Blog

The FDIC Is Broke - Now What?

Monday, August 17, 2009, 5:13 PM

This blog post is the most recent Martenson Report, which I am now making available for wider distribution.  I believe this needs to be read and understood by as many people as possible. 


Sunday, August 16, 2009

Executive Summary

  • With the most recent bank failures, the FDIC is out of funds.
  • The FDIC is levying a one-time fee on member banks to cover the shortfall, but it will not be enough and it punishes the prudent.
  • The FDIC has been suspiciously slow at shutting down banks that have admittedly already failed.
  • Banks have been allowed to overestimate the actual worth of their assets using "mark-to-fantasy" accounting.
  • Hundreds of banks are likely already mortally wounded and set to fail.
  • The FDIC means well, but creates a moral hazard the effects of which now haunt us.
  • Take prudent action: Choose only high-rated banks, and keep cash out of the bank.

Five more banks failed this week, resulting in a long weekend for the FDIC (see below). The largest of these, by far, was Colonial Bank, which will cost the FDIC some $2.8 billion. And that's assuming that their loss estimates pan out as expected and that the $15 billion in shaky assets on which the FDIC will share future losses do not turn into larger-than-expected losses.

SAN FRANCISCO (MarketWatch) -- Colonial BancGroup Inc. became the largest bank failure this year after the Federal Deposit Insurance Corporation seized the struggling Alabama-based lender Friday and sold it to BB&T Corp.

The Colonial BancGroup deal will knock roughly $2.8 billion off a pool of money, known as the Deposit Insurance Fund, which the FDIC maintains to guarantee bank customer deposits.

The FDIC and BB&T will share losses on $15 billion of Colonial's assets. Loss-sharing deals have become common since the financial crisis struck last year, as the FDIC tries to encourage more stable banks to take over failing institutions.

(Source

Here is the list of failed banks for the weekend of August 15/16, 2009:

(Source

Let's add up the estimated costs to the Deposit Insurance Fund (DIF), which is the FDIC pool of money toward which banks pay a premium and out of which all bank failure costs are covered.

Union Bank: The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $61 million.   (Source)

Community Bank of AZ: The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $25.5 million.   (Source

Community Bank of NV: The cost to the FDIC's Deposit Insurance Fund is estimated to be $781.5 million.   (Source)  

Colonial Bank: The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $2.8 billion.   (Source)  

All together, that adds up to $3.67 billion dollars in new costs to the Deposit Insurance Fund. The problem is that this turns out to be $3 billion more than currently exists in the Deposit Insurance Fund: 

(Source

The incredible shrinking balance of the DIF is best viewed on a chart comparing it to total insured deposits:

(Source

With this latest series of bank closings, the DIF ratio is now solidly in negative territory. Interestingly, we might also note that insured deposits have declined for the first time since at least 1999, which is as far back as I have found data.

I suspect this deposit decline reflects the fact that people who are out of work are drawing down their savings, but I lack the data to confirm it at this time. Regardless of the cause, declining deposits are a significant threat to the banking system, which is only ever stable and happy when it is continuously growing. 

Okay, so the FDIC is out of money. Now what?

Punishing the Prudent

In March 2009, Sheila Bair, head of the FDIC, announced that the FDIC intended to levy a one-time fee on member banks to cover the looming shortfall.

Small and regional banks protested vigorously, noting that they were effectively being punished for remaining sound while Wall Street and a few notorious banks played with fire. They have an excellent point. Note the strong language used by ICBA president Camden Fine:

The group — made up of mostly small town, rural banks that never traded in exotic mortgage-backed securities — is outraged [by the proposed levy].

[Independent Community Bankers of America] ICBA President Camden R. Fine compares the FDIC to Japan’s attack on Pearl Harbor. He calls the special assessment on the nation’s 8,000 community banks “crippling,” and blamed “greed, incompetence and sins of the Wall Street firms that so crippled this nation’s economy.”

“We have now come to the point where the ‘systemically unimportant’ banks of Main Street must, along with the nation’s taxpayers, bail out the ‘systemically important’ Wall Street firms,” Fine said. “Not only are a handful of Wall Street CEOs holding a gun to the taxpayers’ heads, they have the banks of Main Street America looking down the barrel as well.”

Fine said it is ironic that on the day the special assessment was announced, struggling CitiGroup received another government bailout. He says community banks are strong and are doing the economic work the bigger banks should be doing.

“During the fourth quarter of 2008, community banks had the largest percentage increase in lending across the industry,” Fine said. “For every dollar paid in premium assessments, a community banks’ ability to make loans and support economic recovery will be reduced at least eightfold.”

(source)  

His point, besides being asked to shoulder the burden for irresponsible banks (which is galling enough in itself), is that every dollar sucked out of a small bank represents eight dollars of loans that cannot be made into local communities. It bears noting that recoveries are mostly made due to small business expansion and hiring, yet the effective result of the FDIC levy will be to siphon recovery fuel from small communities and transfer it to the big players.

This is not a small point. It is a big deal.

After listening carefully to these concerns, the FDIC voted on May 22, 2009 to go forward with the special levy:

The Board of Directors of the Federal Deposit Insurance Corporation today voted to levy a special assessment on insured institutions as part of the agency's efforts to rebuild the Deposit Insurance Fund (DIF) and help maintain public confidence in the banking system.

The final rule establishes a special assessment of five basis points on each FDIC-insured depository institution's assets, minus its Tier 1 capital, as of June 30, 2009. The special assessment will be collected September 30, 2009.

(source

This is where the real test of the FDIC begins. Long an underused form of bank insurance, it is now being severely tested.

You might note in the quote above that the levy will not be collected until September 30, which is 45 days away. Yet the FDIC is already out of money.

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.

