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.

No bank failures this Friday

Feb 13, 2010 04:50 UTC

With the problem bank list 552 names long, and the unofficial list even longer, one might expect FDIC to pick up the pace of bank closures. Yet here we are, six Fridays into the new year, and only 16 banks have been put into receivership, with none this week and only one last week. At that rate, we’ll see 136 closures in 2010, short of the 140 that were closed last year.

That leaves lots of zombie institutions hobbling along, sucking up deposits and capital to service busted loan portfolios.

A key lesson from the S&L debacle is that delays in closing insolvent banks increases the resolution costs for FDIC and, ultimately, taxpayers. That’s why the Prompt Corrective Action law was passed, to mandate that regulators close banks sooner rather than later, and while there’s still some capital left in them to absorb losses.

With that in mind, it’s hard to see why FDIC is moving so slowly. FDIC’s not short of cash right now. It just got $45 billion of fresh cash from banks on January 1st.

Nor should the President’s Day holiday be slowing them down. FDIC used July 4th weekend last year as an opportunity to close seven banks.

Bad weather in DC? Probably not. FDIC is a large operation and it’s unlikely folks in the field can’t do their job because the Washington office is taking a few snow days.

President Obama says he wants to jump start lending. Closing zombie institutions more quickly would be a much more effective way to achieve that than, for instance, throwing $30 billion  of TARP money at community banks…

COMMENT

The FDIC has been stepping in when losses are ~ 30%, and sometimes up to 40%. Shows the degree of regulatory forbearance that is operative, in violation of statute.

Posted by tjfxh | Report as abusive

Morning Links 1-22

Jan 22, 2010 15:19 UTC

Geithner has reservations on US banks (Wutkowski/Eder, Reuters) More evidence that Geithner is a goner. Will Volcker replace him? Sheila Bair could be a dark horse. She has lots of Democratic fans on the Hill despite being appointed by a Republican. In any case, Geithner was on PBS last night defending the plan.

A closer look at the Volcker rule (Felix) Capitol Hill may not be taking Obama’s rule very seriously. They think it was just a way to spin the news cycle away from the fact that healthcare will fail now that the Dems have lost their 60th vote in the Senate. Moreover, they don’t think Obama’s actually going to wage the fight against Wall Street that he claims he’s ready for.

Bernanke faces tougher vote in Senate (Reddy/Paletta, WSJ)

Fed secrecy claims bogus redacted AIG details already public (Adams, Naked Capitalism) More detail in a second post here.

FDIC and Bank of England to cooperate on resolution of troubled cross-border financials (FDIC) Next time a big financial blows itself up, Sheila Bair and Mervyn King want to make sure they’re prepared to deal with it in tandem.

NYC will move (a little bit) of its money (Traub, HuffPo) Bloomberg puts a little bit of support behind the Move Your Money campaign.

Chavez accuses U.S. of using weapon to cause Haiti quake (Moran, Digital Journal) “Venezuelan President Hugo Chavez has accused the United States of causing the devastating 7.0 magnitude earthquake in Haiti, which killed possibly 200,000 people. Chavez believes the U.S. was testing a tectonic weapon to produce eco-type devastations.”

National Enquirer eyes Pulitzer (Kurtz, WaPo) …for breaking the John Edwards affair/love child story. Incidentally, he admitted paternity in a press release yesterday. Where was he when the release went out? Haiti, helping earthquake victims. I’m not going to criticize anyone for going to help Haitians, but it’s not hard to see that Edwards isn’t doing this because he’s the charitable type….

Quote of the Day, from Behind the Numbers:

A trend we are noticing is that many companies are reporting their results and comparing them to last year, or the last two years, and claiming that they have returned to margin and revenue growth. However, when compared to two or three years ago (i.e. pre-meltdown), the companies are reporting lower margins and lower growth rates (revenue, stores, etc.). Yet, these companies have now returned to pre-meltdown valuations. In other words, the companies are trading at “historic” valuations, but with lower margins and much lower prospects for future revenue growth than was true when those historic valuations were set.

