Les Jones

Where do you put money if you’re concerned about bank failures?

Thursday, September 24th, 2009 | Best Of, Economics | Permalink | 10 Comments |

Over on this post Placebo has a question:

I’ve noticed you’ve posted quite a bit on banks failing. So where are you parking your money in light of this widespread problem? I know gold is one place …
Thanks!

Right now the FDIC is still guaranteeing everything. I don’t think anyone needs to panic as long as their accounts are FDIC-insured. Keeping your money in the bank is still safer than keeping it in your mattress where robbers and fire can take it. Bear in mind that the government recently stopped its temporary protection of money market accounts, so you may want to move money markets to an FDIC account or Treasuries.

Having said that, here are some things I’ve done in light of bank failures and other potential problems. All of my amateur investment advice is worth exactly what you paid for it.

Diversification
Over the years the money for the entire family - my wife and I, our children, my mother, and my brother - wound up in the same bank. That’s too many eggs in one basket. My wife and I recently opened a vacation and Christmas savings account at a credit union so that not all of our money is in one bank. As our CDs mature we’re going to move some of them to the credit union.

Incidentally, we’re discovering that the credit union has much better interest rates than our bank. So besides the protection of putting our eggs into different baskets we’re earning more interest.

Pre-payments
A few months ago I made an advance payment on the car. If the banks went totally wonky I’d have a month to get things straightened out with my car payment. That extra payment is also a form of savings - if I couldn’t pay my other bills I could call Honda Finance and tell them to not withdraw money from my checking account that month. I need to do the same thing with the mortgage.

Naturally you should pay off credit cards, not just now but always. You should never let money linger in your savings account at 0.5% when you have a credit card balance of 10%. Even in good times that’s bad math. In really super bad times it’s worse - the bank behind the savings account balance might disappear, but the credit card company behind your debt balance never will.

A little in cash
I keep a little more cash in my wallet than I used to a year ago. After payday I typically get $200-300 in cash from the bank.

In general, most people are too dependent on plastic for day to day expenses. It isn’t just bank failures that are a potential problem. A few years ago one of the satellites that processed credit cards stopped working. Some travelers found themselves out on the road with no way to buy enough gas to get to the next gas station, much less get home. If there’s a natural disaster that knocks out power no one will be able to take plastic. It’s been reported in some recent disasters and hurricane evacuations that ATMs ran out of money and there was no one around to refill them.

In an emergency where no one can take plastic many stores will run out of change. Avoid hundred dollar bills. Don’t depend entirely on twenties, either. Fives and ones are very useful, particularly now that many vending machines can take ones. Likewise, it’s good to have a roll of quarters in your emergency supplies for vending machines and payphones.

You say you won’t need a payphone because you have a cell phone? Think again. In the event of an extended power outage cell phone towers exhaust their batteries, rendering your cell phone useless. We now keep CB radios in both cars along with a roll of quarters.

A little more in cash
I’ve also moved a little more money to cash in a safe deposit box at the bank. Not a lot, but enough so that if we couldn’t use the debit card or credit card we’d be able to pay for gas and food for a couple of weeks. The safe deposit box is inside an alarmed, fireproof vault that’s hurricane- and earthquake-proof and that’s under the watch of an armed guard during bank hours. We also keep important documents and a backup hard drive in the box. Cost is $35 per year, a bargain.

The contents of the safe deposit box aren’t part of the banks assets, so they aren’t subject to bank losses. However, if the bank is shut by regulators you won’t be able to access the safety deposit box until the bank re-opens. Typically the bank is shut down before the weekend and the FDIC re-opens it after the weekend. However, there’s a possibility that might not be true in the event of some unforeseen series of events or national crisis. It’s something worth thinking about. Once again, don’t put all of your eggs in one basket.

What about inflation?

Inflation - not bank failures - are why you should move a portion of investment and savings intended for later use to something besides cash. Typically that means things like retirement funds or college funds with a long investment horizon.

Gold
For inflation protection gold is excellent and is on a roll. China, Russia, and Middle Eastern states are buying gold to get rid of their dollars. Hong Kong is recalling its gold to put into its own vaults. Barrick, the world’s largest gold miner, issued several billion dollars in new stock to close its gold short position. More arguments for gold can be found in this Doug Casey interview.

