Bank failure Friday

Mar 5, 2010 22:47 UTC

Sheila Bair has said publicly that more banks will fail this year than last (140), so we can expect bank failures to stay elevated.

Reader note: I’ve added a new bullet point for each failure. Because I’m a glutton for punishment on a Friday night? Possibly. But also because, technically, FDIC doesn’t pull the trigger to close a bank. The regulator closes the bank and appoints FDIC receiver. They do coordinate. And, of course, FDIC folks are the boots on the ground that repo the bank…

Check back for updates to this post as failures roll in tonight.


—Failed bank: Sun American Bank, Boca Raton FL
—Regulator: Florida Office of Financial Regulation
—Acquiring bank: First Citizens Bank & Trust Co, Raleigh NC
—Vitals: at 12/31/09, assets of $536 million, deposits of $444 million
—Estimated DIF damage: $104 million


—Failed bank: Bank of Illinois, Normal IL
—Regulator: Illinois Department of Financial Professional Regulation – Division of Banking
—Acquiring bank: Heartland Bank & Trust Co, Bloomington IL
—Vitals: at 12/31/09, assets of $212 million, deposits of $199 million
—Estimated DIF damage: $54 million


—Failed bank: Waterfield Bank, Germantown MD
—Regulator: OTS
—Acquiring bank: None
—Vitals: at 12/31/09, assets of $156 million, deposits of $156 million
—Estimated DIF damage: $51 million


—Failed bank: Centennial Bank, Ogden UT
—Regulator: Utah Department of Financial Institutions
—Acquiring bank: None…payout transaction
—Vitals: at 12/31/09, assets of $215 million, deposits of $205 million
—Estimated DIF damage: $96 million



If you accept that, go to step #2, which is, “How to regulate BIG BANKS.”


To see an example, visit:

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Evening Links 3-5

Mar 5, 2010 22:38 UTC

Analyst: Fannie and Freddie will force banks to eat $21 billion of soured loans this year (Keoun) Very interesting thread to follow. Remember, Fan and Fred guarantee loans meeting their underwriting standards that are originated by banks. Bad underwriting often means these loans are pushed back to the originating bank. Why care? Because banks have literally trillions of off balance sheet exposure to Fan and Fred loans. Wells Fargo alone has over $1 trillion (see page 52 of its 10-k). Of course the vast majority aren’t going to be put back to them, but only a fraction need be to cause material losses. There are even vulture funds in the market looking for loans they can push back to banks. Meanwhile, the new accounting standard that forced banks to bring off B/S items back on balance sheet — FAS 166 and 167 — allows them to avoid all recognition of their Fan/Fred loan exposure.

Betting on the blind side (Lewis, Vanity Fair) Excerpts from Michael Lewis new book, of which I have a manuscript and am enjoying very much. Also looking forward to Roger Lowenstein’s new book.

Fannie was declared insolvent in 1981 (Scion Cap, ht Nick Gogerty) Nick forwards a link that, ironically, comes from the same guy profiled in the Vanity Fair article above.

PDF–An extended interview with Jim Rickards (Welling) The Welling@Weeden series is fantastic. Readers who liked Jim Rickards’ two columns in this space will like this a lot.

The “staple” is back (Lattman/McCracken, WSJ) “It is the surest sign yet that corporate credit markets are roaring anew.”

HBO picks up rights to Sorkin’s “Too Big to Fail” (Fleming, Deadline) Can’t wait. Hopefully they don’t take as charitable a view as Sorkin of all the characters involved in the drama.

For psychic, suit came as a surprise (de la Merced, NYT) This guy’s website is a hoot. I recall, during my interlude as musical theater actor here in NYC, a guy who was doing seminars like this trying to sell people on the idea that covered calls could make them rich. Total scam artist, but the people he targeted — actors — were vulnerable, uninformed and poor.

Graphic–Consumer Credit rises for first time in a year (Culp, Reuters) The statistical release from the Fed is here. This doesn’t include mortgage debt. Are consumers re-levering?

Busted (Hayes, CBS)


“Meanwhile, the new accounting standard that forced banks to bring off B/S items back on balance sheet — FAS 166 and 167 — allows them to avoid all recognition of their Fan/Fred loan exposure.”

Are you referring specifically to WFC here?