Dead Banks Walking

It has seemed quite the puzzle to many financial observers that some effectively-bankrupt banks have been allowed by the FDIC to continue operating.

For example, there's the second-largest bank in Texas, Guaranty Bank, which practically begged to be taken over by the FDIC earlier this year. When that failed, they submitted a filing with the SEC on July 23rd 2009, which read:

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.

(source

That's about as clear as things can be, except for the case where the filing uses the phrase "critically under-capitalized," when the more common, and accurate, term is "bankrupt."   Also, when a bank notes in its filing with the SEC that it probably will "not be able to continue as a going concern," you can be all but certain that it is truly and utterly bankrupt.

A similar story can be told for Corus Bank, which announced on June 30, 2009 that it, too, was "critically undercapitalized" and that things are growing worse because two-thirds of their loans are non-performing. In their filing, the Corus officers even went so far as to remind the FDIC of its regulatory obligations:

[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, unless the institution’s primary Federal regulatory authority (here, the OCC) and the Federal Deposit Insurance Corporation (“FDIC”) determine and document that “other action” would better achieve the purposes of PCA.

If such a depository institution remains critically undercapitalized during the last quarter ending one year after the institution became critically undercapitalized, the appropriate Federal banking agency must appoint a receiver for that institution unless it and the FDIC affirmatively can determine that, among other things, the institution has positive net worth and the agencies can certify that the depository institution is viable and not expected to fail.

(Source)

Luckily for the FDIC's dwindling DIF account, the law gives them 90 days after the filing to act, during which time they will still remain in compliance. Since Corus filed on June 30, that gives the FDIC until September 30.

But that's adhering to the letter of the law. In times past, the FDIC moved promptly to shut down insolvent banks, because waiting only makes the problem grow larger.  So why has the FDIC been dragging its feet here?

The answer, quite probably, is because the FDIC does not have the funds it needs to shut down these banks, and so it is buying whatever time it can. 

The Pressure Mounts

The two examples of failed-but-operating banks, above, are merely the tip of the iceberg. According to a Bloomberg article, even with the relaxed mark-to-fantasy asset rules in place for banks, there are hundreds of banks flashing bright red warning signs:

Toxic Loans Topping 5% May Push 150 Banks to Point of No Return

Aug. 14 (Bloomberg) -- More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.

The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.

The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound. 

Imagine how many more would appear mortally wounded if realistic mark-to-market asset valuations were used? One shudders to think of it.

Making Matters Worse

An additional pressure on the DIF stems from the fact that losses from prior FDIC enforcements have been dramatically higher than initial estimates. With each new FDIC report, we see less money in the DIF kitty than expected. This next article does a great job of articulating that this is because bank assets are worth a lot less than originally thought:

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 (and probably still counting).

This is why Q2 is even more interesting, since the estimated costs are $11,504 million, thus leaving only $833 million in the fund for supporting failing banks in the future. Moreover, the real total cost for the first quarter in 2009 was almost twice the estimates. If Q2 is even close to this figure, the FDIC’s DIF will (very) soon be out of funds.

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.

(Source  

To review, banks have been granted a waiver by the government to essentially overstate the value of their assets, a convenience that wags refer to as "mark-to-fantasy" accounting.  When the FDIC swoops in on a Friday afternoon and takes over a failed bank, they have to start with the bank's own estimates of asset values when assessing the possible losses.  To put it bluntly, these are pie-in-the-sky estimates that will only ever disappoint.

Looking carefully at the numbers above, we see that the FDIC estimated $2,147 million in losses, but spent $4,137 million, resulting in losses that were 92% higher than expected (and counting). I don't know about you, but I happen to think that a 92% variance is a lot

None of this is the least surprising to those who have been paying attention. It is another shell game, being conducted for the benefit of a very few at everyone's expense. It works like this:

  1. Allow banks to effectively lie about the value of their assets.
  2. Let them operate until it is beyond obvious that they need to be shut down.
  3. Act surprised when their losses are a lot higher than "expected." 

Nobody who is paying attention is fooled in the slightest, but unfortunately, very few seem to be paying attention.

Moral Hazard

This is just one more example of where giving banks extra maneuvering room, by allowing them to overestimate the actual worth of their assets, has only made matters worse.

The alternative? Let the bondholders and shareholders of failed banks get completely wiped out.  Let a large number of failed banks go out of business. It is a complete fabrication to suggest that we need anything more than a fraction of the existing banks and financial institutions. Certainly quite a few could go under, and we'd be none the worse for the wear. Then, if there's any additional exposure left in the remaining banks, have the problem assets be nationalized so that a healthy core remains. 

At the most basic level, the FDIC itself is a very bad idea. While protecting depositors is a good thing, the FDIC also encourages bad banks to engage in risky behaviors, because there's no detectible reason for depositors to prefer one bank over the other. All pay essentially the same rate of interest, and all the monies are FDIC-insured.  Bad banks that take on a lot of risk make huge profits compared to their more sedate competitors.  Before you know it, perilously risky lending is the new normal.

And then the bad times hit, the bad banks are bailed out, and their safer competitors are left paying for their mistakes. And  here we are, reaping the 'rewards' of this well-intentioned - but ultimately destructive - government program. 

Lest you think that this moral hazard is some sort of passive by-product about which I am merely speculating, I offer you this account from March of 2009:

FDIC Criticizes Massachusetts Bank With No Bad Loans for Being Too Cautious

A Massachusetts bank that has defied the odds and remained free of bad loans amid the economic crisis is now being criticized by the Federal Deposit Insurance Corp. for the cautious business practices that caused its rare success.

The secret behind East Bridgewater Savings Bank's accomplishments is the careful approach of 62-year-old chief executive Joseph Petrucelli.

