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Archive for the ‘Federal Deposit Insurance Corporation’ Category

By the end of the recession, there will be approximately 1,000 bank failures.  Does this sound extreme?  It should but the numbers don’t cover the entire story.  Since 2008 the number of bank failures has reached 269 and this doesn’t include consolidations done through the FDIC where bigger banks ate up smaller banks before they officially failed.  Last week, 7 banks failed.  At that pace, we are looking at 364 bank failures per year and the actual number of closings per week has consistently gone up.  The FDIC is in a precarious situation.  The Deposit Insurance Fund (DIF) is technically speaking, broke.  They have added additional cash reserves by front loading premiums on surviving banks but this can only stunt the financial bleeding for so long.  The problems in the banking system run deep and many of the smaller regional banks are failing because of commercial real estate loans going bad.

Here is the actual weekly trend of bank failures:

Source: FDIC

The trend is unmistakable.  The worse offending states are as follows:

Georgia:          40

Illinois:                        34

Florida:           34

California:       27

These four states make up 50 percent of all bank failures since the crisis started.  The current policy and momentum seems to be with banks ignoring balance sheet problems until they are no longer able to hide the dirt.  The too big to fail banks have already been chosen by the government and the rest will need to deal with the new economic landscape.  The FDIC, the seal of confidence and strength dates back to the Great Depression:

It is a game of confidence that we have increased the actual amount of deposit insurance to $250,000 from $100,000 at a time when the actual insurance fund is negative.  You would think that something this problematic will cause for a sense of urgency but the government is giving the FDIC until 2020 to get this fixed:

“WASHINGTON (MNI) – With the passage of the Dodd-Frank Act, the Federal Deposit Insurance Corp. will now have until the end of September 2020 to bring its reserve ratio to the statutory minimum of 1.35%, rather that 1.15%.

This is more than the eight years provided under the current Restoration Plan that would have given the FDIC only until the end of 2016 to bring its reserve ratio to 1.15%, an FDIC spokesman told Market News International Wednesday.

The latest projections presented at a Board meeting in June, indicated agency did not expect to meet that deadline.”

While the government gives the FDIC until 2020 to get their house in order, this is how the deposit insurance fund is looking:

This is the third consecutive quarter in the absolute red.  The banking system is starting to look like an imploding ponzi scheme and Wall Street is capitalizing on this vulnerability.  How?  If you were a big time investor would you invest in a too big to fail bank that may be performing poorly but has full government support or a smaller well run bank that has no support at all?  The incentive is not necessarily with the best performing and that is usually a staple of a well run capitalist system.  We are not operating in a capitalist system but a corporate oligarchy based on political connections between Wall Street and D.C.  This kind of system has been prevalent for decades now and crosses both political parties.

As the FDIC digs deeper into a hole, the number of problem institutions grows:

Keep in mind that the above list also fails to catch many of banks that do fail.  It isn’t exhaustive.  So even just looking at the above, we already have the 1,000 banks that will fail.  And the problem of course is how the current banking system is structured.  We have close to 8,000 FDIC insured banks but in reality, a very few control the bulk of the assets:

The top 4 banks of Bank of America, JP Morgan Chase, Wells Fargo, and Citibank make up 55 percent of all banking assets.  Then there is another tier of roughly 100 banks that eats up another 20 to 25 percent of assets.  So you have some 7,800 banks basically fighting for the remaining scraps.  The FDIC is in deep trouble going forward and this means we are in deep trouble.  The taxpayer is on the hook for the bill.  The U.S. Treasury already extended a lifeline of $500 billion to the FDIC “in case” they need the money.  Looking at the above data do you think they are going to use that lifeline?  It is only a matter of time.

My Budget360

Last Friday seven more banks failed bringing the total bank failures to 103.

U.S. bank failures this year have surpassed a bleak milestone of 100 as regulators shut down banks in Georgia, Florida, South Carolina, Kansas, Nevada, Minnesota and Oregon.

The seven bank seizures announced Friday bring to 103 the failures so far in 2010. The pace of bank closures this year is well ahead of that of 2009, which saw a total of 140 banks shuttered amid the recession and mounting loan defaults. That was the highest annual tally since 1992, at the height of the savings and loan crisis.

The number of banks on the FDIC’s confidential “problem” list jumped to 775 in the first quarter, from 702 three months earlier, even as the industry as a whole had its best quarter in two years.

More Failures Coming

The FDIC is now deep in the red and the situation is getting worse every week. The situation would be even worse were it not for widespread “extend and pretend” tactics that keep woefully insolvent banks in business.

FDIC Shell Game To Hide Bad Assets

To address the situation, the FDIC is going to start selling U.S.-guaranteed FDIC senior certificates. However, it has no Congressional authority to do so according to former thrift regulator William Black.

Unlimited Taxpayer Bailout

Black claims an “unlimited taxpayer bailout” of the FDIC is on the way.

Barrons discusses the situation in Uncle Sam Rides Again: Banking on a Bailout?