Posted by kfunck1 | Report as abusive

Not till they’ve nothing left to lose?

Mar 4, 2010 19:11 UTC

Those calling for financial reform aren’t being upfront about its costs, making it impossible to achieve. This was again evident at the Roosevelt Institute’s otherwise very good conference at Time Warner Center yesterday.

First the good. The purpose of the gathering was to galvanize support for deeper reforms than lawmakers have proposed. Roosevelt’s Chief Economist Rob Johnson and his murderer’s row of thinkers — including Simon Johnson, Elizabeth Warren, Frank Partnoy, Rick Carnell, Josh Rosner and others — presented a very good white paper outlining how best to clean up the financial system. Other attendees were George Soros, Brooksley Born, Jim Chanos, Joe Stiglitz. Even Eliot Spitzer showed up.

When it comes to reform, they all argued, nibbling around the edges ain’t gonna cut it.

Banks need more capital, Fannie and Freddie need to be wound down, banks’ risky activities must be corralled, tax incentives that encourage borrowing must be done away with. Most importantly, perhaps, we need to end the cycle by which the financial system lends too much and too easily only to be bailed out by a compliant Fed when things go wrong.

Throughout there was much indignation as to why such sensible reforms haven’t been enacted. Wall Street’s lobby machine got most of the blame, the rest went to “the people” for their perceived lack of outrage. But of course people are mad, and though the lobby machine is strong, it’s not the real obstacle to reform.

We are.

We don’t really want it. More to the point, people care more about their jobs than they do about reform.

What the reforms in paragraph 4 all have in common is that they reduce the availability of debt finance. That’s smart because our chief economic problem is that we’ve too much of the stuff.

But said another way, the reforms reduce credit. Like a lot. And that means deep and prolonged recession. Crucially, it means higher unemployment.

Just for instance, try to imagine winding down Fannie and Freddie. Doing so means housing finance — all of it — goes away. The economic implications are so dire no one is even contemplating how to do it, even though all know it must be done.

Yet the most vocal supporters of financial reform, which should properly be called “lending reform,” also whine that banks and the government aren’t lending enough!

We can’t have it both ways.

Real reform means cutting lending, it means more jobs will be lost. And Americans aren’t yet willing to make that trade, no matter how mad they are about bailouts.

Today we got a new report out of CBO, which may kill the highly sensible bank tax proposed by the Obama administration with the following sentence:

The fee would probably lower the total supply of credit in the financial system to a slight degree. It would also probably slightly decrease the availability of credit for small businesses.

Despite the “slight” qualifier and comments elsewhere that the fee would help level the playing field for small banks, the loss of any credit whatsoever for “small businesses” is something Congress hasn’t been able to stomach.


A reason we got substantive financial reform in the mid ’30s is that folks had nothing left to lose. Real output fell 30% peak to trough during the Great Depression.

During last year’s recession, output fell just 3%. If you compare debt levels today with those leading up to the Depression — and consider that de-leveraging is the proximate cause of the decline — we’ve much further to fall.

That’s not to suggest that reform isn’t necessary. It absolutely is. But it will cost jobs and output. The speakers at Roosevelt Institute’s conference did a disservice to their audience by not discussing these costs. Some even suggested the credit engine can magically be made to run at close to full speed even as it’s in the shop for repairs.

Luckily, Roosevelt is led by the very capable Johnson, who has no illusions about the costs of bank reform. He acknowledges that financial fixes will reduce lending and output, but speaks about the need to control the velocity of that decline.

The test of his leadership, and of Roosevelt’s relevance, will be whether they can convince America to put up with any decline at all. The last thing we want is a rerun of the Depression. A great set of banking rules came out of it, but only after the economy collapsed into a smoldering pile of rubble allowing us the freedom to start from scratch.

We want proactive, not reactive reform. But it won’t happen unless voters and Congress are convinced to prioritize it over credit creation and, yes, jobs.


[...] Not till they’ve nothing left to lose? Rolfe Winkler [...]

Live-blogging the Pandit hearing

Mar 4, 2010 14:52 UTC

Hi folks….Vikram Pandit is scheduled to testify for Congress starting at 10AM. We’re live-blogging it here on, but you can also watch it yourself on C-Span 3.

Here’s a copy of his testimony.

Lunchtime Links 3-2

Mar 2, 2010 15:34 UTC

Larry Fink’s $12 trillion shadow (Andrews, Vanity Fair) One of the most powerful men on Wall Street that most have never heard of.

FDIC to grease mortgage market with $1.8 billion deal (Yoon, Reuters) The FDIC is collecting toxic assets by the bucket load as they seize banks. One way to get rid of them is to turn them into securities and sell them to investors. But the deal is private. Why not do a public transaction?

Deal near on new banking rules (Paletta, WSJ) In a plan likely to be a non-starter with others in Congress, Dodd and Corker would put consumer protection inside the Fed.

Wherein John Dugan says we should “err on the side of safety and soundness” (OCC) The Comptroller of the Currency talks about the new Basel proposals designed to strengthen capital and liquidity requirements. Dugan has been much maligned, perhaps appropriately, for using his power as Comptroller to preempt state efforts to, for instance, clamp down on predatory lending. Good to hear that he agrees a stronger financial sector is necessary and that to achieve it we need stronger capital requirements, but it remains to be seen where new capital standards will be set. He says the 7.9% aggregate Tier 1 Common ratio at national bank holding companies on 12/31 is a big improvement relative the 5.1% level where it was in March. But that’s not enough, not with the huge embedded losses banks are likely sitting on…

Uncle Sam’s housing stock keeps growing! (CR) Very interesting chart shows how much foreclosed property is sitting on the balance sheets of Fannie, Freddie and FHA. And this dramatically understates the total housing inventory on the government’s balance sheet when you consider that these agencies guarantee the vast majority of mortgage debt offered in the market. Ultimately the collateral behind these loans — i.e. homes — is on their balance sheet. That is to say, it’s on Uncle Sam’s…

Internet overtakes print news consumption among Americans (ars technica)

Disney/Cablevision fight over cost of “free” (Kramer, PaidContent) When it comes to consumers paying for free content, the sexy story is newspapers erecting new paywalls. But the bigger fight in dollar terms may be cable networks and broadcast companies battling cable companies for higher carriage fees, a cost that is simply passed on to cable customers.

Google reading your e-mail isn’t all bad… (imgur)

Vacation… (imgur) Good wallpaper for a stressed-out desktop.

NASA scientist: Chile quake shortens day, shifts earth’s axis (BusinessWeek, Morales) Bigger quakes have had bigger impacts…

Lunchtime Link 3-1

Mar 1, 2010 16:53 UTC

Buffett’s ’09 letter to shareholders — pdf (Berkshire Hathaway)

Kohn retiring from Fed in June (Hilsenrath/Wessel, WSJ) The Economist once wrote a leader that Don Kohn should have been the guy to replace Greenspan…

Declaring victory at half-time (Steve Keen)

People won’t take free umbrellas in rainstorm (Rubenstein, SF Chronicle) Interesting story, but not really that surprising. People running around a busy city are so assaulted with stimuli — traffic, other pedestrians, folks asking for money or handing things out (here in Times Square the worst are Scientologists handing out Dianetics flyers and guys hawking comedy tickets) — that they can only function by actively blocking out everything around them, including offers of free stuff.

The end of business class? (Economist)

Rising threat of infections unfazed by antibiotics (Pollack, NYT)

Dodd’s proposed compromise… (Andrews) …will include a neutered CFPA. More from Felix.

Network news at a crossroads (Stelter/Carter, NYT) [ABC News President David] Westin said high-priced and purely cosmetic talent would become an increasingly endangered species. “There have been people in television news — very successful people — who do not write,” he said. “We are going to definitely require more of our journalists.”

Florida AG investigating Cash4Gold (Sun Sentinel) This blog once got a letter from the Cash4Gold folks after we warned readers to avoid them.

Official language fail (imgur)


Must read this one Mr. Capital Jungle :P ….
Due North: Canada’s Marvelous Mortgage and Banking System

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Bank failure Friday

Mar 1, 2010 05:49 UTC

Reader note: Some Internet troubles over the weekend delayed this post. Apologies.


  • Failed bank: Carson River Community Bank, Carson City NV
  • Acquiring bank: Heritage Bank of Nevada, Reno NV
  • Vitals: as of 12/31, assets of $51.1 million, deposits of $50 million
  • Estimated DIF damage: $7.9 million


  • Failed bank: Rainier Pacific Bank, Tacoma WA
  • Acquiring bank: Umpqua Bank, Roseburg OR
  • Vitals: as of 12/31, assets of $718 million, deposits of $446 million
  • Estimated DIF damage: $95.2 million

Afternoon Links 2-26

Feb 26, 2010 21:01 UTC

Existing home sales/more existing home sales (Calculated Risk) Existing homes sales were down sharply from November, but the Nov number was high because of folks rushing to take advantage of the first time homebuyers tax credit, which has since been extended. Anyway, existing home sales were actually up versus January ’09.

Schadenfreude alert: AIG cut 20,000 jobs in 2009 on asset sales, defections, layoffs (Son, Bloomberg)

FDIC to test principal reduction for underwater borrowers (Merle, WaPo) Small program to start….it’s only on mortgages acquired by FDIC as part of bank failures, which is less than 1% of mortgages.

Bernanke delivers blunt warning on U.S. debt (Hill, Wash Times) He says the Fed won’t monetize debt, but it already has. It’s probably the economy will be fighting deflation for years to the degree that credit losses continue to make it hard for banks to create credit money….see Japan. As that cycle continues, the Fed will be forced into successive rounds of quantitative easing, which likely means more Treasury bond purchases down the line. It’s good that Bernanke is being vocal about unsustainable deficits, but it’s all just talk until he actually puts monetary policy where his mouth is…

China buying IMF gold story unfounded: author (Miles, Reuters) Gold was up 1% on a false rumor yesterday….

…of the river… (imgur) subtle and brilliant

North Korean stoplights (flickr) Reuters wrote a good story on this a while back. The video makes the story even more interesting.

The Dawning of Aquarius in South Dakota (Discover Mag) I’m guessing astrology doesn’t have an impact on climate…

Afternoon Links 2-25

Feb 25, 2010 20:46 UTC

The Euro’s final battleground: Spain (Fidler, WSJ) The folks at Variant Perception warned the world about the impending disaster in Spain last August. Here’s a copy of their report, which they’ve graciously allowed me to share. (Though they’re famous for that one, they do write about more than Spain.) Anyway, Spain’s economic problems are prompting mainstream discussion that the euro could actually collapse. Greece is small enough that it can be rescued by Germany and France. Spain not so much.

What Greece tells us about Europe (Defterios, CNN) “It is not often discussed, but many [striking] government workers enjoy preferential tax rates, can retire at the age of 54 (in some cases earlier) and enjoy 14 months of pay for 12 months worked.”

Detroit Mayor emphasizes need to shrink city (MacDonald, Detroit News) Detroit is at the forefront of dealing with economic decline. The U.S. economy is overgrown and collapsing under its own weight. More to the point, we don’t have the resources to support all of our commitments. Some mode of shrinkage is necessary. Doing it proactively, as Mayor Bing seeks to do in Detroit, is better than the alternative….

Cash-strapped L.A. goes after unlicensed dogs (AP)

Madoff whistleblower Markopolos says he thought about killing Madoff in new book (Baram, HuffPo)

Idol winners: not just fame but big bucks (Wyatt, NYT) And you don’t have to win Idol to cash in….you just need to finish near the top.

Henderson back at GM, for $3,000 an hour (Taylor, Fortune)

Stand up while you read this (Judson, Opinionator) “Your chair is your enemy.”

Cringeworthy video resume…(more examples at Gawker)…be sure to check out the Michael Cera parody at the bottom. Disappointed that Gawker forgot the most infamous video resume of all time.


VARIANT PERCEPTION??? THIS IS HILARIOUS STUFF: Are you sure he hasn’t confused Spanish banks with American banks?

“Why have the Spanish banks not experienced the same fate as American…..
We believe that Spanish banks are hiding their problems. We explore how they are doing this
1) Getting a boost from accounting changes
2) Not marking loans to market
3) Continued lending to zombie companies
4) Making 40 year and 100% loan-to-value loans”

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Lunchtime Links 2-24

Feb 24, 2010 16:45 UTC

Rogoff says China crisis may trigger regional slump (Ito/Rial, Bloomberg)

Fed to get $200 billion boost (Hilsenrath, WSJ) The Treasury will borrow the money and put it on deposit at the Fed. Bernanke could use that money to fund Fed interventions in the economy instead of printing more money.

The extended period continues (Bernanke) In his semiannual monetary policy report for the House, Bernanke reiterates that rates will stay low for an “extended period.” Go the the “monetary policy” section of the speech.

New home sales fall to record low in January (CR) “…another extremely weak report.” And imagine what will happen to home sales if the extended period ever ends…

Greenspan: U.S. recovery extremely unbalanced (Lawder, Reuters) He also says that the 10-year yield is the one stat he looks at morning and afternoon….higher rates will surely nip the recovery in the bud.

Second strike paralyzes Greece (Kitsantonis, NYT) Greece may be bankrupt, but Greek workers won’t settle for pay cuts.

Italy’s worse, and the Nazis stole our gold (Reuters, ht Stacy-Marie Ishmael) Meanwhile, Greece’s deputy prime minister is making excuses.

The Bankruptcy Boys (Krugman, NYT) Krugman is entirely correct that Republicans are all talk and no action when it comes to deficit control. And he doesn’t even mention that the biggest recent increase to America’s long-term obligations was the Medicare drug benefit signed by George Bush.

Happy birthday! (imgur)

Floating, ice-breaking backhoe (imgur) This looks like a lot of fun…



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CoreLogic: 24% of residential properties upside down

Feb 23, 2010 22:58 UTC

You don’t keep paying for something that you own.

From FirstAmerican Core Logic:

…more than 11.3 million, or 24 percent, of all residential properties with mortgages were in negative equity at the end of the fourth quarter of 2009, up from 10.7 million and 23 percent at the end of the third quarter of 2009. An additional 2.3 million mortgages were approaching negative equity at the end of last year, meaning they had less than five percent equity. Together, negative equity and near-negative equity mortgages accounted for nearly 29 percent of all residential properties with a mortgage nationwide.

Negative equity means the mortgage balance is higher than the value of the home.

The bulk of underwater properties are concentrated in five states: California, Florida, Nevada, Arizona and Michigan. Nevada leads the way in terms of most homes with negative equity at a whopping 70 percent.

“Home-ownership” is badly defined by, for instance, the Census Bureau, which considers all “owner-occupied housing units” in its calculation of the home-ownership rate.

But the rate would be far lower if one simply calculated the amount of equity that Americans have in their homes. Since this is the portion of real estate for which they don’t pay anything, it is the only portion that is truly “owned.”

Subtract folks who owe more on their homes than they are worth and the home-ownership rate drops from 67% to 43%.

Update: Reader Dan Hess offers a better calculation in the comments. He correctly notes that underwater homes are 24% of homes with mortgages, not 24% of all homes as I implied in the math above. Backing out these homes would reduce the homeownership rate to 57%. Though backing out ALL mortgage debt, even on homes with owner equity, would lower the ownership rate even more.

This isn’t merely academic. Having equity in their homes is a big reason homeowners keep paying their mortgage, which is necessary for banks to stay solvent.


Market analysis based on homeownership

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Night of the living dead banks

Feb 23, 2010 22:17 UTC

Cross-posted from today’s NYT.

Killing zombies isn’t just a job for horror-movie heroines. It’s also one of Sheila Bair’s primary tasks. And the Federal Deposit Insurance Corp chief’s challenge has increased as the number of scary banks on the regulator’s watch list has spiked. Thankfully, there’s no financial excuse to keep FDIC from quickly exterminating the industry’s living dead.

On Tuesday, the agency reported 702 institutions on its “problem” list at the end of the fourth quarter — up from 552 in the third quarter. Moreover, total assets for banks on the list increased to $403 billion, or 3 percent of GDP. While these are terrifying figures, the FDIC also managed to collect $46 billion of fresh cash from banks, bringing its total cash and liquid securities to $66 billion.

That may not sound like enough. After all, the average estimated loss rate for failures since 2007 — excluding the collapse and simultaneous sale of Washington Mutual to JPMorgan – is 23 percent of assets. On that basis, FDIC’s kitty would appear to be some $27 billion shy of being able to handle its current list of troubled institutions.
But not all of the banks FDIC diagnoses as sick will need to be seized. As is often the case, many banks work their way through their difficulties, raise fresh private capital or are taken over by healthier rivals. And the FDIC can levy another special assessment on banks before asking the U.S. taxpayer for help anyway. Add it all up and the FDIC has no financial excuse not to get busy cleaning up the mess.

Yet the pace of bank seizures — up by half year-to-date — hasn’t kept pace with the growth of the problem bank list, which has nearly tripled. The worry is that has left too many zombies hobbling along, sucking up deposits and hoarding capital that might otherwise be lent by healthy institutions, thereby helping the economy to rebound.

True, the “Snowmaggedon” storms that closed Washington earlier this month complicated travel plans for FDIC staff. But the key lesson from the savings and loan debacle was that delays in closing insolvent banks increases the resolution costs for FDIC and, ultimately, taxpayers. With spring just around the corner, Bair needs to set her sights on a big zombie hunting trip.

Lunchtime Links 2-23

Feb 23, 2010 16:13 UTC

FDIC has $66 billion in cash (FDIC) The quarterly banking profile was released today. The headline in some press will be that the DIF’s net worth is -$20.9 billion, but that ignores $46 billion of new cash recorded as deferred revenue, along with FDIC’s contingent loss reserve. Still not enough to swallow a major bank, were one to fail. But FDIC has cash to deal with the problem bank list, which now stands at 702 institutions (up from 552 last quarter and 252 a year ago) and $403 billion of assets…

House prices up slightly in December — seasonally adjusted (Calculated Risk). This chart shows how the 20-city index has varied versus the previous month and the year ago month:


Basically, it’s over (Munger, Slate) Buffett’s consigliere Charles Munger writes “a parable about how one nation came to financial ruin.” Great piece, though keep in mind that Buffett/Munger, each with substantial paper wealth, benefited as much as anyone from the bailouts. At the end of the day, the bailouts are essentially price supports to prop up the value of paper wealth…

Wall Street’s bailout hustle (Taibbi, Rolling Stone) Taibbi previously penned the article in Rolling Stone calling Goldman a “vampire squid” wrapped around the face of humanity. This is fun reading if only because Rolling Stone will let Taibbi use expletives where most biz press won’t.

Rakoff OKs “half-baked” SEC – BofA settlement (Stempel, Reuters) I highly recommend the judge’s 15-page order. The judge explains his thinking quite clearly. He has a nuanced view of the issue and was able to see through Bank of America’s absurd initial objections while also forcing the SEC to do a bit more legwork and come up with a better and larger settlement than the first one it proposed. He has set a high bar for the SEC and for judges approving future settlements. Well done.

Five former Treasury Secretaries: Congress should approve Volcker rule for banks (Blumenthal/Brady/O’Neill/Shultz/Snow, WSJ) Probably won’t happen. And that’s a shame.

Doomsday is here for Illinois (McKinney, Sun-Times) Besides tax increases and drastic budget cuts, a watchdog group says unions have to pay more towards their pension and medical benefits. Though those benefits threaten to bankrupt the state, unions are pushing back. Like basket case countries Greece, Ireland, Argentina and others, the U.S. is likely to see massive general strikes by public sector workers as state/local governments try to get spending in line with income. Collective bargaining is not a bad thing in and of itself, but unions have overplayed their hand. On a related note, the Rockefeller Institute reports a 5th consecutive quarterly drop in state tax collections.

Abrupt eviction, narrowly averted (Ruger, HeraldTribune)

The doomsday cycle (Boone/Johnson, VoxEU)

IMF changes its mind on capital controls (Economist)

4 trillion degrees Celsius creates quark soup (

History in the remaking (Symmes, Newsweek) “A temple complex in Turkey that predates even the pyramids is rewriting the story of human evolution.”

Bank failure Friday

Feb 20, 2010 01:16 UTC

Reader note: As always, this post will be updated as bank failures are announced. One large one so far tonight…and it was acquired by OneWest, the former IndyMac, which was the subject of a controversial web video a week ago. The video went viral and FDIC was forced to respond. Though the video was badly misguided, the episode highlighted the fact that FDIC doesn’t provide as much disclosure as it could about loss-share agreements. But before getting to bank failures, a note on upcoming FDIC news.

The quarterly banking profile is due out next Tuesday the 23rd. Key information to look for will include the updated problem bank list, the number of banks on it as well as their total assets and deposits.

Also the funded status of the DIF will be updated. Be careful here. The fund’s balance will likely fall deeper into negative territory, but in fact it will be in better position than last quarter.

Why? Last quarter banks prepaid 3 years worth of regular assessments all at once….should work out to about $45 billion in cash that went to FDIC. But on the DIF’s balance sheet the cash all counts as deferred revenue, not capital.

The flip side of the coin is that the banking system doesn’t have to write down $45 billion worth of capital. Instead they get to treat the $45 billion payment as a “prepaid asset,” to be drawn down in equal parts over the next twelve quarters as payments come due.

This accounting treatment is the reason banks supported prepaying $45 billion worth of “regular” assessments even though they screamed bloody murder about paying a one-time $5.6 billion “special” assessment last June 30. The special assessment counted as a hit to capital….

It’s hard to explain how this works without a lesson in accrual accounting. Imagine prepaying 12 months of your cable bill in January. On your personal income statement, which is designed to match up expenses and income for a given period, you would recognize your monthly bill as it comes due even though you paid the bill in advance.

For more, check out this September story from Reuters’ Karey Wutkowski.


  • Failed bank: Marco Community Bank, Marco Island FL
  • Acquiring bank: Mutual of Omaha Bank, Omaha NE
  • Vitals: at 12/31/09, assets of $119.6 million, deposits of $117.1 million
  • Estimated DIF damage: $38.1 million


  • Failed bank: La Coste National Bank, La Coste TX
  • Acquiring bank: Community National Bank, Hondo TX
  • Vitals: at 12/31/09, assets of $53.9 million, deposits of $49.3 million
  • Estimated DIF damage: $3.7 million


  • Failed bank: George Washington Savings Bank, Oak Park IL
  • Acquiring bank: FirstMerit Bank NA, Akron OH
  • Vitals: at 12/31/09, assets of $412.8 million, deposits of $397 million
  • Estimated DIF damage: $141.4 million


  • Failed bank: La Jolla Bank, FSB, La Jolla CA
  • Acquiring bank: OneWest Bank, FSB, Pasadena CA
  • Vitals: at 12/31/09, assets of $3.6 billion, deposits of $2.8 billion
  • Estimated DIF damage: $882.3 million

And so tightening begins?

Feb 19, 2010 00:15 UTC

No, not really.

Raising the discount rate a quarter point is a start, but as the Fed went to pains to explain, it doesn’t indicate broader tightening of credit. For that we have to wait for some combination of the Fed shrinking its balance sheet along with a hike in the Fed funds rate and, perhaps more importantly, a hike in the rate paid on banks’ excess reserves.

But meaningful tightening may never happen. Unless we get a dollar crisis — a possibility if the printing press runs on high too long — the Fed won’t be able to raise rates for the simple reason that it is trapped.

Why? Two reasons jump to mind:

1. Banks are still carrying trillions of dollars of loans collateralized by real estate, loans that will lose significant value and wipe out still-thin capital cushions if interest rates move up in any substantial fashion.

Remember that real estate prices move in the opposite direction of interest rates. Incomes can support a certain monthly payment for a mortgage. Higher rates mean a larger component of that monthly payment has to go towards interest. The price has to correct accordingly.

2. America is still deep in debt. Federal, state and municipal governments, private pension plans, households, in the aggregate we still owe lots of money. And that debt is constantly being rolled over. Raising rates would make rolling the debt much more difficult, stopping the “recovery” in its tracks and leading to massive deflation.

The Fed would only risk that if it were faced with a dollar crisis. It would be wrong to expect such a crisis any time soon. But after multiple cycles of quantitative easing — the first round may be winding down, but expect it to come back in the future — a dollar crisis may not seem so far-fetched.

In the meantime, don’t be fooled. Bernanke has shown no sign that he’s willing to put up with the kind of recession that is needed for the economy to de-lever. Meanwhile the federal government will keep borrowing to make sure that we don’t.


Hi Rolfe
Are you concerned with the $640 Trillion dollar derivates market?
I just don’t see how the American Economy will escape that 600 LB gorilla.
It’s like everyone thinks it’s not there or they pretend it’s not.

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