Insured deposits

how about greenbacks under the mattress? I have most of nine in money market accounts, but about 10-15% in hard cash. I am curious about KC Fed chief Hoenig's speech and comments re "too big has failed" and wonder what the next weeks might hold. Could we be getting ready to press the RESET button? Who knows? I don't, but I'm damn suspicious about any and all Official Statements these days. thanks for the forum and many of the comments-- two cents beats a plugged nickel-- or an insolvent regulator


FDIC is Broke

Looks like my blog article was one month early.

(Bloomberg) -- The FDIC’s insurance fund is going broke, and Sheila Bair is wondering aloud about how to replenish it. This means one thing for taxpayers: Watch your wallets.

I've got another "ahead of the curve for you"

I noticed many are claiming that the stock market rally is a "junk" rally and now those stocks will be dumped.

i.e. sucker's rally. Yet to be seen of course.

Once again, the Blogosphere was correct

It's now leaking out into the mainstream.

Moonraker Fund Management, the independent investment boutique, is concerned that banks may have been using their bailout money to buy equities, helping to fuel a rally that is vulnerable to a major correction if they consequently sell in thinly traded markets.
Instead of lending to businesses and homebuyers, banks may have been using some of their bailout money to buy stocks from an oversold base in March, Moonraker believes. The British Bankers’ Association’s own figures show that gross mortgage lending by the banks has fallen from a high of £21.5bn in June 2007 to £9.1bn in August 2009, while new term lending to small businesses was £796m in July, compared with around £900m last October.
“The banks have every right to use the money they borrow in any way they choose. But it would be good to know how much of the bailout money has been used to buy equities. Clearly, someone has been buying, and given that it hasn’t been ordinary investors and the institutions that does just leave the banks.
“The banks’ balance sheets will certainly have benefited from their equity holdings. If they could sell these investments into a rising market then they would be in a better position to repay their debts. But there will be a problem if the public and institutions do not join the rally and the banks have to sell equities into a vacuum.”

That's why its a suckers rally. Except the suckers don't appear to be ready to jump in. With the summer house selling season over, the collapse of the commercial real estate market, and the coming end to federal support of the markets, there is going to be increasing pressure for the banks to unload those equities.

used their bail out money to gamble!

Jesus, good god. Yeah, there is a strong reason why we have our space for the peanut gallery of America to write!

You've got to be frickin' kidding me.

If this was Uncle Fred, he'd have his bank accounts frozen, his credit cards taken away and committed to gambler's anonymous in house rehab.

I mean come on, they are doublin' down to make back the money?