Smart Bottlenose Dolphins….

COMMENT

Dolphins – so smart. It’s easy to imagine that given a million years or so (if we weren’t around to mess things up for them) they might well advance to the point of, who knows, NOT having a fractional reserve banking system!

There, fixed it for ya!

Posted by fresno dan | Report as abusive

Deposit Insurance Fund, UNoffcially

Dec 18, 2009 23:38 UTC

I was heading out for Thanksgiving vacation when FDIC released the quarterly banking profile, so I wasn’t able to update an important chart: Total Insured Deposits, Unofficially…..

FDIC Culp

(ht Stephen Culp)

When the world was falling apart, FDIC increased deposit insurance limits….to $250,000 for individual non-retirement accounts and unlimited for business transaction accounts. But those increases were treated as “temporary” and so left out of FDIC’s total.

Since the $250,000 limit was extended to 2013 — decidedly not “temporary” — FDIC started collecting that data from its member banks. The data was published for the first time in Q3.

So in Q3, the official figure — which includes $250k limits — jumped from $4.8 trillion to $5.3 trillion. Throw in the $761 billion insured by the transaction account guarantee program and you’ve got a total of $6.1 trillion of insured deposits. Compare to Q3 ’08. Back then, before all the emergency measures, the total was $4.5 trillion. So the increases added $1.6 trillion, or 34%, to the total.*

I’ve juxtaposed that with the reserve balance on the Deposit Insurance Fund. It’s now negative, though that doesn’t mean FDIC is out of cash. And they’ve got another $45 billion coming this quarter, but for accounting reasons the reserve will still be listed as negative.**

But even with that cash coming in, the FDIC’s resources are under a lot of pressure. With 552 banks and $346 billion in assets on the “problem” list, FDIC will struggle to pay its bills.

Sheila will have to increase assessments on banks at some point, or start drawing on FDIC’s credit line at Treasury…

————

*The transaction account guarantee program is scheduled to expire in June of next year.

**The $45 billion to be collected isn’t a “special” assessment, it’s front-loading three years of “regular” assessments. The distinction is crucial. Since these assessments are regular, banks can treat them as a prepaid expense on their balance sheet, i.e. as an asset to be drawn down quarterly. That means they only have to draw down capital quarterly. The flip side is that FDIC can’t count the $45 billion as revenue. It has to treat it as “deferred revenue.” Deferred revenue is a liability on the balance sheet. Normally an assessment counts as revenue, which is added to the DIF’s equity balance.

Don’t you just love accounting?

COMMENT

[...] Deposit Insurance Fund, [...]

Big banks get reprieve from FDIC

Dec 15, 2009 18:41 UTC

Due to new accounting rules — FAS 166 and 167 — banks have to bring certain off balance sheet assets back onto their balance sheets starting next year. More assets, same capital = lower capital ratios. (More in this column about the individual impact on the large banks).

Anyway, the FDIC has agreed to give big banks a 6 month reprieve on raising new capital to buffer the new assets. From Ian Katz at Bloomberg:

The Federal Deposit Insurance Corp. gave banks including Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. a reprieve of at least six months from raising capital to support billions of dollars of securities the firms will be adding to their balance sheets.Bank regulators including the FDIC and Federal Reserve want to permit a phase-in of capital requirements that rise starting next month under a change approved by the Financial Accounting Standards Board. The rule, passed in May, eliminates some off- balance-sheet trusts, forcing banks to put billions of dollars of assets and liabilities on their books.

“We’re still recovering from the damage these structures caused,” FDIC Chairman Sheila Bair said, explaining that the entities contributed to the financial crisis. The phase-in recognizes the “very fragile stage in our economic recovery,” she said at a board meeting Washington.

While Citi and Wells were raising capital this week to repay TARP, FDIC should have had them go for a few billion more to offset the impact of FAS 166/7.