"We’re paranoid about credit quality," he told the Boston Business Journal.

That paranoia has allowed East Bridgewater Savings Bank to stand out among a flurry a failing banks, with no delinquent loans or foreclosures on its books, the Journal reported. East Bridgewater Savings didn’t even need to set aside in money in 2008 for anticipated loan losses.

But rather than reward Petrucelli's tactics, the FDIC recently criticized his bank for not lending enough, slapping it with a "needs to improve" rating under the Community Reinvestment Act, the Journal reported.

Can you imagine?   Even as the credit crisis is savaging the land, the FDIC, lacking more urgent matters we guess, was busy slapping "needs to improve" ratings on the safest and soundest bank in the land. 

We wonder if Citibank got a "needs to improve" rating?   But we doubt it - and that's the problem.

As an aside, we wonder if Sheila Bair, the current FDIC chairwoman, isn't already grasping for a rope tied to the wharf:

Friday August 14, 2009, 6:54 pm EDT

FDIC Chairman Sheila Bair said Congress would not go along with expanding the Federal Reserve's authority to regulate large financial companies or with giving a new consumer protection agency enforcement powers over banks.

Power to enforce rules for banks now belongs to Bair's agency and other bank regulators.

"There's a lot of resistance from a lot of different quarters to a lot of the things the administration has submitted," Bair told the AP on Thursday. "That is a reality the administration needs to deal with."

(Source)

Given what we've reviewed here, that would be our preferred strategy too - find a side issue to create cover for the departure.  Our appreciation for Ms. Bair's skills just bumped up a couple of notches.  

What this means

To begin with, one thing we can be completely certain about is that the FDIC is going to need a lot more money, and soon.  While there is a bolus coming in on September 30th from the special FDIC levy, I doubt that it will last more than 2-3 months, given the accelerating rate of failures and the number of banks that have already failed but are still operating.

I assume that the Treasury or the Fed will need to step in by year's end to provide additional funding. Hopefully the US Treasury can continue to find adequate market demand for its ever-growing debt sales. If not? Then the FDIC will be one of many demands upon an insufficient pool of funding. And who knows how that will play out?

I also fear that this drama is just getting started.  Like an asset bubble, a banking crisis has a trajectory and pace all its own.  In the chart below from Calculated Risk, we can see that the S&L crisis that began in 1980/81 took eight years to peak and another four to subside. 

While it's possible that this banking crisis will be shallower and shorter than the S&L crisis, I consider it very unlikely. Assuming that this crisis began in 2007/08 and that it, too, will take eight years to peak, we might expect the FDIC to find itself increasingly busy through 2019, with a peak in 2015. 

Too bad the FDIC is completely out of money already, even as this crisis is just beginning.

So how do I protect myself?

My immediate concern, should the FDIC find itself short of cash, is that it will simply turn from dragging its feet on closing banks to dragging its feet on paying out depositor claims. This means that if you have money in a failed bank, it could be tied up for quite some time.

Here's the advice I gave last year when I wrote about the FDIC:

  1. Do not keep more than $100k in any one bank account (okay, no genius insight there…)
  2. Always keep 1-2 months worth of basic living expenses, in cash, out of the bank but in a safe place. This way, if the banks close down, the ATMs aren’t working, and checks won’t clear, you’ll still be able to go on with things as the crisis gets resolved. And don’t worry; you won’t be losing much in the way of interest payments on that cash.
  3. Be prepared to run, not walk, down to the bank to remove your funds if the bank looks like it’s going down. Being one step ahead of the legal machinery could save you a lot of anxiety, if not your money. Here I would keep a sharp eye on the bank's stock price, because that will give you the earliest possible warning. The FDIC is notorious (and for good reason) for keeping mum about a troubled bank prior to seizing the assets.
  4. All banks are NOT created equal. Only keep your money in a Blue Ribbon bank (as rated by Veribanc in their Blue Ribbon Report ) or in one that is rated “B+” or higher by TheStreet.com. If need be, separate your holdings across several banks to assure your risk is not overly concentrated. Also, just ask around – some banks play a riskier game than their local brethren, and knowing who’s who could be a real life saver.

Another great place to check on your bank is to see if it appears on this unofficial list of troubled banks maintained at Calculated Risk.  If my banks were on that list (I use several, all highly rated, to spread the risk), I would switch to a different (highly rated, naturally) bank. 

You might also want to read my prior report on the FDIC, because it covers the legal language from the FDI Act, which unequivocally states that depositors may only be paid from money that exists within the insurance fund (which is now depleted).

Conclusion

The FDIC Deposit Insurance Fund (DIF), carefully built up over decades, has been completely depleted in the first two years of this crisis. While there's a special levy on the way on September 30th that will help the FDIC continue to operate for a while longer, those funds will prove insufficient to last the year.  Funds will have to be found outside of the usual and customary system of assessing a premium on bank assets.

Adding to the FDIC money woes are the already-bankrupt but not-yet-seized banks that are waiting in the wings, the mark-to-fantasy accounting gimmick used by banks to understate the true extent of losses by nearly 100%, and past losses from already-seized banks running out to be much worse than anticipated.

This banking crisis has a long way to go.  And if history is any guide, it may not peak for another 5-6 years.

The FDI Act provides for no additional source of funding to repay depositors other than funds located in the depleted DIF.  The FDIC will need to have that fund restocked by the Treasury or some other source later this year.  Smaller banks are already quite miffed about having been asked to pay higher premiums to pay for the all-too-predictable mistakes of their larger brethren. 

Because of the potential funding problems for the FDIC, I continue to advise that it is prudent to keep some money out of the banking system entirely, avoid troubled banks, and be ready to rapidly withdraw funds from any bank that appears troubled.

Stay calm, be ready, there's more to come.