Think of gold as insurance. It might or might not dip a little in the next few months or next year, but it won’t get wiped out and it could do phenomenally well. The conditions that will cause gold to do well will cause a massive writedown in many of your dollar-denominated assets (which for most of us is all of our assets), which makes it an excellent hedge against not just inflation but against an extreme event like the collapse of the U.S. dollar.

Physical possession of metal is best because it doesn’t involve any counterparty risk. American Precious Metals Exchange sells bullion for a small premium over the spot price. The spot price assumes you’re moving gold within the assayed gold vault system in 100 ounce bars, so it’s fair to charge a premium over spot for things like U.S. gold double eagles or Canadian maple leafs.

For those of us investing in 401Ks there are ETFs (Exchange Traded Funds), which are traded like stocks but are based on holding commodities rather than shares of a company. I have shares of GLD, CEF, and GTU in my 401k and I’d like to add some SGOL. A conservative position might be 10-15% of your long-term investments.

Absolutely avoid leveraged and inverse ETFs, which are intraday plays for traders, not long-term investors. If the name mentions 2x or 3x it’s leveraged. Run away.

Other commodities and metals
I also have some other metals and energy ETFs, including SLV, OIL, UNG, and a little platinum. In the event of inflation commodities and metals should rise. Diversification here seems prudent. I wouldn’t mind picking up some uranium and some broad food commodities.

TIPS
Another, more conservative option is TIPS - Treasury Inflation-Protected Securities. They’re secured by the U.S. Treasury, just like traditional Treasury notes. The difference is that TIPS have a variable rate. They pay a low base interest rate plus the official U.S. government inflation rate.

Bear in mind that TIPS aren’t 100% inflation-proof for two reasons. One, the government manipulates the official inflation rate, whose definition keeps getting revised. (No, really. See Shadowstats.com. The official inflation rate hasn’t kept up with rising costs of health care, education, energy or assets in forever. Subsequently Americans have much less purchasing power now than they did a few decades ago.) Two, once inflation really gets going the government will likely shut the door on TIPS sales the same way they shut down inflation-adjusted Series I Bonds.

Still, TIPS are a simple, safe investment with no real downside that I can see. I have about 10% of my 401K in these via Vanguard Inflation-Protected Securities (VIPSX). Get ‘em while you can.

Tags: banks, fdic, gold, inflation

FDIC may borrow money from banks to rescue banks

Wednesday, September 23rd, 2009 | Economics | Permalink | 3 Comments |

Who will bailout the bailer-outers?

New York Times - F.D.I.C. May Borrow Funds From Banks:

Tired of the government bailing out banks? Get ready for this: officials may soon ask banks to bail out the government.

Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.

The plan, strongly supported by bankers and their lobbyists, would be a major reversal of fortune.

A hallmark of the financial crisis has been the decision by successive administrations over the last year to lend hundreds of billions of taxpayer dollars to large and small banks.

Tags: banks, fdic

FDIC quarterly report: problem banks rise, funds fall

Thursday, August 27th, 2009 | Economics | Permalink | No Comments |

Financial Times - US ‘problem’ bank list hits 15-year high:

The number of US banks at risk of failure is at a 15-year-high while the fund protecting depositors is at its lowest level since 1993, according to figures that highlight the spread of the crisis to the lower reaches of the financial system.

The Federal Deposit Insurance Corporation, a banking regulator, on Thursday said the number of “problem banks” had risen from 305 to 416 during the second quarter. The FDIC does not name the lenders on the “problem list” but said that total assets of that group had increased from $220bn to $299.8bn in the three months through June.

The agency said its fund had fallen to just $10.4bn from $13bn in the quarter, the lowest level since March 1993 when the US was in the middle of the savings and loans crisis. The fund has been depleted by bank failures: regulators have shut 81 banks this year.

That $10.4 billion number seems too high, but I think a commenter on this post at Zero Hedge nailed it:

More like Accounting 102 … from the report:

So they had $10.2 billion of income.

