FDIC's Watch List of 'Problem Banks' Keeps Growing

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Includes: SKF, XLF
by: Adam Lass

The Federal Deposit Insurance Corporation’s list of 117 “problem banks” is growing, according to its latest press release. The number of banks that may have squandered away their depositors’ cash is up 30%, quarter over quarter, the highest it’s been in more than five years.

What’s more, the FDIC anticipates that this list will surely grow over the next few months or maybe even weeks, as profits are down some 87% compared to the same quarter last year.

At that time, the guys who should know more about money than anyone besides the folks who print it made some $36.8 billion. Now they are down to less than $5 billion in profits. Hardly secure gains, for, as we have seen lately, a single American bank can lose $5 billion in the blink of an eye.

How did they make so much money then, only to be in their current situation? As many know by now, bankers are suffering from the pains of their own excess. Some 20% of the loans they made to anybody who could tie their own shoes are now overdue 90 days or more.

The FDIC’s website does not disclose the names of the banks on its watch list. The very last thing the FDIC wants to publicize is which bank might be at risk. If you knew that, you and a couple of million of your friends and neighbors might be tempted to pull your money out of the troubled bank. And that would get ugly indeed. You could easily find out the names of the nine banks that have already failed in 2008, compared to three the year before and none for two years prior to that. You might, if you searched long enough, find the buried memo the FDIC has sent off to the Treasury Department, complaining that its funds are now so depleted that it would be unable to cover this expected wave of failure with out delving deeply into the public till.

Yes, that’s right: The semi-independent insurance corporation whose sole job is to bail out banks is in need of a public bailout itself. In fact, it is right in line behind those other semi-private giants, Fannie Mae (FNM) and Freddie Mac (FRE).

Wait -- wasn’t their job to assure the public of our economic stability, too?

None of this sounds too terribly stable to me. I am not assured one bit. I am told that in a good year, some 13% of the banks that appear on the FDIC’s list go under. That means that some 15 more banks are virtually guaranteed to go bankrupt in the near future.

Even if the Feds do manage to gin up enough cash to cover depositors (and how they will manage that feat is a worrisome thought worthy of an entirely separate column), a fair number of investors will get screwed out of every penny. These are not wild-eyed speculators plunking down play money on pie-in-the-sky tech dreams. These are not shifty Florida real estate flippers. The sober upstanding folks who bought into these banks and into the mammoth Washington outfits that insured them are retirees, orphans and widows who were told that these investments were veritable “Rocks of Gibraltar.” Unbeatable, and indeed untouchable. Sound as an American dollar. Good as gold. So I am more than a little curious. And perhaps a little angry. In fact, I am in the mood for a little revenge.

And since living well is always the best revenge, I propose the following: When the next wave of defaults hits the newswires, the S&P Financial SPDR (NYSEARCA:XLF) -- the ETF that bundles together the biggest players like Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) with regional outfits like Wachovia (NASDAQ:WB), SunTrust (NYSE:STI) and Fifth Third Bancorp (NASDAQ:FITB) -- ought to fall at least two or three bucks. A drop from current levels ($20.37 as I sit to write) to, say, $18 would push the XLF December 20 puts [XLF XT] from $179 to $272 per contract, for a gain of some 52%. A real rout, you know, the sort that brings on bank holidays, would drop the XLF below its August low of $16.77, rounding your put gains over 79%.

Disclosure: none