Endorsed Financial Adviser Endorsed Financial Adviser

Looking for a financial adviser who sees the world through a similar lens as we do? Free consultation available.

Learn More »
Read Our New Book "Prosper!"Read Our New Book

Prosper! is a "how to" guide for living well no matter what the future brings.

Learn More »

 

Related content

31 Comments

FireJack's picture
FireJack
Status: Silver Member (Offline)
Joined: Feb 8 2009
Posts: 156
Re: The FDIC Is Broke - Now What?

In Canadian banks, is our money protected? Despite all the claims to how great their doing what if, for example, the royal bank of canada (RBC where my money is) were to go down what would happen to my deposits?

targetbuster's picture
targetbuster
Status: Bronze Member (Offline)
Joined: Jun 1 2009
Posts: 27
Re: The FDIC Is Broke - Now What?

This essay scares the *&^% out of me until I stop to realize that the amounts of money the article is talking about total no more than a rounding error in comparison to the amounts that TARP and the Treasury auctions are looking at.

Other than the raw ethical and moral corruptness, why should I be too worried about this. Heck, the FDIC will just ask for a few billion more from the fed or congress, they will give it to them and all will be well again. Now I know that is not the right way to handle this situation but someone,.....convince me I'm wrong.

 

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: The FDIC Is Broke - Now What?
targetbuster wrote:

This essay scares the *&^% out of me until I stop to realize that the amounts of money the article is talking about total no more than a rounding error in comparison to the amounts that TARP and the Treasury auctions are looking at.

Other than the raw ethical and moral corruptness, why should I be too worried about this. Heck, the FDIC will just ask for a few billion more from the fed or congress, they will give it to them and all will be well again. Now I know that is not the right way to handle this situation but someone,.....convince me I'm wrong.

 

Short term true.

Slightly longer term the trend is that the banks were, are and ever will be insolvent.

The losses aren't going to be covered. Your talking about a shadow banking system that is far, far greater than our GDP. Every other countries GDP. And our the world's GDP put together.

bsm20's picture
bsm20
Status: Member (Offline)
Joined: Oct 8 2008
Posts: 22
Re: The FDIC Is Broke - Now What?

It gets worse than this (of course).  The article above that states that bad loans may push 150 banks over the edge, applies only to publicly-traded banks.  The many (thousands?) of privately controlled banks are not immune and, frankly, will likely suffer similar problems at higher rates.

Further, as commercial real-estate continues to tank, more and more of these loans will default, causing additional pain.  And the CRE free fall is just beginning.  Plenty of airspace there.   Also, many CRE loans are relatively short/mid-term loans that need to be rolled over.  As these come due, many will not qualify under today's tougher standards.  These will be denied and will result in additional pain in the CRE sector, which will certainly further aggravate defaults.  CRE loans make up a large portion of the portfolio of small and mid-size banks, so, while these banks didn't play too heavily in the world of toxic RMBS instruments, they will suffer disproportionately as CRE face plants.

The failures this far are just the tip of the iceberg.  Small and mid-sized banks that, to date, have looked more prudent and professionally run will begin to show increasing cracks.  There will be pain throughout all levels and sizes of banking.

Brian

SteveS's picture
SteveS
Status: Gold Member (Offline)
Joined: Sep 6 2008
Posts: 358
Re: The FDIC Is Broke - Now What?

I also wonder how much the lowering of reserve requirements by Greenspan (when he was Fed chairman) has exacerbated the problem. I imagine it now takes a much smaller percentage of non-performing loans now to overwehlm a bank's meager reserves.

targetbuster's picture
targetbuster
Status: Bronze Member (Offline)
Joined: Jun 1 2009
Posts: 27
Re: The FDIC Is Broke - Now What?
Davos wrote:
targetbuster wrote:

This essay scares the *&^% out of me until I stop to realize that the amounts of money the article is talking about total no more than a rounding error in comparison to the amounts that TARP and the Treasury auctions are looking at.

Other than the raw ethical and moral corruptness, why should I be too worried about this. Heck, the FDIC will just ask for a few billion more from the fed or congress, they will give it to them and all will be well again. Now I know that is not the right way to handle this situation but someone,.....convince me I'm wrong.

 

Short term true.

Slightly longer term the trend is that the banks were, are and ever will be insolvent.

The losses aren't going to be covered. Your talking about a shadow banking system that is far, far greater than our GDP. Every other countries GDP. And our the world's GDP put together.

Yep, but it must be recognized that the sheer size of the ponzi scheme that has been created will dictate:

1) that it will take many years for the scheme to run its' course

2) that there is enough money coming in from legitimate sources to plug these holes for a very long time

3) There is basically no stopping it until it reaches the "Madoff Moment", but all this information and effort that has gone in to these     assessments is truly amazing and much appreciated.

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: The FDIC Is Broke - Now What?

I think we have reached the Madoff point where outlays aren't and won't be there.

On the books we have 3.5t CRE and 1.5 residential. Those are the conservative end of the spectrum.

Off balance sheet there is about 200 trillion.

200 trillion!

And that is just 5 financial institutions.

I myself don't see this taking years.

willid3's picture
willid3
Status: Member (Offline)
Joined: Jul 31 2009
Posts: 6
Re: The FDIC Is Broke - Now What?

if the banks fail, what make any one think there are any save places to your money. the credit unions have also failed, the S&Ls are also as unsave as the others are. so that leaves exactly where to put your money?  so just where are you going to put your cash for save keeping? in a mattress? if a 1000 banks fail like in the GD, it will be a repeat 

targetbuster's picture
targetbuster
Status: Bronze Member (Offline)
Joined: Jun 1 2009
Posts: 27
Re: The FDIC Is Broke - Now What?
Davos wrote:

I think we have reached the Madoff point where outlays aren't and won't be there.