“Accrued assessment income from the regular and the special assessment increased the fund by $9.1 billion. Interest earned, combined with realized gains on securities and debt guarantee surcharges from the Temporary Liquidity Guarantee Program added $1.1 billion to the fund. Unrealized losses on available-for-sale securities combined with operating expenses reduced the fund by $1.3 billion.”

I think that’s right. In addition to regular fees there was a “special assessment” to restore the depleted funds that will be collected September 30. There is talk of other special assessments that may amount to 25% of bank profits for 2010. The FDIC wouldn’t need those special assessments if they hadn’t failed to collect insurance between 1996 and 2006.

Other FDIC and bank news:

• MSNBC - 1,000 Banks to Fail In Next Two Years: Bank CEO
• Of the world’s 30 safest banks, not one is in the U.S.

Tags: banks, fdic

FDIC report on bank health due today

Tuesday, August 25th, 2009 | Economics | Permalink | No Comments |

Days Away From Economic Chaos?:

So there, you can see that in addition to goodwill, the bank’s capital was largely increased by bailout funds. So a dose of reality therapy will lead one to conclude that nearly all American banks are essentially insolvent.

If this leaves you feeling a bit queasy, well, you may need to reach for Dramamine when you realize the FDIC is not only broke, but it will probably announce it is tapping into its line of credit at the US Treasury Department, which is also insolvent (America is spending $1.58 trillion more than it collects in taxes this year)

The headline’s overblown, but it’s hard to expect news that’s both encouraging and believable.

Tags: fdic

FDIC’s losses higher on failed banks now than in S&L era

Tuesday, August 18th, 2009 | Economics | Permalink | No Comments |

Wall Street Journal - Failed Banks Weighing on FDIC:

For the 102 banks that have collapsed in the past two years, the FDIC’s estimated cost averaged 34%. That is sharply higher than the 24% rate between 1989 and 1995, when 747 financial institutions were closed by regulators … At three of the five banks that failed Friday, increasing the total to 77 so far this year, the financial hit to the agency’s deposit-insurance fund is expected by the FDIC to be about 50% of their assets.

If a failed bank’s assets are $10 billion and the losses are 34% that’s 3.4 billion. Now that the FDIC has exhausted its deposit insurance fund all of those losses are paid for by us taxpayers.

Hat tip to CalculatedRisk.

Tags: fdic

The FDIC just spent the last of its money

Sunday, August 16th, 2009 | Economics | Permalink | 6 Comments |

Mish - As of Friday August 14, 2009, FDIC is Bankrupt. Mish puts a harsh spin on it, but he’s right that the FDIC’s funds were more or less depleted with Friday’s takeover of five banks. One of the institutions, Colonial, was the biggest bank to fail in 2009. The FDIC has now closed 77 banks in 2009.

Congress already approved $100 billion in additional FDIC money, so the FDIC can go right ahead closing banks next Friday. However, the depletion of FDIC’s existing funds does signal the seriousness of this country’s banking problems and the lack of seriousness in the FDIC’s preparations. Recall that in September, 2008 the FDIC was admonishing people that they were well-funded and would not need any taxpayer money:

Let me be clear: The insurance fund is in a strong financial position to weather a significant upsurge in bank failures. The FDIC has all the tools and resources necessary to meet our commitment to insured depositors, which we view as sacred. I do not foresee – as Mr. Evans suggests – that taxpayers may have to foot the bill for a “bailout.”

Now the FDIC’s “strong financial position” is wiped out and taxpayers will in fact have to “foot the bill” to rescue depositor’s money at other failed banks. That’s in no small part because the FDIC collected almost no deposit insurance between 1996 and 2006. Other big potential bank failures on the horizon include Corus, Guaranty Financial, and Regions and there is a long list of problem banks.

Here’s the iTulip.com prediction for the banking sector:

We estimate banks will continue to fail through the end of 2011, that more than 1,000 will fail, representing a total asset loss of $890B, based on RBS estimates, information from contacts at the FDIC, and our own calculations.