Bank failure Friday

Dec 11, 2009 22:32 UTC

#131

  • Failed bank: Republic Federal N.A., Miami FL
  • Acquiring bank: 1st United Bank, Boca Raton FL
  • Vitals: at 9/30, assets of $433m, deposits of $352.7m
  • DIF damage: $122.6m

#132

  • Failed bank: Valley Capital Bank N.A., Mesa AZ
  • Acquiring bank: Enterprise Bank & Trust, Clayton MO
  • Vitals: at 9/30, assets of $40.3m, deposits of $41.3m
  • DIF damage: $7.4m

#133

  • Failed bank: SolutionsBank, Overland Park KS
  • Acquiring bank: Arvest Bank, Fayetteville AK
  • Vitals: at 9/30, assets of $511.1m, deposits of $421.3m
  • DIF damage: $122.1m

Politics and bank regulation don’t mix

Dec 8, 2009 13:28 UTC

The Federal Deposit Insurance Corp tried to seize and sell Cleveland thrift AmTrust last January but local politicians intervened. In the end, the bank still went bust 11 months later – a delay that may have increased losses to the U.S. regulator’s funds. As Congress debates banking reform, AmTrust provides a useful warning that the regulatory apparatus needs to be kept free from politics.

Regulators had known for some time that AmTrust was troubled. AmTrust’s chief regulator turned down the bank’s request for TARP money last fall. It also hit AmTrust with a cease-and-desist order, instructing management to change lending practices and boost capital by December 31. When AmTrust missed the deadline the FDIC decided to step in.

But Ohio Congressman Steven LaTourette and Cleveland mayor Frank Jackson convinced Treasury and the White House to keep the regulators at bay. Bythe time FDIC finally seized AmTrust on Dec. 4, its tangible common equity – the capital it has to withstand loan losses – had fallen to $276 million from $943 million the year before. The cost of the bank’s failure to FDIC: $2 billion.

The price tag to the FDIC would’ve been lower had it acted sooner, according to the Wall Street Journal. This isn’t a new lesson. Congress established the Prompt Corrective Action doctrine in 1991 because the S&L crisis taught that to limit the cost of bank failures, it’s important to seize troubled institutions quickly, while they’ve still got capital.

And the importance of speedy resolution is more pronounced with larger firms, whose deterioration can infect the entire system. Remarkably, Congress is poised to erect new political barriers that may delay pre-emptive action to corral systemically dangerous firms.

An amendment offered by Rep. Paul Kanjorski to Barney Frank’ s Financial Stability Improvement Act would require Treasury to sign off on corrective actions imposed by regulators on firms with greater than $10 billion of assets. For $100 billion+ firms a White House signature would also be needed.

AmTrust was small enough that its collapse didn’t pose a systemic threat. At worst, it just compounded losses at FDIC, which may require its own taxpayer bailout before too long. With systemically dangerous firms, however, the cost of political delay will be much higher.

COMMENT

From what I understand, the Fed says it didn’t have the tools to handle the collapse of these firms. They aren’t asking for the authority to do so. But they do point out that because of a lack of any processes to unwind those companies the Fed had to keep the financial system afloat or the resulting defaults would have cause a depression on a global scale.

Mr Bernanke Pointed out that during the depression the banks were allowed to simply fail. And the resulting defaults cascaded causing a global down turn. He said that in order to prevent a repeat, some choices needed to be made to support the banks. If I understand history correctly, there was no financial social safety net in place during that time either.

I think it would have been easier and cheaper to keep the citizens afloat than it has cost us to keep the banks up. It also would have put the banks in a position of accountability to the citizens. Citizens with money can choose what sectors of the economy to support by choosing where to spend. It’s just incomprehensible to me that even though the citizenry is the engine of the economy, the engine is never given any fuel.

It’s like wanting to keep harvesting fruit from a tree that never gets watered. Eventually the tree dies and there is no fruit to be had. We are strangling our people with poverty. We are cutting off our own heads by keeping our people uneducated and sick, while expecting them to labor tirelessly. Our future slips away with each failed generation. It’s time to think about the citizens.

FDIC’s problem bank list grows to 552, DIF now negative

Nov 24, 2009 16:27 UTC

I’m not good at taking vacations….