On the books we have 3.5t CRE and 1.5 residential. Those are the conservative end of the spectrum.

Off balance sheet there is about 200 trillion.

200 trillion!

And that is just 5 financial institutions.

I myself don't see this taking years.

You could easily be right. But right now they are busy plugging holes and probably will be for some time to come. The image that comes to my mind is the squirrel on "Ice Age" that begins plugging the hole in the ice wall and another one sprigs up as soon as the first one is plugged. Eventually it overwhelms him and it becomes obvious to those below what was going on that they couldn't see. But by then it's too late to get out of the way.

This forum allows those of us who pay attention to actually spot them as they attempt to plug the holes. So I'm hoping we will be able to see the wall crumbling before it's too late. But for now, all we can do is keep our eye on the squirrel.

But I've given up on the hope that the financial oligarchy or political class will ever acknowledge the problem. It's up to us to know what it is and prepare as best we can.

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: The FDIC Is Broke - Now What?

Agreed, but this is one damb I don't want to be anywhere near.

DWShultz's picture
DWShultz
Status: Member (Offline)
Joined: Nov 21 2008
Posts: 10
Re: The FDIC Is Broke - Now What?

Great read.

Glad you made it avaible for everyone. Lowly college students like myself that are scrapping by, find it hard to come up with some of the yearly fees :)

Also want to make everyone aware of the situation, defientley going to post this on facebook.

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: The FDIC Is Broke - Now What?

Have to agree with targetbuster that the amount needed to top up the DIF is small change compared to the trillions being peed away on other, lesser priorities.  Chances are Kongress (now on vacation; that is to say, junketeering while the FDIC burns) will come up with a last-minute bailout.

But Kongress is like a dysfunctional family who shows up with the back rent, just as the sheriff knocks on the front door to evict them. They behave like reckless drunken clowns, leaving a string of smoking disasters in their wake, even as they pat themselves on the back for 'helping working Amerikans.' Puke, retch, barf!

I'd like to see private deposit insurance, with at least three major players. The prudent banks, like the one Dr. M mentioned in Massachusetts, could shop around for low premiums -- instead of being punished for the excesses of the politically-connected derivative kings.

Like every other federally-sponsored insurance scheme, FDIC is a mismanaged, undercapitalized joke. After three-quarters of a century, haven't we accumulated ample evidence that the U.S. fedgov should get OUT of a business in which it has no competence, not to mention no constitutional authorization? Sheila Bair, you're under citizen's arrest, ya lyin' floozie.

willid3's picture
willid3
Status: Member (Offline)
Joined: Jul 31 2009
Posts: 6
Re: The FDIC Is Broke - Now What?

not sure its the derivatives that will kill th ebanks this time. and the small banks are going to die based on CRE not derivatives or home loans. and that is happening already! and if there was private insurance how would it be different than say AIG and its derivative business? private insurance will charge them higher rates based on the banks ability to survive a depression, care to guess how much that will really cost? they have had easy, they could get the government to cut their premims fr no apparant reason. some thing you wont get from a private insurer.  the reason the government got involved in this to begin with is that the private sector can't or won't police them selves. but FDIC is the only reason more banks haven't collapsed  based on bank runs (which is what killed the majority of banks in the great depression, and that was based on rumor as much as reality in some cases. it also lead that generation to not trust banks or any thing similar and it also lead them to not trust wall street. maybe some thing the latest generations are also learning in the same manner too!!!!!)     

alcatwize's picture
alcatwize
Status: Bronze Member (Offline)
Joined: Dec 24 2008
Posts: 78
Re: The FDIC Is Broke - Now What?

Yes, the next step is to ask congress for more money, which they will do.  The problem is that it sends the opposite message the mainstream propaganda machine is trying to send.  If they have to report that the FDIC begged congress for money, it's hard to say things are getting rosier.  Yes?!?!?

Lifeshort.Deathcertain's picture
Lifeshort.Death...
Status: Member (Offline)
Joined: Feb 21 2009
Posts: 4
Re: The FDIC Is Broke - Now What?

 

Thank you Chris for making this posting available to all. This information really MUST be much more widely understood by the public. It really is a matter of life and death for millions of Americans.

The widely published but rarely understood data from last week’s bank closures details the extent to which U.S. banks are routinely and grossly exaggerating the value of their current loan portfolio’s today, in order to remain ‘solvent’ in the short-term.

 

Community Bank of Nevada’s inflated their asset values by 106%

Dwelling House Savings and Loan inflated their asset values by 103%

Union Bank in Gilbert and Community Bank of Arizona in Phoenix combined inflated their asset values by 44%.

Colonial BancGroup inflated their asset values by 33%.

 

Today, mid-Q3 2009 the entire U.S. banking system requires real inflation adjusted economic growth rates in excess of 30-100%.  Bank’s asset values are in the short term being artificial (some would say fraudulently) maintained in the hope that ‘growth’ will spark a ‘recovery’. Understanding that true recovery from here requires rates of return on energy expended in the neighborhood of 60% should make it glaring obvious to all that the U.S. banking system (and with it most of the world’s) has already completely collapsed.

The extent to which you are personally dependant on money- the prime product of our banking system, will dictate the extent to which your own standard of living will collapse with the system.

Here is a simple example from a recent CNN article.

“Outside of Colonial, the largest collapse of the day was Community Bank of Nevada in Las Vegas, which went under with assets of $1.52 billion and total deposits of about $1.38 billion. Its failure will cost the FDIC's Deposit Insurance Fund an estimated $781.5 million”

 To recap, in millions of dollars:

“Assets”                   $ 1,520 

Deposits                   $ 1,380 

FDIC Injection         $ 781.5

 

IF FDIC had to inject $ 781.5 

THEN the REAL assets at the bank before this injection was only $ 738.5 

NOT   $ 1,520.