A thousand failed banks would mean 900 more failed banks between now and the end of 2011. At first I found that number unbelievable, but I’m starting to think it’s in the realm of possibility. The FDIC is now assuming the deposits of five to seven banks per week, which would be a rate of 250-350 per year. Calculated Risk recalls the Savings and Loan era of the early 90s, noting that the pace of closings accelerated as time went on, reaching a peak of more than 500 per year.

LATER: The quote above was from FRED’s summary of an iTulip.com article released today: August 2009 FIRE Economy Depression update – Part II: Snowball in Hell. The final version expands the timeframe to 2012, which makes it more likely. Follow that link for an excellent treatment of the deflation vs. inflation debate. iTulip’s verdict is the same as it has been for years - a little deflation now followed by lots and lots of inflation.

Tags: fdic

Well the first thing you know old Jed’s a zeroaire

Monday, April 27th, 2009 | Economics | Permalink | No Comments |

The FDIC took control of the First Bank of Beverly Hills and three other banks last Friday. Jethro, Granny, Ellie May and Miss Hathaway hardest hit. First Bank of Beverly Hills was in such bad shape the FDIC couldn’t find a buyer for it. You’d think Mr. Drysdale would have done a better job.

There have now been more bank seizures in 2009 than in all of 2008. In addition to the FDIC’s four banks, the National Credit Union Administration (NCUA) seized a failed credit union on Friday.

Tags: banks, fdic, X ends Y hardest hit

Senate bill would raise FDIC borrowing from $30B to $100B

Tuesday, March 31st, 2009 | Economics | Permalink | 3 Comments |

If you’re not mad about the FDIC’s shameful conduct in the banking meltdown it’s because you’re not paying attention. Mish has the latest:

In a galling move that has nothing to do with credit card reform at all, the Senate slipped in a provision to allow the “FDIC to borrow up to $100 billion from the U.S. Treasury, an increase from $30 billion now. The FDIC has said the additional borrowing authority may reduce a special one-time fee imposed on banks to replenish the deposit insurance program.”

And of course borrowing “from the U.S. Treasury” means borrowing from taxpayers. By getting the money from taxpayers they reduce the “special one-time free imposed on banks.” Translation: they’re putting the burden of bailing out failed banks on the taxpayer, rather than the banks. Recall that the FDIC collected almost no insurance fees from banks from 1996 to 2006.

Note that just six months ago the FDIC was publicly repudiating a Bloomberg News report that said the FDIC might need $150 billion in taxpayer money to cover deposits at failed banks. Back in the long ago innocent age of September, 2008 the FDIC stated in the strongest terms:

Let me be clear: The insurance fund is in a strong financial position to weather a significant upsurge in bank failures. The FDIC has all the tools and resources necessary to meet our commitment to insured depositors, which we view as sacred. I do not foresee – as Mr. Evans suggests – that taxpayers may have to foot the bill for a “bailout.”

Yet here we taxpayers are in the faraway future of March, 2009, being asked to foot the bill for a “bailout.” This bill calls for an increase on the FDIC’s borrowing limit against taxpayers to $100 billion, and a Congressman recently called for $500 billion for the FDIC “bailout.” As long as we’re putting bunny quotes around words, note that the FDIC is “borrowing” this money from the taxpayer. What do you suppose the odds are that we will get our money back?

In summary, the FDIC - the federal agency tasked with insuring against bank failures - failed to collect insurance premiums, failed to adequately account for banks’ risky lending, failed to foresee just six months ago what Bloomberg News saw as a looming disaster, and will now be taking tens or hundreds of billions in taxpayer money to bail out the failed banks they themselves were supposed to insure. If you’re not mad about the FDIC’s shameful conduct in the banking meltdown it’s because you’re not paying attention.

Note that this is a bill and is not yet law, but at this point this sort of taxpayer bailout of the FDIC is probably unavoidable. The least we should get out of this is reform of the FDIC. In particular, I want banks to pay insurance premiums year in and year out, just as I pay my home, auto, and life insurance premiums even in good years when my house didn’t burn down, my car didn’t get totaled, and I didn’t keel over and die. That’s how real insurance companies work and it’s how the Federal Deposit Insurance Corporation should work.

