Will the FDIC Be Able to Withstand 400 Bank Closures?

The FDIC has made it clear that bank closures are no big deal and that they have the capital to cover the increasing amount of closures that we are seeing. However when we hear '106 bank closures' it sounds bad- but not really that bad- especially when put into the perspective of the S&L crisis of 20 years ago.

I would first like to point out that the S&L crisis involved institutions that were much smaller in size, which is very important to note. Second, did the FDIC ever run out of money during the S&L crisis? No, it did not. So a comparison is kind of ridiculous in my opinion.

When we examine the frequency of bank closures we see a dramatic increase after the supposed recovery has begun in the economy. How could that possibly be? If the economy is recovering, bank closures and unemployment cannot both be lagging indicators. Bank closures are especially curious with the Fed keeping rates at zero and the yield curve favorable towards lending. Well, we know banks are not lending, but that is the story we are being fed. It stands to reason that if we were having a recovery then banks would not be failing at the rate we are seeing.

Closures rise and fall with FDIC's fortunes?

I see another anomaly that I cannot explain in bank closures. We have been averaging in H209 between 2-4 banks shutting down every week. However, in the first 2 weeks of October there were almost no closures or 1 per week-- very odd. This, of course, comes after the FDIC announces it is virtually broke, so I do not believe this is a coincidence. Last Friday we saw a huge increase in closures from 1 to 7 banks, after the FDIC is guaranteed to collect 3 years worth of fees from institutions which will raise some $45B.

However, even with an additional $45B in hand, there is no way the FDIC can remain solvent and cover the remaining 400 or so troubled banks on its watch list, based on historical factors from this year. What does that mean? That the FDIC will have to tap its banks again, or its emergency line of credit with Treasury. Either way, the FDIC is facing a crisis in the near future and to deny that is an insult to any level headed person’s intelligence. See charts below.

FDIC's liabilities

When a bank fails, the FDIC steps in and tries to find a buyer for the institution. The buyer can take all or some of the failed bank, leaving the rest for the FDIC to handle. Of the assets the acquiring bank takes they can enter a loss-share agreement with the FDIC on those assets to cover non-performing assets or unknown losses. That's because these deals often happen extremely quickly, within a couple of days or in hours in some cases. The FDIC will pay up on some or all of those loss-share agreements. You can see BB&T (BBT), Wells Fargo (WFC) or any other bank earnings statement to verify that statement, but it's true. Not to mention the FDIC also guarantees some debt offerings, see Goldman Sachs (GS) and other banking institutions, which it may have to cover in the future as well.

The point being that the FDIC pays out on a bunch of things that most people do not even consider. Especially the loss-share agreements which most people simply ignore on the weekly closure press releases.

But I do not for a couple of reasons: I have been around too long, I am too cynical and I worked for a bank in a former life so I know the game. If you are going to offer a bank a guarantee on an asset, they are going to find a way to collect on that guarantee. Wouldn’t you?

Doing the math

As far as the actual bank closures themselves, they have actually slowed down, see below. This should not make you feel good about the situation because I fear there is something going on simply because the FDIC hasn’t actually received its funding from the banking system yet. In other words, closures should be higher, about 15-17% higher based on the averages and velocity. It’s just math, that’s all.

Exhibit 1-1 (Click to enlarge)

However, the costs of these closures, which includes loss-sharing agreements, has just ballooned far beyond where I thought they would be. The last time I did this chart was in August so this was a bit of a shocker for me. Granted, the actual losses will vary from my projected losses, but trust me, not by as much as you might think. By my guesstimate perhaps no more than 20-25% on the high end.

Could I be wrong? Sure, but there are a few things to take into account. We do not know how much real estate, residential or commercial, was inherited or what the other credit portfolios look like. Given that they were small banks, my guess is they are a mess so this means a higher percentage of the loss-shares will have to be paid out.

Exhibit 1-2 (Click to enlarge)

There are also a few really big banks that collapsed with huge credit losses. Those loss-shares, totaling billions of dollars will have to be paid out-- probably 100%.

