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Archive for the ‘Federal Deposit Insurance Corporation’ Category

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.

Is The Federal Reserve Insolvent?

Submitted by Tyler Durden

With Geoffrey Batt

The ongoing troubles at the GSEs are no secret: it is public knowledge that Fannie had a 5.38% delinquency rate at December, while Freddie just passed the 4% threshold in January; both continue to rise rapidly each month. The fact that the mortgage-bond spread has just hit a record tight is merely an ongoing artifact of the Fed’s endless meddling in the mortgage market, with the sole purpose of keeping rates artificially low, and preventing banks from being forced to take massive writedowns on their entire loan book. This is all well known. What, however, seems to have escaped public attention is what the impact of these delinquencies is on the one largest holder of Mortgage Backed Securities, the Federal Reserve. What also seems to have escaped the public is that the Fed is now the world’s largest bank, with total assets near $2.3 trillion. We provide a weekly update of the Fed’s balance sheet and while we briefly note the liability side, our, and everyone else’s, attention, is traditionally focused on the asset side. Yet a more detailed look at the liability side reveals something very troubling, specifically that the Fed’s capital, i.e. equity buffer, which as of most recently was $53.3 billion (a comparable metric for plain vanilla banks is their equity buffer, or Tier 1 Capital, or however the FASB wants to define it on any given day when it is covering up massive capital shortfalls) is in fact negligible and could well be substantially negative, if the Fed were to account for the rapidly rising level of delinquencies in its one largest asset holdings: the $1.027 trillion in settled MBS. And while there is no possibility of a run on the Fed, the reality is that the Fed now likely runs with a negative real capital balance, meaning that the US Federal Reserve is now essentially insolvent.

First, we present the Fed’s assets broken down by key segments. The chart below shows the most recently disclosed asset holdings as per the H.4.1 statement. Of the $2.3 trillion in assets, the vast majority, or $1 trillion is held in MBS. As pointed out previously, this is only the settled amount – in reality the Fed has already purchased $1.22 trillion in MBS, which will settle over time. In practice, this merely means that the potential for asset impairment at the Fed is even greater by about 20%.The chart also shows what happens to MBS holdings if haircuts of 5%, 10% and 15% are applied.

Like any balance sheet, where there are assets, there are liabilities, and some version of capital/equity. The Fed’s liabilities are two principal components: currency in circulation, which has been at about $900 billion for an extended period of time, and the much more relevant recently line item called “Bank Deposits”, which has been popularized as Reserves with Federal Reserve Banks (or excess reserves). The Reserve line has increased from essentially nothing to nearly $1.3 trillion in the span of a few months. Furthermore, as more and more MBS purchased are settled, the excess reserve line will soon reach at least $1.6 trillion, if not more, if indeed Q.E. 2 is launched at some point in the future. The persistent discussions of potential inflation center precisely on the interplay between the green and blue blocks in the chart below: as long as the Currency in Circulation is flat, and Bank Deposits keep rising, the probability of inflation is slim to none. In essence, excess reserves exist only due to the Taylor rule implied negative Fed Funds rate. Should there be a material shift from green to blue, or from excess reserves to currency in circulation, that is when the hyperinflationary threat becomes all too real, as suddenly far too much money will chase a fixed amount of assets. This is also where the discussion about all the various mechanisms that the Fed has at its disposal to moderate tightening comes into play, whether it involves selling of assets, increase of the rate on reserves, or some combination inbetween (we point readers to yesterday’s paper from the Minneapolis Fed which discusses these options, and the caveats associated with each). While the asset reallocation debate is very interesting, it is not the topic of this discussion.

The one item on the balance sheet that is often ignored, is the Fed’s “Equity”, or as it is defined, “Capital.” As previously pointed out, this line item is currently $53.3 billion. It is shown graphically in the leftmost column of the chart below, which depicts actual Fed liabilities. Where the interesting part comes in, is when one analyzes what happens to the Fed’s capital when the abovementioned MBS haircuts are applied.

A 5% realized haircut on MBS alone would result in a complete elimination of the Fed’s capital balance. Applying a 10% or even 15% haircut, results in a capital deficiency of $50 billion and $100 billion respectively. This deficiency will grow as more and more MBS are settled, and as the serious delinquency rate on MBS keeps increasing (no danger in this moderating any time soon). 

Now in an environment, such as the one we live in today, when mark-to-myth is the new normal, and when banks are encouraged to come up with creative ways to indicate that their Residential and Commercial Loan portfolios are worth par (despite recent disclosures by the FDIC), to assume that the Fed would do something that lowly depositor banks are told not to do, would be folly. Yet, for those who prefer to live away from Never Never land, and brave this thing called reality, just what will happen if and when the Fed finally does disclose that it is, for all intents and purposes, insolvent?