 

That the bank held itself out to regulators and the public that it had 106% more in asset collateral than it really did is not even news worthy, it is merely business as usual today. 

http://money.cnn.com/2009/08/14/news/companies/colonial_bancgroup/index.htm

 

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: The FDIC Is Broke - Now What?

 

The FDIC is on the hook for this, which means more looting will be taking place with respect to our pocket/pocketbooks.

 

Insanity is not created by sane people!

Dick Bove points out  this is insane:

It is being reported that China Investment Corp (CIC) intends to purchase $2 billion of AAA rated, distressed mortgages in the United States. The press reports are suggesting that CIC is presently interviewing 9 American money managers.

These managers have been approved by the Treasury to participate in the PPIP program as servicers. CIC will pick one or perhaps two to manage its investment program.

Note that the PPIP program:

As the Treasury matches whatever a private investor puts up, then credits 6X as much capital. So if the Chinese are buying $2 billion, the US  puts up $2 billion, and then the PPIP allows the purchase of $24 billion of distressed assets in the open market.

All for $2 billion dollars. Oh, and the FDIC would guarantee the debt being issued by the PPIP.

Hence, taxpayer dollars are subsidizing Chinese purchases of U.S. assets at a discount.

This is insanity . . .

MarkM's picture
MarkM
Status: Platinum Member (Offline)
Joined: Jul 22 2008
Posts: 849
Re: The FDIC Is Broke - Now What?
Davos wrote:

 

The FDIC is on the hook for this, which means more looting will be taking place with respect to our pocket/pocketbooks.

 

Insanity is not created by sane people!

Dick Bove points out  this is insane:

It is being reported that China Investment Corp (CIC) intends to purchase $2 billion of AAA rated, distressed mortgages in the United States. The press reports are suggesting that CIC is presently interviewing 9 American money managers.

These managers have been approved by the Treasury to participate in the PPIP program as servicers. CIC will pick one or perhaps two to manage its investment program.

Note that the PPIP program:

As the Treasury matches whatever a private investor puts up, then credits 6X as much capital. So if the Chinese are buying $2 billion, the US  puts up $2 billion, and then the PPIP allows the purchase of $24 billion of distressed assets in the open market.

All for $2 billion dollars. Oh, and the FDIC would guarantee the debt being issued by the PPIP.

Hence, taxpayer dollars are subsidizing Chinese purchases of U.S. assets at a discount.

This is insanity . . .

Insanity, indeed.  I thought PPIP was crazy before, now this.  WE, the taxpayers, are on the hook to gaurantee a shaky (at best) investment by a foreign country.

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: The FDIC Is Broke - Now What?

All to do what? Save banks that regulators allow to get too big and allowed to dive into creating toxic debt.

Capitolism is dead.

The aftermath of this wreck will be no different from a plane crash - people will perish. They should take those in the cockpit to trial - for treason and manslaughter - the hell with theft.

MarkM's picture
MarkM
Status: Platinum Member (Offline)
Joined: Jul 22 2008
Posts: 849
Re: The FDIC Is Broke - Now What?

Treason was on my tongue, as well.

nickbert's picture
nickbert
Status: Diamond Member (Offline)
Joined: Jan 14 2009
Posts: 1208
Re: The FDIC Is Broke - Now What?

Holy cow I just noticed that one of those banks, Union Bank of Gilbert, was the bank I used for school finances while going to college in AZ.  Thankfully I stopped using them and closed that out in '05.  Bank closures and FDIC reliability is definitely starting to go from a abstract/potential hazard to one that's getting rather close to home.

Thanks again Chris for the valuable info.... even being dog-tired from travelling hundreds of miles through the remote stretches of Canada I still make time to check up on the site and your reports!

- Nickbert

SingleSpeak's picture
SingleSpeak
Status: Platinum Member (Offline)
Joined: Dec 1 2008
Posts: 505
Re: The FDIC Is Broke - Now What?

The writing is on the wall. Number one on my to-do list for today: "Find a new bank."Money mouth

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: The FDIC Is Broke - Now What?

Oh by the way -- the reason the FDIC's 'special levy' is due on Sep. 30th? That would be the last day of Usgov's fiscal year. So this one-shot, last-day cash infusion will make FDIC's annual results look merely bad, rather than catastrophic.

As any business owner knows, the unannounced flip side of the FDIC's fiscal year-end maneuvering will be to withhold payments due until after Oct. 1st if possible. Then those expenses will go into the next fiscal year.

If FDIC is going to have a cash-flow crisis, probably they will time it for October. Kongress will be in session, and FDIC can plead for emergency funds, along with a rabble of other public and corporate mendicants. The regretable situation will be treated like a hurricane -- an unforeseen, tragic phenomenon, that no one could have foreseen or prevented. But alert KongressKlowns rode to the rescue when the alarm was sounded.

Re-elect them, each and every one, my fellow depositors! Who's yo daddy? Kiss

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: The FDIC Is Broke - Now What?

FDIC:  Federalized Delusional Insurance Coverage

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Mish Read

Good article from Mish today on FDIC and reported-loan-value-accounting:

http://globaleconomicanalysis.blogspot.com/2009/08/emails-from-bank-owner-regarding-fdic.html

Here is an interesting Email from a Bank Owner and CEO regarding As of Friday August 14, 2009, FDIC is Bankrupt

ABO, who as been in the business 30 years, writes:

 

The Next Bubble To Burst

Inquiring minds are reading Next Bubble to Burst Is Banks’ Big Loan Values, an excellent article by Bloomberg columnist Jonathan Weil.