FDIC published its quarterly banking profile today. Here are the latest banking industry statistics at a glance. A few interesting takeaways I’d like to highlight. First, the problem bank list grew again. And it still understates total problem assets…both Citi and Bank of American should also be on this list.

The number of institutions on the FDIC’s “Problem List” rose to its highest level in 16 years. At the end of September, there were 552 insured institutions on the “Problem List,” up from 416 on June 30. This is the largest number of “problem” institutions since December 31, 1993, when there were 575 institutions on the list. Total assets of “problem” institutions increased during the quarter from $299.8 billion to $345.9 billion, the highest level since the end of 1993, when they totaled $346.2 billion. Fifty institutions failed during the third quarter, bringing the total number of failures in the first nine months of 2009 to 95.

Also, what will get lots of headlines today is that the Deposit Insurance Fund went negative as of September 30th. We already knew this to be true, and it’s not totally fair to report the negative balance without noting that FDIC does have cash. That said, the DIF is still in a very precarious position.

As projected in September, the FDIC’s Deposit Insurance Fund (DIF) balance – or the net worth of the fund – fell below zero for the first time since the third quarter of 1992. The fund balance of negative $8.2 billion as of September already reflects a $38.9 billion contingent loss reserve that has been set aside to cover estimated losses over the next year. Just as banks reserve for loan losses, the FDIC has to set aside reserves for anticipated closings over the next year. Combining the fund balance with this contingent loss reserve shows total DIF reserves with a positive balance of $30.7 billion.

Chairman Bair distinguished the DIF’s reserves from the FDIC’s cash resources, which stood at $23.3 billion of cash and marketable securities. To further bolster the DIF’s cash position, the FDIC Board approved a measure on November 12th to require insured institutions to prepay three years worth of deposit insurance premiums – about $45 billion – at the end of 2009. “This measure will provide the FDIC with the funds needed to carry on with the task of resolving failed institutions in 2010, but without accelerating the impact of assessments on the industry’s earnings and capital,” Chairman Bair said.

The DIF will continue to be negative after FDIC gets the additional $45 billion at the end of this year. That’s not a “special assessment,” it’s the next three years’ regular assessments being collected up front. The distinction is crucial. Because it’s a regular assessment, FDIC won’t count it as new reserves for the DIF. Instead it will be counted as deferred revenue on the DIF’s balance sheet.

Why is that important? Because unlike the $5.6 billion special assessment in Q2, banks don’t have to take a hit against their capital all at once for this assessment. They get to treat it as a prepaid expense.

More later….

COMMENT

If the general public would take actions on knowing their account balances the banks would not charge them. There would be no overdrafts… The American public seems to point blame on the banks and not take the responsibility of maintaining their own accounts. When was it decided that Americans can just overdraw their accounts and expect the banks to pay the check for free? I think the general public needs to get a grip on their spending and actually keep a register again to make sure they have money in their accounts. You know just because you have checks it doesn’t mean you have money in your account. TAKE RESPONSIBILIY and quit blaming the banking system for your lack of knowing your account. The banks are not telling you to write bad checks….you are doing that on your own. If you don’t have the money don’t make the purchase. It’s high time people started owning up to their actions and quit blaming the banks. Tell me would you rather the banks send back your rent/mortgage payment? That way you would have the collectors calling you stating you owe money, then that would in turn hit your credit report and lower your score so when you went to purchase a vehicle or applied for credit you would be denied.
So you tell me what the banks should do? Just pay your mistake and not charge you for it? It sounds like you want everything for free…The reason banks charge is because people yes that’s right live people (that know how to manage an account) have to touch the check or make a decision about whether or not to pay it. If you want to you can go to your bank and ask them not to pay any checks that would create an overdraft fee. The banks are willing to just return your bad check and have the business owner turn it over to the prosecuting attorney to track you down.

Posted by Steve | Report as abusive

Sheila throws GMAC a bone

Oct 28, 2009 22:27 UTC

GMAC sold more FDIC-backed debt today… (Reuters)

General Motors Acceptance Corp on Wednesday sold $2.9 billion in three-year government-guaranteed notes, according to a market source familiar with the sale. The 1.75 percent notes were priced at 99.991 to yield 1.753 percent, or 31.6 basis points over comparable U.S. Treasuries.

The notes are guaranteed under the Federal Deposit Insurance Corp’s temporary liquidity guarantee program.

GMAC has permission to sell up to $7.4 billion of FDIC-backed debt, in addition to the $12.5 billion of TARP money already received and the $2.8-$5.6 billion of additional TARP cash they’re negotiating for.

In exchange for upping GMAC’s TLGP allowance, Sheila Bair supposedly extracted concessions on the interest rates GMAC will be able to advertise for deposits.

On BankRate, they’re still listed as #3 for 1-yr CDs.

While we’re on the subject of auto bailouts, John Stoll and Sharon Terlep of WSJ are reporting that GM dipped into its bailout fund from Treasury to help rescue supplier Delphi:

General Motors Co. by the end of the week will outline plans to draw down more U.S. government money it will use to aid Delphi Automotive LLP and also give an update on a closely watched escrow account of its bailout funds, according to several people familiar with the matter.

GM’s additional borrowing will mostly be limited to Delphi’s funding needs and is expected to be north of $2.5 billion, based on prior announcements.

According to the article, the U.S. has committed $50 billion to the GM bailout, $30.1 billion of which was committed when the company filed for bankruptcy. Much of that amount went into an escrow account GM can tap as needed.

#100….and counting (+ charts)

Oct 23, 2009 21:42 UTC

Another failure in Georgia. And two in Naples.

#100

  • Failed bank: Partners Bank, Naples FL
  • Acquiring bank: Stonegate Bank, Ft. Lauderdale FL
  • Vitals: as of 9/30, assets of $66 million, deposits of $65m
  • DIF damage: $28.6m

#101

  • Failed bank: American United Bank, Lawrenceville GA
  • Acquiring bank: Ameris Bank, Moultrie GA
  • Vitals: as of 8/11, assets of $111 million, deposits of $102m
  • DIF damage: $44m

#102

  • Failed bank: Hillcrest Bank Florida, Naples FL
  • Acquiring bank: Stonegate Bank, Ft. Lauderdale FL
  • Vitals: as of 10/1, assets of $83 million, deposits of $84m
  • DIF damage: $45m

#103

  • Failed bank: Flagship National Bank, Bradenton FL
  • Acquiring bank: First Federal Bank of Florida, Lake City FL
  • Vitals: as of 8/31, assets of $190 million, deposits of $175m
  • DIF damage: $59m

#104

  • Failed bank: Bank of Elmwood, Racine WI
  • Acquiring bank: Tri City National Bank, Oak Creek WI
  • Vitals: as of 9/30, assets of $327 million, deposits of $273m
  • DIF damage: $101m

#105

  • Failed bank: Riverview Community Bank, Ostego MN
  • Acquiring bank: Central Bank, Stillwater MN
  • Vitals: as of 8/31, assets of $108 million, deposits of $80m
  • DIF damage: $20m

#106

  • Failed bank: First DuPage Bank, Westmont IL
  • Acquiring bank: First Midwest Bank, Itasca IL
  • Vitals: as of 8/31, assets of $279 million, deposits of $254m
  • DIF damage: $59m

This week’s bonus: a promotional video from Sheila….

One problem I have: It’s not fair to compare the number of bank failures during this cycle to the number in past cycles. As a % of GDP, the deposits in failed banks is far higher this time ’round:

(Click chart to enlarge in new window)

deposits-in-failed-banks

Yes, I include Citi, BofA and Wachovia in the failed bank bucket. None of them could have withstood last year’s crisis were it not for bailouts and ultra-easy money.

Also, it’s important to remind folks that the big four banks have grown significantly larger in recent years….

create animated gif

COMMENT

…one other thing, I know De Beers Diamonds were under scrutiny for antitrust, is there something similar for Bank Monopolies ?

Posted by Casper | Report as abusive

Bank failure Friday

Oct 2, 2009 22:29 UTC

Later this evening, I’ll have a post on stats for all failed banks since the beginning of 2007. In the meantime, we have our first failure of Q4:

#96

  • Failed bank: Warren Bank, Warren MI
  • Acquiring bank: Huntington National, Columbus OH
  • Vitals: as of July 31, assets of $538 million, deposits of $501 million
  • DIF damage: $275 million

#97

  • Failed bank: Jennings State Bank, Spring Grove MN
  • Acquiring bank: Central Bank, Stillwater MN
  • Vitals: as of July 31, assets of $56.3 million, deposits of $52.4 million
  • DIF damage: $11.7 million

#98

  • Failed bank: Southern Colorado National Bank, Pueblo CO
  • Acquiring bank: Legacy Bank, Wiley CO
  • Vitals: as of Sept 4, assets of $39.5 million, deposits of $31.9 million
  • DIF damage: $6.6 million

FDIC has acknowledged that the DIF will show a negative balance as of the end of Q3. That doesn’t mean FDIC will be going to taxpayers for funds. Not yet anyway.

No, Sheila still has cash on the balance sheet. And she’ll be getting $45 billion more in Q4 when banks prepay their assessments. This cash will be carried on the DIF balance sheet as deferred revenue, so the balance ($10.4 million at the end of Q2) will continue to be negative.

COMMENT

I want to vote for the next ceo of bofa, cit, and aig as a taxpayer and now a shareholder in these companies that accepted tarp. PEUW on government oversight, it should be public taxpayer assoc. oversight. ANYONE willing to join?

Posted by MIOMI | Report as abusive

FDIC tries another gimmick

Sep 29, 2009 18:37 UTC

In the latest government gimmick to protect bank capital, the FDIC plans to replenish its Deposit Insurance Fund by front-loading regular premiums in lieu of another “special assessment.”

The good news is that the fund gets replenished and taxpayers don’t foot the bill. The bad news is that Sheila Bair is missing a great opportunity to shrink the financial sector.

Under a proposal released by the FDIC, banks would prepay three-and-a quarter years of regular assessments on December 30, $45 billion in total.

The gimmick is how that $45 billion will be treated on balance sheets — as an asset that won’t drain capital, not all at once anyway.

Because the funds were already scheduled to be collected, banks will be able to treat this assessment as a prepaid expense on the asset side of the balance sheet. In other words, the banks will pay the cash today but will reflect it in earnings over the next three years.

Had Bair instead decided to charge another “special” assessment, the hit to earnings would have come up front.

Hitting earnings means reducing bank capital by a like amount and reducing lending a lot more. That’s because banks lend money based on a multiple of their capital — at a ratio of 25 to 1 if one uses tangible common equity in the denominator. So reducing earnings through special assessments has an outsized impact on banks’ ability to lend.

Is that really a bad thing? We’re told that without “more lending” the economy can’t recover. But the economy is still saddled by huge amounts of debt. More lending provides the temporary illusion of growth — propping up asset prices and industries dependent on credit — but in the end only adds to our burden.

In any case, we know the financial sector has grown too large relative to the rest of the economy. If we’re serious about shrinking it, that means less lending. There are no two ways about it.

“Assessments should hit earnings and reduce lending today,” says Martin Weiss, president of Weiss Research Inc, an investing consulting firm. “Gimmicks like this will backfire.”

To be sure, the proposal isn’t the worst that could have been expected. The FDIC might have chosen to borrow from Treasury or from banks themselves. It’s far better to have banks pay directly. This avoids moral hazard by making those who benefit from the Deposit Insurance Fund responsible for its solvency.

Still, given Bair’s desire to shrink the biggest banks, it’s a shame that she’s willing to sheath her sharpest weapon.

COMMENT

So they pull forward $45B but will use it all in less than a year on upcoming bank foreclosures! Game the citizens into thinking it’s just about over.

How many banks do you think are going to fail over the next 4 years? What do you think the FDIC will have to pay out? Has the FDIC been anywhere close to honest on the expense of those already closed?

Honestly and integrity are completely missing in true discussions with the citizens (taxpayers), imo.

Posted by Bob | Report as abusive

Let’s say RIP to PPIP

Sep 24, 2009 19:21 UTC

Remember PPIP? The Public-Private Investment Program was to provide cheap government financing to encourage investors to overbid for banks’ toxic assets.

Investors would overbid, it was thought, because they were being offered a free put option. If the toxic assets they bought fell further in value, taxpayers would be left holding the bag.

The program has been largely left for dead, but the FDIC still sees some life in its part of the plan. Last week, the agency had a pilot sale, offering loans out of the estate of failed Franklin Bank, whose assets are in FDIC receivership.

Sure enough, the winning bidder elected nearly the maximum available amount of non-recourse leverage, resulting in a 22 percent premium for the assets over bids that didn’t take advantage of leverage.

On the surface, this seems like a good thing for taxpayers, since the higher purchase price accrues to the FDIC’s Deposit Insurance Fund.

But in a new paper, Linus Wilson of the University of Louisiana at Lafayette argues that while the auction prices are increased by leverage, the increase is offset by the loan guarantee the FDIC makes as part of the deal.

So at best it’s a wash and at worst the “subsidized leverage discourages the winning bidder from maximizing the value of loan portfolios.”

If true, this last part is problematic. The point of getting assets back into private hands is that private investors are supposed to be better than the FDIC at managing them. But if the structure of the sale discourages investors from maximizing value, then FDIC may be short-changing itself in the long run.

At least in this case, the 22 percent purchase premium was captured by the Deposit Insurance Fund, since the pilot sale was for assets already in FDIC receivership.

But FDIC conducted the test with an eye toward using it on living banks. If it does so, shareholders and creditors of those banks will capture any increased value that results from government leverage, while taxpayers will be left holding most of the risk.

Another potential problem according to Wilson: Inflated prices from PPIP auctions may give other banks an excuse to mark up their own assets, reducing their incentive to raise necessary capital.

A better idea is to let asset prices fall to levels that don’t require government support. Shareholders and bank creditors should eat those losses. Such a recapitalization will put the financial system on firm footing again, providing a strong foundation for sustainable growth.

COMMENT

Any money Mr Obama will be letting the bankers make subprime liar loans to poor blacks and hispanics in less than 12 months.
On a totally different topic could any one tell me what an “uncle tom” is?

Posted by gd | Report as abusive

Banks should pay for FDIC fund

Sep 22, 2009 18:32 UTC

The banking system is still suffocating under the weight of bad loans, and it’s well known that the FDIC doesn’t have enough cash to deal with the problem.

What to do? According to a plan floated in the New York Times, FDIC may borrow from the banks themselves in order to replenish its Deposit Insurance Fund.

The optics may be good, but don’t be fooled. The plan would be another balance sheet gimmick to paper over losses.

The FDIC itself is throwing cold water on the idea. Andrew Gray, FDIC’s director of public affairs, says that “although this plan is an option, it’s not being given serious consideration.”

That leaves Sheila Bair with two unpopular options to replenish the Deposit Insurance Fund, which had just over $40 billion in reserve at the end of the second quarter.

One approach — the right one — would be to charge special assessments on banks themselves. FDIC insurance is the best marketing tool in American finance, and for too long banks paid next to nothing for it.

The other option is to borrow from taxpayers. Earlier this year the FDIC secured a $400 billion emergency line of credit at Treasury to go with the $100 billion line it already had.

To her credit, Sheila Bair has been very reluctant to tap Treasury. She’d prefer that bank shareholders and creditors absorb the cost of failure. In the meantime, she’s charging banks special assessments to replenish the insurance fund.

Before the end of September, Bair has to decide whether she’ll charge banks another special assessment in the third quarter.

Banks would prefer that she not do so, and have apparently floated a plan to offer themselves as lenders to the FDIC as an alternative.

It’s an accounting gimmick, and a pretty simple one at that. Banks would replenish the Deposit Insurance Fund, but from the asset side of their balance sheet, buying bonds issued by the FDIC, rather than paying large “special” assessments directly out of earnings.

Theoretically, banks themselves would pay back the FDIC’s bonds, but in smaller amounts that FDIC assesses over time. In the meantime, because their capital levels aren’t reduced, banks can continue to lend. More lending will spur “recovery,” and banks will eventually earn their way out of trouble. Or so their argument goes.

The idea that more lending is going to help us recover from a credit binge is itself laughable. But the bigger issue is the size of losses that are festering on bank balance sheets. The losses are so large that normal assessments are unlikely to be able to cover them.

But banks don’t want to admit to their losses. They’d prefer to extend and pretend in order to avoid the kind of wholesale restructuring that is necessary to repair the financial system’s balance sheet.
And in any case this plan most likely wouldn’t spur lending into the real economy. It may actually cause lending to contract.

Right now banks have hundreds of billions of excess reserves parked at the Fed earning an interest rate of just 0.25 percent. Presumably FDIC-backed bonds would pay better.

So besides avoiding the pain of special assessments, banks would have a new, more profitable place to park reserves.

Sheila Bair should ignore such delaying tactics floated by banks and order them to pay more special assessments into the Deposit Insurance Fund.

To emerge from the financial crisis in better shape, we need to shrink the financial sector. An important way to do that is to reduce the return on equity available to bank shareholders. Charging banks appropriate fees for deposit insurance can help achieve that.

COMMENT

I agree there are a lot of banks out there that need to go away and this will have minimal affect on over all lending for these banks simply don’t have the funds to lend to begin with.

The availability and expection of easy credit has allowed prices to climb faster then incomes. This was great for the ecomomy on the way up, but now the debt burden on consumers has gotten too big. There is no room for an income hic-up or prices to continue to climb as the consumer simply can’t afford it anymore. This de-leveraging is needed and will continue to be painful for some time.

However to help the FDIC get the temporary funds it needs to get through this period, selling bonds to healthy banks would be better than then borrowing from the Treasury or another special assessment. The FDIC gets the funds it needs at a fair price that will utimately be paid by regular assessments on all banks; healthy banks get a low-risk investment alternative at a time when Fed Funds and Treasury alternatives are next to nothing. I don’t see a negative affect on the consumer.

Posted by Glenn | Report as abusive

Corus, gone

Sep 11, 2009 23:51 UTC

Headlining this week’s bank failures is Corus out of Chicago. Condo loans in Florida and other bubbly states did ‘em in. There’s an odd item in the press release. It lists the bank’s deposits as “approximately” $7 billion. I can’t remember seeing that modifier in a bank failure press release. When you read enough of them, the littlest things jump out at you…

#90

  • Failed bank: Corus Bank, Chicago IL
  • Acquiring bank: MB Financial Bank, Chicago IL
  • Vitals: As of June 30th, assets of $7 billion, deposits of “approx.” $7 billion
  • DIF damage: $1.7 billion

From WSJ’s article on Corus’ failure: “More than half of the bank’s $3.9 billion in condo construction loans were in nonaccrual or foreclosure in April.”

#91

  • Failed bank: Brickwell Community Bank, Woodbury MN
  • Acquiring bank: CorTrust bank, Mitchell SD
  • Vitals: As of July 24th, assets of $72 million, deposits of $63 million
  • DIF damage: $22 million

Mitchell, SD … famous for the Corn Palace!

#92

  • Failed bank: Venture Bank, Lacy WA
  • Acquiring bank: First Citizens Bank & Trust, Raleigh NC
  • Vitals: as of July 28th, assets of $970m, deposits of $903m
  • DIF damage: $298m
COMMENT

Interesting article in the Cleveland Plain Dealer today on AmTrust. This bank was ordered to increase capital but it hasn’t. Its capital base is deteriorating, 10 percent of its loans are not being repaid, it is losing money at an accelerating rate. About the only positive thing, it is is a positive thing, is that AmTrust is still out there originating loans, $8.5 billion worth in the 2nd quarter alone. Now the stimulus folks may like that but I’m not sure I do.

Posted by sangellone | Report as abusive
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