The pragmatics among you will say: this is irrelevant, the Fed can just print more money and fill in any capital hole. Well, yes and no. As an increase in cash would have to be offset by a comparable increase in some asset, it is not that simple. For a refined analysis of what would happen in that moment of clarity when the world realizes the world’s biggest bank is broke, we turn to a presentation by Chris Sims, given before Princeton University, titled “Fiscal/Monetary Coordination When The Anchor Cable Has Snapped.” We encourage all readers to read this powerpoint cover to cover, as it discusses precisely the issues were are faced with today: namely a monetary policy that has run amok, seignorage, exploding excess reserves, the impact of these on “power money”, and, in general, a Fed balance sheet that is increasingly reminiscent of a drunk, rapid and schizophrenic bull in a China store.

Among other relevant things we note that as the author points-out that “Interest bearing deposits at the Fed do not (yet) count against the Federal debt ceiling” and “if substantial interest is paid on reserves, they could constitute a major leak in the US system for legislative control of debt creation or they are not backed by the full faith and credit of the US government, which has implications for inflation control” – the consequences here are material – with a $1 trillion plus in vacuum interest-collecting paper which in all other world would be counted toward the debt ceiling, the US debt subject to limit would increase from the $12.5 trillion currently to about $13.7 trillion. Add in $6 trillion from the GSEs and America is already at the dreaded $20 trillion threshold. And furthermore, what happens to the interest payments by the Fed should rates go up to 100 bps, 200 bps? On $1.6 trillion in excess reserves this is a material amount that would reinforce inflation in a circular loop, further justifying why the Fed is mortally worried about a rise in rates.

As for the topic at hand, we turn to pp 23-24 of the presentation:

• Central bank operations generate fluctuating levels of net earnings (seigniorage), most of which are turned over to the Treasury as revenue
• Central bank balance sheets sometimes go into the red. The Treasury may then recapitalize it by creating, and giving to the central bank, new government debt
• [The Fed's] Independence meant that the legislature and the Treasury did not complain [much] about seignorage fluctuations or about the effect of interest rate changes on the Treasury’s interest expense
• Fed can always “print money” to pay its bills.
• There is no possibility of a run on the Fed, since its liabilities make no conversion promise.
• A commitment to a path for inflation or the price level makes the balance sheet matter.
• Without Treasury backing, the Fed must rely on seigniorage to raise revenues, and that can conflict with inflation-control goals.

So here is the crux of the issue: the only way to deal with a mark-to-market of the Fed currently is to embrace monetization. It is no longer a question of semantics, of who promised what: it is the only mechanical way by which the Fed can dig itself out of a capital deficiency. With GSE delinquencies exploding, and with the Fed (and Congress) singlehandedly facilitating imprudent lender policy by allowing ever more borrowers to become deliquent without consequences, the MBS delinquency rate will likely hit 10% over the next 6-12 months. At that moment, someone will ask the Fed: “what is the true basis of your capital account?” And when the Fed is forced to justify a valid response, is when monetizaton will begin.

Since the market deals in expectation absolutes, all it would take for rates to breach the inflection point black swan and commence going up, is the mere possibility of open monetization.

What we hope to show with this exercise is that no course of action, even the one currently employed by the Fed, can continue in perpetuity: you can’t have infinitely low housing rates in an environment of exploding delinquencies, as even more MBS are onboarded on the taxpayer’s balance sheet. The reality is that inflationary conerns will come to a fore, and have a material impact on rates, the second all these speculations are voiced in a more reputable arena. At that point the game will be up; the Fed’s attempt to continue the status quo will be over, and the relentless rise up in rates will begin, culminating with the long-awaited Minsky moment.

As for the timing of this development? We will join the Bob Janjuah camp on this one. While few have the guts to take the money printer head on, doing so early is certainly suicidal. Yet with each passing day, all those who are fully aware that the Fed’s course is one of self-destruction, grow bolder, until finally one day a new class of investors – the Fed vigilantes will emerge, looking for cheap opportunities to make a killing (think ABX) on the other side of the “Fed trade”, which ultimately will lead to a systemic catharsis of unprecedented proportions.

At that point neither gold, nor lead will be in any way useful. Beta and gamma radiation will make sure of that.

ADMISSION By FDIC: Massive Balance Sheet FRAUD

Posted by Karl Denninger

The Ultimate Ponzi Scheme – FDIC is Backing $5.3 Trillion through the Deposit Insurance Fund that now has a Balance of -$20.8 Billion. FDIC has Cash and Marketable Securities of $66 Billion. Is that Really Enough to Back Every Account for $250,000?

Posted by mybudget360

The FDIC is running the biggest confidence game in the country.  The FDIC is now protecting through the Deposit Insurance Fund (DIF) some $5.3 trillion in deposits in banks across the country.  All of this is secured by an insurance fund that is now in the negative by $20.8 billion.  In the middle of this financial crisis we allowed the government to suddenly up the deposit insurance coverage from $100,000 to $250,000 which on face value seems fantastic.  I mean every average American wants their money to be covered so upping it to $250,000 seems fantastic even though most middle class Americans have nothing close to that and are merely trying to pay their bills from one month to another.  But what if people suddenly pulled their money out of banks similar to what occurred with IndyMac Bank in California?  Think this can’t happen again?  One of the too big to fail banks seems to think this might be coming down the pipeline.  Some interesting information on Citigroup:

“(Prison Planet) A new advisory being sent by America’s third largest bank to its account holders has stoked fears that major financial institutions could be preparing for old fashioned bank runs if the economy takes a turn for the worse.