Check out the footnotes to Regions Financial Corp.’s (RF) latest quarterly report, and you’ll see a remarkable disclosure. There, in an easy-to-read chart, the company divulged that the loans on its books as of June 30 were worth $22.8 billion less than what its balance sheet said. The Birmingham, Alabama-based bank’s shareholder equity, by comparison, was just $18.7 billion.

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5752
Re: The FDIC Is Broke - Now What?

Below is a nearly perfect example of accounting shenanigans as they pertain to banks.

Read it and weep:

If you examine second quarter earnings reports carefully, you’ll discover no basis for enthusiasm. The so-called “improved” bank earnings we’ve seen, over the last two quarters, are mainly the result of creative accounting. There has been a widespread failure to mark down the value of assets deeply in the red.

The “mark to market” rule is gone, and banks are taking full advantage. However, since 1993, they have been required to report the fair market value of their holdings annually. A new rule requires the disclosure every quarter. So, in spite of the removal of mark to market accounting practices, we’ve got more data to work with now than ever before. Big banks are adept at changing the rules of the game, but the numbers disclosed in many recent 10Q quarterly earnings reports tell a very depressing tale.

Actually, even under the previous "mark to market" rule, commercial banks were allowed to mark assets that they were allegedly keeping "for investment" and "not for sale" to imaginary values.

This was a huge hole in the rules, through which a great deal of mischief was wrought. Banks have been marking "investment" assets to fake values for a long time. But, that doesn't change the facts. No bank would give you a loan based on tainted collateral, so why would you invest in a bank that holds tainted collateral to back its loans, when the bank would be insolvent if it were forced to repossess or foreclose and sell the collateral, especially at a time when repossessions and foreclosures are soaring?

A close reading of earnings reports shows that banks are carrying assets at “values” that are inflated far above fair value. Wells Fargo (WFC) shows on page 120 of its report that the fair market value of various assets is actually $34.3 billion less than the amount they are being carried at.

Bank of America (BAC) shows, on page 79, a similar unwritten-down “loss” of $64.4 billion; Regions Financial (RF) shows on page 37, 22.8 billion of unwritten down losses, and this is more than its shareholder capital of $18.7 billion and, under a strict mark to market standard, the bank would be considered insolvent;

SunTrust Banks Inc. (STI) has a $13.6 billion gap as of June 30, 2009, and that amount exceeds its $11.1 billion of Tier 1 common equity; KeyCorp admitted that its loans were worth $8.6 billion less than the value the bank carries on its books; its Tier 1 common was just $7.1 billion.

Imagine if we marked all these assets to market value? That would put all these banks very close to failure.

Yet, on August 14th, 2009, a rather humorous event occurred. Nearly insolvent BofA-Merrill Lynch, upgraded the even more insolvent Regions Bank to a “BUY”. While other stocks fell, Regions Bank stock rose by 8.46%!

(Source)

Nice move BoA!  How does one upgrade a technically bankrupt and insolvent institution and sleep at night? The odds are that BoA, or someone hey knew, had a bunch of Regions Bank stock to sell.  I suppose if they sold it, they slept soundly as that's what passes for financial morality these days.

I think it's important to illuminate "the game" that Wall Street plays and the BoA upgrade of Regions Bank shines a bright light on their dark practices.

But be sure to also note all of the other large banks that are technically insolvent.  Their only hope is that growth will soon return allowing them to slowly dig out from under their crushing loads of bad debt.  

Good luck with that strategy.

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: The FDIC Is Broke - Now What?

You know, I hate to pick on folks when they're on the beach at Mykonos and Ibiza, and can't defend themselves. It seems a little unfair.

But ask yourself -- what do you do before going on vacation in August? Responsible people either pay their bills in advance, or make arrangements so that the bills will be paid while they are away.

So, why did the 45 members of the House Subcommittee on Financial Institutions and Consumer Credit -- the one which supervises the FDIC -- go on vacation, knowing that the FDIC was going to run out of money two weeks after they split town?

Here on their own website (it's the second subcommittee in the list) are the 45 irresponsible klowns who are gleefully junketeering round the world while the FDIC burns.

http://financialservices.house.gov/subassignments.html

The chairman of the Financial Services committee, to which the subcommittee reports, is a garrulous slug named Barney Frank. He walked off the job too. Who elects these contemptuous stuffed-shirt clowns, anyway?

 

targetbuster's picture
targetbuster
Status: Bronze Member (Offline)
Joined: Jun 1 2009
Posts: 27
Re: The FDIC Is Broke - Now What?

I spoke with my local bank manager today. He informed me that although he wasn't sure he could talk specifics with me, but he did say that his banks' FDIC payments had increased 12 fold this year. He said that the premium they paid the entire year of 2008 would equal LESS than the 1 month payment they make now.

Please correct me if I'm wrong but having the PPIP program insured by the FDIC means that the healthy banks will have to not only pay for the closures occurring weekly BUT they will also be on the hook for any future defaults on the toxic assets that eventually come due when the real estate market does not recover enough to substantiate the "mark to past market" accounting that (in their fantasy world) would allow China to reclaim their money on these assets they are buying through the PPIP program. If this is true, it begs the question regarding the FDIC and its' only real asset left which is public confidence.

This same banker told be that there is a common belief amongst the industry that the ONLY thing that is preventing runs on banks now is the belief that the FDIC stamp on the counter is giving the public the ever discipating confidence that the FDIC will cover their depostis. What happens when the public puts this all together????

As we are all debating healthcare, the financial system is imploding. With the only real "insured" accounts being those of the banking oligarchs. 

jmc8888's picture
jmc8888
Status: Member (Offline)
Joined: Aug 24 2009
Posts: 11
Re: The FDIC Is Broke - Now What?