Tags: banks, fdic, mortgage mess

Urban Legend: FDIC has 99 years to pay back depositors

Wednesday, March 25th, 2009 | Economics | Permalink | No Comments |

I had a person at the bank desk tell me that the FDIC has 99 years to pay back depositors, which is why his bank has other forms of insurance to protect their accounts.

I had to look it up. Snopes says the 99 year payback is false and so does the Wall Street Journal:

A recent comment by a reader indicated that the FDIC has up to 99 years to get depositors their money back after a bank closure. Over the years, the agency says, consumers have been told that the FDIC has up to 99 years to repay depositors and that depositors will only get back pennies on the dollar. Typically, the people spreading these myths are peddling their own insured — and commission-generating — financial accounts.

The FDIC says “historically” depositors are paid within a few days after a bank closes, usually the next business day. Depositors can access the funds by opening an account at another bank or by receiving a check for principal and interest, up to the insurance limit. (I emphasize historically, because the current mortgage mess testing the financial industry has no precedent.)

Tags: banks, fdic

How healthy is your bank?

Thursday, March 19th, 2009 | Economics | Permalink | 1 Comment |

Find out here.

First Tennessee doesn’t look so hot considering they received $800 million in TARP bailout money. SunTrust isn’t looking so good, either. Still, they’re in better shape than these guys.

Continue reading the rest of this post right here ›››

Tags: banks, fdic

The third wave of loan defaults: construction and development loans

Wednesday, March 11th, 2009 | Economics | Permalink | No Comments |

Calculated Risk - Bank Failures and C&D Loans:

Called acquisition, construction and development, or ADC, loans, they total 8.4 percent of all bank loans, just below a 30-year peak, and are used by developers to buy land, put in infrastructure and construct housing or commercial space.

[CR Note: or just C&D loans for Construction * Development]

“Everyone in the media is focused on consumer foreclosures,” said Ivy Zelman, a housing analyst at Zelman & Associates. “What they’re not focused on is the builder-developer foreclosures, which are only in the early innings and which will continue to wreak havoc as these assets are liquidated at depressed prices. Until they are cleared, there can’t be a stabilization in home prices.”

Zelman thinks the pressure will cause “hundreds of banks” to close.
…
Of particular concern is that ADC loans are concentrated in smaller banks, which tend to have deep ties to local developers. ADC loans account for 47 percent of nonperforming loans at small banks, compared with 14 percent at larger banks.
This really isn’t a new topic - the FDIC issued a report on emerging risks in 2006 that clearly showed that medium sized institutions ($1-$10 billion in assets) had excessive exposure to C&D loans. And it is really the mid-sized institutions, not the smaller institutions (although plenty of those will fail too because of bad C&D loans).

…

Put together, these graphs suggest many more bank failures as the C&D noncurrent rate continues to rise. Other banks will fail because of bad residential loans (like IndyMac), and some institutions from bad CRE loans, but most bank failures will probably be C&D related.

Tags: banks, fdic

FDIC collected almost no insurance from 1996 to 2006

Wednesday, March 11th, 2009 | Economics | Permalink | 8 Comments |

Unbelievable. The FDIC is supposed to charge insurance fees to banks. Those fees are then used to cover depositor’s money in case the bank fails.

During the boom years the FDIC thought most banks were so healthy there was no reason to collect insurance premiums. Now taxpayers may be on the hook for $500 billion to cover FDIC’s backstopping of failing banks. If past bailouts are any indication, the $500 billion is just a down payment.

This is another example of the bezzle: the FDIC was supposed to be collecting that insurance to cover losses at failed banks, but they didn’t do their jobs. When times were good, no one noticed the missing insurance fees. Now that the banks are being revealed as hollowed-out husks everyone is noticing the FDIC money that was supposed to be there but isn’t.

Tags: banks, fdic

Congress plans to give FDIC $500 billion for failed banks (UPDATED)

Friday, March 6th, 2009 | Economics | Permalink | 8 Comments |

Wall Street Journal - Bill Seeks to Let FDIC Borrow up to $500 Billion:

Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department.

The Connecticut Democrat’s effort — which comes in response to urging from FDIC Chairman Sheila Bair, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner — would give the FDIC access to more money to rebuild its fund that insures consumers’ deposits, which have been hard hit by a string of bank failures.

Last week, the FDIC proposed raising fees on banks in order to build up its deposit insurance fund, which had just $19 billion at the end of 2008. That idea provoked protests from banks, which said such a burden would worsen their already shaken condition. The Dodd bill, if it becomes law, would represent an alternative source of funding.

This $500 billion is in top of the $700 TARP bailout and the several trillion dollars the Fed is using to prop up banks. As Mish likes to say, “What cannot be paid back will be defaulted on. If you did not know it before, you do now. The entire US banking system is insolvent.”

Act accordingly. Spread your deposits around. Pull money out of the bank whenever you can do it safely (meaning, not just stuffing the money in your mattress where robbers and fire can take it). Pay off your outstanding bills. Pay extra on regular bills like your utilities, car payment, or mortgage. Put cash in safety deposit boxes. We could wind up with massive inflation, so it might not hurt to have some physical gold in the safety deposit box.

A full pantry never hurts, either. If nothing else you can save money buying in bulk, you’ll make fewer trips to the grocery store, and you’re less likely to find yourself without an ingredient when you’re cooking dinner on a Wednesday night.

Needless to say, you shouldn’t hold any banking stocks or insurance stocks (AIG was primarily an insurance company). More to the point: unload stocks now. The Dow is at 6,594 and the S&P is at 682. Notice how both numbers start with 6? They’ll start with 5 not long from now and I wouldn’t be surprised to see 4 eventually for the Dow.

P.S. While I think the banking system is largely insolvent, that isn’t the same thing as being 100% confident the banks will be wiped out or that you won’t get your money back. Take considered steps like the ones above, but don’t do anything foolish. (Putting money in your mattress is foolish.) The steps above have almost no risk. At worst, gold might go down some. The upside of gold is that it might double or triple from here if things get really bad. And if things don’t get really bad, you’ve still got gold.

UPDATE: CalculatedRisk notes that just six months ago the FDIC was disputing a Bloomberg story claiming the FDIC would need taxpayer money to cover bank losses:

Bloomberg reporter David Evans’ piece (”FDIC May Need $150 Billion Bailout as Local Bank Failures Mount,” Sept. 25) does a serious disservice to your organization and your readers by painting a skewed picture of the FDIC insurance fund. Let me be clear: The insurance fund is in a strong financial position to weather a significant upsurge in bank failures. The FDIC has all the tools and resources necessary to meet our commitment to insured depositors, which we view as sacred. I do not foresee – as Mr. Evans suggests – that taxpayers may have to foot the bill for a “bailout.”

So six months ago the FDIC was crying yellow journalism over a report they might need $150 billion in taxpayer money. Two days ago the FDIC said they might be insolvent this year without more money. Yesterday there were calls in Congress to give $500 billion in taxpayer money to the FDIC to cover failed banks. How things change. Nervous yet?

Previously

• More reasons I’m worried about banks
• This would be a good weekend for the FDIC to shut down banks

Tags: bailout, banks, fdic

More reasons I’m worried about banks

Wednesday, March 4th, 2009 | Economics | Permalink | 1 Comment |

I knew it was possible, but I never dreamed the FDIC would actually come out and admit how overwhelmed they are by the current financial crisis.

Bloomberg - FDIC’s Bair Says Insurance Fund Could Be Insolvent This Year

Federal Deposit Insurance Corp. Chairman Sheila Bair said the deposit insurance fund could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency.

“Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.

“A large number” of bank failures may occur through 2010 because of “rapidly deteriorating economic conditions,” Bair said in the letter. “Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative.”

The FDIC last week approved a one-time “emergency” fee and other assessment increases on the industry to rebuild a fund to repay customers for deposits of as much as $250,000 when a bank fails. The fees, opposed by the industry, may generate $27 billion this year after the fund fell to $18.9 billion in the fourth quarter from $34.6 billion in the previous period, the FDIC said. The fund was drained by 25 bank failures last year.

Smaller banks are outraged over the one-time fee, which could wipe out 50 percent to 100 percent of a bank’s 2009 earnings, Camden Fine, president of the Independent Community Bankers of America, said yesterday in a telephone interview.

She’s telling the American public that their FDIC-insured bank accounts are backed by an agency that may be insolvent this year. Can you say “bank runs”?

Me, I think the FDIC is an eyedropper trying to extinguish a forest fire. They have a few billion dollars in holdings to backstop trillions of dollars in deposits. The only reason the FDIC isn’t completely irrelevant is because the banks are being backstopped by the TARP bailout and separately by the Federal Reserve, which has committed several trillion dollars to guarantee loans.

Want some real banking doom and gloom? There are links from my FDIC and banking file:

Mish: You know the banking system is unsound when…

23. FDIC Chairman Sheila Bair said the FDIC is looking for ways to shore up its depleted deposit fund, including charging higher premiums on riskier brokered deposits.

24. There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.

25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.

What cannot be paid back will be defaulted on. If you did not know it before, you do now. The entire US banking system is insolvent.

iTulip: Major US banks worse than Japan’s zombies?

iTulip: What do you make of the extraordinary levels of bank reserves that the Federal Reserve is pumping into the Federal Reserve System, now at more than 600% higher than November 2007 levels?

Dr. B: Think of the commercial banks that take loans from the Federal Reserve banking system as a person and the money that flows through them as the blood in a person’s body. Now think of that person as injured. When he suffers a severe injury and loses blood, the Fed gives him an emergency money transfusion. You can see in your chart below the money transfusions in late 1999 just before the end of the year, due to the Y2K scare — false, as it turns out — and in 2001 after 9/11. Some believe that the withdrawal of reserves in mid 2000 caused the market decline that led to the recession of 2001.

Dr. B: After the injury is operated on and healed and the patient is producing his own money again, the money that was added earlier by the Fed’s transfusion is drained back out. As you can see from your chart above, the transfusions usually take two to six months and typically six months or so after the crisis is over are gradually withdrawn over a period of several months to return total money in the system to pre-crisis levels.”

iTulip: That makes sense. But why has the Fed this time had to continue to transfuse money? Why are the transfusions so huge and why do the transfusions seem to not be working? Is he still bleeding and the money is pouring through the system? If you try to compare previous expansions with this one on the same chart on the same scale, the differences are quite stark.

Dr. B: My theory is, and I admit not everyone will agree with it, is this: the patient is dead.

iTulip: Interesting. That does not bode well for the efficacy of future transfusions.

Dr. B: No it does not. They can keep the intravenous tube hooked up to a pint bottle or a 100 gallon drum of blood but it doesn’t matter if the blood is not circulating through the patient so he can take it in.

I picked a bad year to give up alcohol for Lent.

Tags: banks, fdic, the fed

Timing and FDIC bank foreclosures

Tuesday, February 17th, 2009 | Misc | Permalink | 1 Comment |

In comments on this thread, Mikee raises a point about FDIC foreclosure rates:

Estimated number of banks, mostly small local or regional ones, that will be closed in 2009 by the FDIC range from the hundreds to over 1000. So if they are going to do 6 per week that is only 300; they need to speed it up or there will be a crush of business for the FDIC at every required reporting period.

I don’t think the FDIC can or will close 1000 banks in 2009, considering they’ve only closed 13 by mid-February. I think their plan for 2009 is to close only the most insolvent banks, stabilize the others as best they can, and reassure the public to avoid bank runs.

As part of the effort to calm fears in late 2008, the government increased FDIC insurance from $100,000 to $250,000. That creates a self-interest for the FDIC to avoid foreclosures where possible. The FDIC has very limited financial reserves and recently had to double its insurance rates.

That increased coverage to $250,000 expires December 31, 2009. I would expect the FDIC to avoid foreclosing all but the most insolvent banks for now. However, it’s possible we could see an accelerated rate of foreclosures after December 31, 2009 when the FDIC’s liability drops back to $100,000. By then it will be more obvious whether the economy is improving or deteriorating, and whether the government’s plans to stablize banks have been successful.

Tags: banks, fdic