Originally reported by John Carney over at the Business Insider website, Citigroup is sending the following information to customers along with their bank statements.

“Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change.”

In other words, let us assume many clients decide to withdraw all their funds in a short period of time because people suddenly realize that $250,000 is actually being supported by pure faith.  In addition, average Americans realize that -$20.8 billion will certainly not cover $5.3 trillion in actual deposits that can be redeemed at any given time!  That is the psychology of our current banking system.  As long as people believe the wizard behind the curtain can back up the deposits then all is fine.  This worked as long as assets actually had values that banks claimed were true.  We know that game is over.  In fact, that is why the entire banking system has received roughly $13 trillion in bailouts and backstops.  It really is this fragile.  This is how the deposit insurance fund looks like:

Source:  FDIC

So you would think that people would at least try to diversify their investments since even a minor bank run would cause major damage.  But instead, people have increased their deposits at these banks at a rapid pace:

And I can’t blame them.  What choice is there?  Gamble in the Wall Street rigged casino or put it in the bank.  If we go back to December of 2007 when the crisis started, DIF-Insured deposits have shot up by $1.1 trillion and the actual fund has gone negative because of all the additional bank failures.  This psychology really does remind me of the mania surrounding the housing bubble boom. What if, hypothetically, people decide that one of the too big to fail is suddenly not that big at all, and Americans start withdrawing funds to some other institution.  Worse yet, they take their funds out and put them in a non-DIF insured institution.  Then what?  Or maybe people want the actual cash.  This is what is so troubling.  Just go to any local store and see how much actual cash is being exchanged.  It is all electronic debits and credits.  Insured to $250,000?  On what?  Clearly the U.S. Treasury would step in at this point and flat out start printing money but what use would that be since the dollars you are being paid with would quickly devalue (even more).

I’ve seen a few people dismiss the current negative DIF fund by saying “the FDIC is flush with cash.”  Really?  Let us examine that part of the equation.  From the latest FDIC quarterly bank report:

“In June 2008, before the number of bank and thrift failures began to rise significantly, total assets held by the DIF were approximately $56 billion and consisted almost entirely of cash and marketable securities (i.e. liquid assets). As the crisis has unfolded, liquid assets of the DIF have been to protect depositors of failed institutions and were exchanged for less liquid claims against assets of failed institutions. As of September 30, 2009, although total assets had increased to almost $63 billion, cash and marketable securities had fallen to approximately $23 billion.”

Did you get that?  The FDIC “cash” went from roughly $56 billion in June of 2008 to $23 billion in September of 2009.  And supposedly, they now have “assets” of $63 billion but how much of this is crap mortgages from failed banks like WaMu and IndyMac?  In reality, the FDIC at this point only had $23 billion to back up $5.3 trillion.  But in December of 2009 the FDIC took the radical step to front-load prepaid assessments:

“To provide the FDIC with the funds needed to carry on with the task of resolving failed institutions in 2010 and beyond, but without accelerating the impact of assessments on the industry’s earnings and capital, the FDIC approved a measure to require insured institutions to prepay 13 quarters worth of deposit insurance premiums. These prepayments—about $46 billion—were collected on December 30, 2009. Cash and marketable securities stood at $66 billion on December 31, 2009.”

Now don’t you feel better?  The FDIC took in 13 quarters of prepaid deposit insurance premiums and we now have a combined total of cash and marketable securities of $66 billion.  In other words, one too big to fail going down and good luck with that $250,000 backup really being worth what you would actually think.  This is what surprises me here.  We all know things are actually getting worse with the banking system yet we keep piling on the risk.  In fact, the FDIC has even upped the number of troubled banks on their list:

You know if the FDIC is saying 702 we know it is much higher.  I still stand by my prediction that this crisis will bring down at least 1,000 banks when all is said and done.  I love how the FDIC lists “assisted institutions” as 8 with total assets of nearly $2 trillion.  I wonder who those could be?

The bottom line is, we are playing a very big game of confidence here.  Gallup just ran a poll showing that 19.9 percent of Americans are underemployed.  That number is getting really close to the 25 percent rate of the Great Depression but with part-time employment.  That does a number on the psyche of average Americans.

FDIC Report: “We Were Broke And Getting Broker”

Posted by Karl Denninger

You won’t believe the deal OneWest Bank got from the FDIC to take over Indymac (on your dime, of course).  And if you think Indymac is the only failed bank that got a deal like this, I’ve got some swamp land to sell you.