Oct 1st, or thereabouts is going to be an intertesting time.

We have to remember Gov't is run by human beings.  Not always good ones.

If that human being doesn't think government can do any good, or they don't care what government does.

This is what results when that happens and greedy people take advantage.

We can blame gov't regulators, or regulations, but I'd rather point the finger at that particular person, AND who voted them in. 

Which in our case, invovles every political party, and every person who has voted. (and conversely not voted)

Gov't isn't the problem.  Gov't run by stupid people, or greedy, is.

Great posts guys, I've been watching this stuff since 2003 or so when alot of the warning signs started going out.  The thing I learned mostly new from this, was the corrollation between small-mid sized being in the CRE market.  I wasn't aware of that.  Thus as everything is collapsing, that specifically will be the trigger to take them down.  I've understood for at least a year about the coming CRE, but didn't realize they are mostly held by the as of now, 'safe banks'. 

This really is going to hit the fan at all levels.  I know that, most of you all know that, or suspect it or whatever, but to realize the linkage is pretty big. 

I also wonder how many 'self made' millionaires that have become such over the past couple of decades have lost all but 250k fdic insurance limit.

But it is something to be cognizant of.  Imagine if you had to wait a couple of months, or even 6 months or a year to get what you have in your bank account.  How is that going to help you pay your mortgage? To buy food, clothing, gas, utilities?  Credit card bills? If you're a smoker, ciggarettes, if an alcoholic, alcohol? What about drug users?

I know the answer, we all do, it's 'you're screwed'.

I can see that happening.  If Oct 1st or thereabouts is d-day, economically, then the FDIC will be 1 of many issues that they'll be facing, probably not the 1st either.  At some point, the calls for austerity come.  At some point we will be made to believe this is how it HAS to be.  Which is bull, but will be what happens, and what we probably LET happen.  I have hope that we won't, but to think congress will vote for a bill authorizing a full 250k for all the banks that are about to fail, or subsequently fail after Oct 1st,

Again they said they are insuring 6 trillion or so in deposits.  If even 11 percent of those have to be paid out, two things will occur.

1.  You can bet 6 trillion (hell maybe 50 trillion)  in deposits that WEREN'T insured will evaporate.  Those people will survive, but will they be buying the same amount of 'stuff' as they were before? Hell no.

2. What would be needed by the gov't to backstop 11 percent of 6 trillion would exceed the 'banking bailout' (as has been reported).

Again to pull from another article, 2012 is wishful thinking.  I'm thinking it is going to hit Oct 1st, 2009 (give or take 2 weeks), and if they can rig it now, this is the last year they can.  Thus Oct 1st 2009 or Oct 1st 2010 seems like it'll be the day.  Of course, people can wisen up at any time.  If they do, the collapse could be 'any day until then'.

 

 

britinbe's picture
britinbe
Status: Gold Member (Offline)
Joined: Dec 28 2008
Posts: 381
Re: The FDIC Is Broke - Now What?

There's a lot of stuff around about bad FDIC numbers triggering a bank holiday.  When is there next quarterly report due out?  I expect we will getstrong ripples from any significant wave over hear in Europe.

 

propamanda's picture
propamanda
Status: Bronze Member (Offline)
Joined: Sep 17 2008
Posts: 61
Re: The FDIC Is Broke - Now What?

Check it out:

NY Times:

http://www.nytimes.com/2009/08/28/business/28fdic.html?_r=1&hp

So far, 81 banks have failed this year, including 45 in the second quarter. That, in turn, has put enormous stress on the deposit insurance fund as administered by the F.D.I.C. It has been drained to $10.4 billion in the second quarter, compared with $45.2 billion a year earlier.

Still, the bulk of that decrease comes from additional money that the agency has set aside to cover the cost of bank failures. F.D.I.C. officials will consider a second special assessment, on top of elevated insurance fees, toward the end of the third quarter to help replenish the fund.

It added $9.1 billion to the insurance fund in the second quarter from higher deposit fees on banks, and it may be able to recover more money by selling assets from seized banks.

Ms. Bair said that she did not anticipate having to tap an emergency credit line run by the Treasury Department, although she did not rule it out. “I never say never,” she said. (emphasis mine)

 

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: The FDIC Is Broke - Now What?
propamanda wrote:

Check it out:

NY Times:

http://www.nytimes.com/2009/08/28/business/28fdic.html?_r=1&hp

So far, 81 banks have failed this year, including 45 in the second quarter. That, in turn, has put enormous stress on the deposit insurance fund as administered by the F.D.I.C. It has been drained to $10.4 billion in the second quarter, compared with $45.2 billion a year earlier.

Still, the bulk of that decrease comes from additional money that the agency has set aside to cover the cost of bank failures. F.D.I.C. officials will consider a second special assessment, on top of elevated insurance fees, toward the end of the third quarter to help replenish the fund.

It added $9.1 billion to the insurance fund in the second quarter from higher deposit fees on banks, and it may be able to recover more money by selling assets from seized banks.

Ms. Bair said that she did not anticipate having to tap an emergency credit line run by the Treasury Department, although she did not rule it out. “I never say never,” she said. (emphasis mine)

 

The FDIC to draw on its line of credit at Treasury soon

The number of problem institutions is still increasing. It was 252 at the end of 2008. It grew to 305 when the FDIC last reported. It is now 416.

Loan losses are increasing, not decreasing. Both the charge-off rate and the non-current loans and leases are increasing. They are at the highest level since data collection began.

The financial sector is clearly deleveraging as $303 billion fewer assets were in the system in Q1 and an additional $238 billion fewer assets were in the system in Q2.

The FDIC only has $10 billion left in the kitty. Clearly, more funds are needed to deal with eventual losses by failed institutions.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments