Expect to See the FDIC Go Deeper into Debt

Profits might be surging at banks with big trading divisions, but lending remains stuck in the mud. In the third quarter, lending by U.S. banks dipped $210.4 billion, or 2.8 percent, representing the largest drop off in 25 years.

Partly as a result, the Federal Deposit Insurance Corporation (FDIC), which insures consumer deposits in the event of a financial institution bankruptcy, swung $8.2 billion into the red in the same quarter. But even as the number of problem banks increased by one third, to 552, banks overall posted earnings of $2.8 billion vs. a loss in the previous quarter of $4.3 billion.

What is more, house prices, which have risen modestly for the past two quarters, are now 10 percent above the relative level they were in the 1990’s, according to historical price-to-rent ratio data based on the Case-Shiller Index, which tracks U.S. home values.

The other day I pointed out how Zions Bancorporation (ZION) may have been getting a little ahead of itself by asking preferred shareholders to convert their holdings into common stock. Since then, the value of its common shares has declined 8 percent in value. Indeed, Zions is a classic example of one of the many financial institutions that needs to keep raising capital in order to fill the massive hole of debt that has been created by four consecutive quarters of losses. Without a strong lending environment, the bank cannot make money — it’s as simple as that.

That’s why the earnings surplus the FDIC reported last quarter is so misleading. Pretty much the only reason for the $2.8 billion number reported above is that a relatively small number of investment banks — whose trading departments are chasing a rapidly-expanding asset price bubble — have been making money as investors have fled the bond markets in search of yield.

If conditions remain the same for the next two quarters, you can expect to see the FDIC go deeper into debt, an increasing number of big banks swallowing their smaller rivals, while home prices will begin to become priced out of the range of most consumers’ pockets. In the end, that scenario won’t even bode well for the big banks and their trading divisions.

Comments

[KirbyJF1]

Daniel

Maybe you should write about a topic that you have an understandong of what is happening. Why don't you try Tech. Good Luck

Kirby

2009 Nov 26 07:12 PM

[Daniel Harrison]

Kirby: I was initially going to ask you what specifically caused you to write this pithy insult, but looking through just one page of the comments you have written on this site under others' material I can see that they are all equally bombastic and insubstantial:

Comment #1: I would like to know how 3 years of prepaid FDIC Fee's will put any bank unto trouble? Don't you have just a basic knowledge of accounting. By your article it shows that your completely devoid in comprehending how the process works ... I think you should take a financial class to fully understand the process. Back to your Bomb Shelter "Chicken Little"

Comment #2: Do you know what your talking about?? Maybe you need to revist your data. Maybe you should go back to MoMo day trading or are you broke already?

Comment #3: You better go back to Finance class 101. Write about some thing you may understand & that is a little easier for you to comprehend.

Comment #4: What a bunch of B.S. Are all you Socialists putting up your moronic idea's. Do you want to stop all commerce??

Comment #5: Glad to see you had enough courage to get out of your bomb shelter for awhile to sniff the fresh air.

Comment #6: Evidently you know nothing about banking per your comments.

Comment #7: Evidently you don't like how people chose how they live or where they want to work & raise a family.You probably would make a good Nanny director

Kirby, it's fine to disagree, and even to disagree emotionally with a commentator's opinion. But for the sake of staying engaging to everyone else on the site, can I suggest that you tone down the personal-attack rhetoric and instead tackle the arguments in the posts head-on?


On Nov 26 07:12 PM KirbyJF1 wrote:

> Daniel
>
> Maybe you should write about a topic that you have an understandong
> of what is happening. Why don't you try Tech. Good Luck
>
> Kirby

2009 Nov 27 03:52 AM