The other thing to consider is the fact that velocity of closures will pick up. What we see here is about the same size of the iceberg as the folks on the Titanic saw.That means the other 80-90% of the troubled institutions are still out there, lurking in the dark, spreading bad credit and trying to stay afloat. That means they are doing dangerous things because they have lost hope. It's the same as locking the stairwells to third class on the Titanic in order to let all the first class passengers off first; essentially killing off the masses to try and save the few. This is guaranteeing that the system will have to absorb bank's reckless behavior when they know all is lost.

No taxpayer bailout?

While Sheila Bair can claim that the taxpayer has never funded the FDIC, all I have to say is that 2008/09 has had its fair share of firsts. If she has to turn to the treasury, then the taxpayer is essentially bailing out the FDIC and to think differently is crazy. Not to mention that every time she levies the banks we pay for it through a higher ATM fee or some other small fee, so it is always taxpayer funded somehow.

If you can look at those numbers and tell me that $45B will carry the FDIC for an additional year and back that up with reasonable data, I will listen. However, there is no way that is possible when there are 400 banks on the watch list and we have only had just over 100 failures and the FDIC is broke already.

I have nothing against the FDIC or Sheila Bair, I am just running the numbers and it is not possible. The numbers simply do not lie. We've got problems, and here it goes from here I do not know, but it may not be pretty.

Comments

[a. palmer jr.:]

Is it unheard of for the FDIC to go into the troubled banks and oversee them BEFORE they fail? Maybe someone could come up with something to keep all the troubled banks from failing instead of handing out money after they go under. (Maybe they could look at salaries or lending practices). After all, a lot of money is at stake here.... oh I forgot, it's someone else's money!

Oct 26 09:41 AM

[greedcanbgood:]

Bank failures are a lagging indicator.

Oct 26 10:31 AM

[PPY:]

Take a look at these ridiculous loss sharing agreements signed by the FDIC that ended up hurting loan modification and short sale efforts while benefiting the new owners of the banks:

"So, you ask...Why does this program hurt short sales? Because, our brilliant government offers this SAME PROGRAM FOR FORECLOSURES! The only difference is, the government picks up 80% of the tab on all of the extra costs associated with a foreclosure (BPO's, upkeep, utilities/maintenance, legal fees, etc.)

So, If I'm OneWest, why would I want to waste my time negotiating through a Short Sale, when I can make the same amount of money (if not more) by just letting it go to foreclosure? And we wonder why nobody can get a Loan Modification? Why would OneWest approve a loan modification for this guy, when they can foreclose and make over $100k? And, to add injury to insult, they have held this loan for 6 months! Not a bad ROI, huh?

What infuriates me the most is that in my particular case mentioned above, they have the guts to hold my client hostage for a $75k promissory note, after they are already making more than $100k on the sale!!! This is his primary residence, 1st Position loan, and OneWest has NO RECOURSE! Imagine if they could make $100k, then get a deficiency judgement! Talk about making some big bucks!

Can you say "GREED"?

The scary thing is that over 50 banks have Shared Loss Agreements in place with the FDIC. Some of them include: Bank of America (go figure), CitiMortgage, Wells Fargo, etc."

activerain.com/blogsvi...-

*imho*

Oct 26 10:45 AM

[pravin404:]

Check all the bank failures list and the snapshot at
portalseven.com/banks/...

You can check
* Recent Bank Failures
* Biggest Bank Failures
* Number of State-wise Banks Failures
* Costliest Bank Failures for FDIC
* Biggest Loss Sharing Agreements for FDIC.

Oct 26 11:07 AM

[RatWatcher:]

"Second, did the FDIC ever run out of money during the S&L crisis? No, it did not. So a comparison is kind of ridiculous in my opinion."

Please correct if I am mis-remembering, but weren't the S&L covered by an agency called FSLIC? If so, there would be no reason for the FDIC to run out of money, or be involved at all.....

Oct 28 12:21 AM