BEFORE THE FINANCIAL CRISIS is unwound, the Federal Deposit Insurance Corp. expects to have taken over some 300 failed banks. The rapid closures have drained the agency’s cash reserves.

The FDIC must sell assets to continue the closings. It has about $37 billion of bad-bank assets to sell, but the stockpile would bring only 10 to 50 cents on the dollar.

Enter the FDIC’s Securitization Pilot Program, the sale of U.S.-guaranteed FDIC senior certificates. This enables the FDIC to push much of the losses off its books, thanks to the U.S. guarantee of principal and interest. The program starts with a $500 million issue.

“They aren’t really selling the bad assets. They’re selling the equivalent of a Treasury bond without congressional approval,” says William Black, a former thrift regulator. “It hides the economic substance of what’s really happening—an unlimited taxpayer bailout.”

The FDIC contests the characterization, saying it doesn’t expect a claim on the guarantee because of an equity cushion to absorb the losses, and the use of only performing mortgages in the pools. The agency says a lot of resources stand between it and the taxpayer.

Foot in the Door Ploy

Notice how the $500 million start gets the FDIC foot in the taxpayer’s door. At some point Congress will probably grant authority to the FDIC just as the Fed got unlimited funding for Fannie Mae.

President Obama and the Democrats are making matters worse by permanently upping the FDIC limit to 250,000 in the financial reform legislation that just passed.

Moral Hazards

FDIC is a moral hazard. Many banks that failed were able to stay in business because of taxpayer deposits at above market rates. For example, no one in their right mind would have had deposits at Corus Bank, a bank with many troubled loans to Florida and Nevada condo developers.

Corus bank would have failed long before it did, without the FDIC guarantee. Not only was the bank able to attract funding by offering above market rates, Corus contributed to the enormous property bubble in Florida and other places.

Instead of preventing risky bank practices in the first place, or upping the insurance rate on risky bank practices to cover excessive risk, the FDIC is about to get an unlimited taxpayer sponsored bailout by selling U.S.-guaranteed FDIC senior certificates, even though it has no authority to do so.

FDIC Legacy

As a result of the inept policy decisions by the FDIC, instead of having small bank failures widely spread out over time, we have had concentrated bank failures in a short period of time.

Taxpayers will be the ones to pay the price. This is the legacy of FDIC and its failed moral hazard policies.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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FDIC next government trillion dollar bailout? Since January of 2000 to October of 2007 we had 27 bank failures. From January 2008 to May 2010 the FDIC has closed down 237 banks. Why 1,000 bank failures will occur before the Great Recession is over.

Posted by mybudget360

The Federal Deposit Insurance Corporation (FDIC) will be the next billion and possibly trillion dollar government bailout.  We have the FDIC that insures over 8,000 banks with an insurance fund that is in the negative.  From 2000 to October of 2007 only 27 banks were closed down by the FDIC.  Nearly eight full years and 27 banks were shut down in the face of epic gambling from the banking industry.  Since the recession started, the FDIC has closed down 237 banks with more to come.  Without a doubt, given the enormous amount of bad debt and commercial real estate loans we will have 1,000 bank failures by the time this recession is over.  Is this so hard to envision?  In April, 17 banks were closed and so far in May, 15 banks have seen their doors shut.  The rate of bank failures is increasing.

Why will this happen?  Because there are at least 763 more banks that are full to toxic waste in the U.S.:

Even the FDIC has 700 banks on their troubled institution list.  Keep in mind failures like WaMu and IndyMac which cost billions of dollars weren’t even on the initial list.  The issue at hand is you have 4 banks that dominate 55 percent of all banking assets:

We already know that the government is unwilling to break up these banks in an orderly fashion.  But the other 8,000 banks don’t have this guarantee.  In fact, if you look at this from a corrupt banking perspective, a giant amount of bank failures is good for these few gigantic banks.  Customers will have less banking options and will have to rely on a tiny group of banks that run like monopolies.  This will provide a fertile ground for anti-competitive practices and will result in unfriendly consumer products in the end.  We’ve already seen that.  These bailouts simply help to consolidate power and transfer wealth to a select few in the economy.

Then on the other hand, you have the FDIC spending millions if not billions each week closing down banks.  We are told that the FDIC is completely solvent.  But at this rate it will be broke rather soon (the DIF is already negative although they have a bit more in cash reserves by front-running premiums for years to come).  Don’t think this will happen?  Here is irony for you; the FDIC which insures banks needs insurance from the U.S. Treasury:

“(FDIC) Chairman Bair distinguished the DIF’s reserves from the FDIC’s cash resources, which included $22 billion of cash and U.S. Treasury securities held as of June 30, as well as the ability to borrow up to $500 billion from the Treasury. “A decline in the fund balance does not diminish our ability to protect insured depositors,” Chairman Bair concluded.”

You know exactly where this is heading.  Why put that $500 billion figure out there?  Why not $20 billion or $50 billion?  If we’ve learned any lesson with Fannie Mae and Freddie Mac or AIG is that Wall Street will raid the taxpayer for every penny they have and use supposed government entities to dump their junk onto the public.

Consider the two giant GSEs for a moment.  You hear Wall Street berate these companies but banks would have zero mortgage market if it wasn’t for them.  Wall Street investment banking is a giant group of crony welfare capitalist that is anti-competitive and has perverted the current economy.  I read current articles on how some people are surprised of the current market volatility.  What do you expect?  27 months of the worst recession since the Great Depression and no fundamental change has happened in the way Wall Street conducts business.

The DIF at the FDIC is in the red:

“(FDIC) The Deposit Insurance Fund (DIF) balance improved for the first time in two years. The DIF balance – the net worth of the fund – increased slightly to negative $20.7 billion, from negative $20.9 billion (unaudited) on December 31, 2009. The fund balance reflects a $40.7 billion contingent loss reserve that has been set aside to cover estimated losses. Just as banks reserve for loan losses, the FDIC has to set aside reserves for anticipated closings. Combining the fund balance with this contingent loss reserve shows total DIF reserves of $20 billion. Total insured deposits increased by 1.3 percent ($70.0 billion) during the first quarter.”

This is the latest press release for Q1 of 2010.  It has gotten worse.  In one week in Q2 the FDIC had to pay out roughly $7 billion on 7 bank failures in one week.  You know where this is going and everything has become one giant bailout.

FDIC insured institutions have assets of $13 trillion.  We have $3 trillion in commercial real estate loans and many banks are valuing these loans at optimistic day prices that were up to $6 trillion at their peak.  Just with CRE we will see at least $1 trillion in losses.

Gear up for another taxpayer bailout although the U.S. Treasury and Federal Reserve don’t even have the money for that.

Regulatory Capture Defined: Sheila Bair

Posted by Karl Denninger

On Sheila Bair’s Lies

Posted by Karl Denninger

FDIC Sells Failed Banks’ Toxic Crap Back To Soon-To-Be-Failed Banks At 50% Haircut With Explicit Taxpayer Guarantee

Submitted by Tyler Durden

The FDIC has just announced that it has closed the sale of $1.8 billion of Notes backed by RMBS “from seven failed bank receiverships.” The value of the actual aggregate balance: $3.6 billion. And somehow banks still keep their RMBS books marked at par. Furthermore, “the timely payment of principal and interest due on the notes are guaranteed by the FDIC, and that guaranty is backed by the full faith and credit of the United States. Sure enough, smelling this insane deal, the vultures came out to snack on the taxpayer’s corpse: “The transaction was met with robust investor demand, with over 70 investors participating across fixed and floating rate series. The investors included banks, investment funds, insurance funds and pension funds. All investors were qualified institutional buyers.” Just how many of these “banks, investment funds, insurance funds and pension funds” are viable to begin with, courtesy of the FDIC’s permission for every failed bank to continue existing is an amusing question, and Zero Hedge will attempt to get an itemized list of the participating buyers.

Some more details on the transaction:

The $1.81 billion of notes is backed by 103 non-agency residential mortgage-backed securities. The aggregate unpaid balance of the 103 securities was approximately $3.6 billion at the time of the sale. The FDIC retained an equity interest in each series. The transaction features two series of senior notes, each backed by a separate pool of RMBS. The larger series of approximately $1.3 billion, is based on option ARMS and has a floating rate tied to the one-month LIBOR. The smaller series of $480 million is based mostly on fixed-rate RMBS and pays a fixed rate. Both series priced at rates comparable to Ginnie Mae collateralized mortgage obligations.

And just in case you thought that the FDIC had finished funnelling taxpayer money from one failed bank to another soon to be failed bank, you are about to be disappointed. FTMFW:

The timely payment of principal and interest due on the notes are guaranteed by the FDIC, and that guaranty is backed by the full faith and credit of the United States.

Hilarious, the use of proceeds will go to refilling a little of the at least technically insolvent Deposit Insurance Fund, which at last check was negative $X billion (we forget, but it was a big number), implyinh that the FDIC’s job as deposit guarantor is now moot, and all Sheila Bair’s organization does is to move money from taxpayers to banks. Thank you Sheila.

As for the underwriter: it was Repo 105 counterparty extraordinaire, Barclays Capital, which served as “sole bookrunner, structuring agent and financial advisor.” Makes one wonder whether the FDIC is using not Repo 105 but Repo 100,000,005 in its existing arrangements with banks. Certainly, don’t hope to find before the US goes bankrupt.

And yes, this is a notable event in the FDIC’s history as the bankrupt organization slowly moves to irrelevancy.

This offering marks the first issuance of notes by the FDIC since the early 1990s and the first issuance by the FDIC of FDIC guaranteed debt backed by the full faith and credit of the U.S..

Here is a summary of the transaction, and below is a chart summarizing how taxpayers got raped once again.