By Jim Sinclair
The analysis of the worsening conditions in bank failures reveals the absolute action of the FDIC turning to the Fed and Treasury to bail out the insurer of private deposits. I therefore assume that before this is all over bank depositors will get short term non-marketable Treasury paper rather than dollars in payment.
Dear CIGAs,
The FDIC closed three more banks this past Friday, 11/13/09. As was the case last week, the details of these closings evidence some very worrisome trends.
In order to get some perspective on the state of these banks it is useful to compare the statistics of the first three banks the FDIC closed back in 2007. According to the FDIC’s 2007 Annual Report, these banks had combined assets of about $2.3 billion and combined deposits of about $2 billion. The total cost to the Deposit Insurance Fund ("DIF") of closing them was $113.2 million, about 5.7% of their combined deposits.
Turning to this week, the smallest of the three banks closed, Pacific Coast National Bank of San Clemente, CA, had assets of $134 million and total deposits of $130.9 million. The cost of closing it is projected to be $27.4 million, about 21% of deposits. This indicates it was in far worse shape than the banks the FDIC closed in 2007.
The largest closed this week, Orion Bank of Naples, Florida, had 23 branches and assets of about $2.7 billion. It had total deposits of about $2.1 billion. The FDIC projects the cost to the DIF will be $615 million, about 29% of deposits. Again, this is a staggering number when compared to the banks closed in 2007.
The statistics surrounding the third bank closed, Century Bank, FSB, of Sarasota, Florida, are downright frightening. The FDIC says this bank had total assets of $728 million and total deposits of $631 million. The projected cost to the DIF is $344 million, almost 55% of deposits. It lost more than half its customers’ deposits by the time the FDIC got around to closing it.
The total projected cost to the DIF of the three closings is $986.4 million, about 38% of their combined deposits.
This week the FDIC announced that in order to replenish the DIF it is requiring banks to pre-pay three years of premiums. This will reportedly bring the assets of the DIF up to $45 billion.
Yet if the cost of bank closings continues to increase at the pace we have been seeing, the DIF will almost certainly be wiped out again in less than a year. There is another huge wave of residential mortgage-related losses coming in 2010 and 2011 as the majority of pay option ARMs reset.
This will be exacerbated by an unemployment rate that has become staggering. To cite one piece of evidence, it was reported this week that fully 22% of mortgages in Florida are non-current.
Banks will also be hit by staggering losses on commercial real estate loans coming due in the next couple of years.
Meanwhile, under the current plan the FDIC will not receive any new premiums from banks until after 2012. Until then, the U.S. Treasury will be the FDIC’s only source of funding.
Secretary Geithner may have found it politically expedient this week to claim the cost of bailing out the financial system will be less than originally expected, but a review of the facts indicates the opposite: the cost will certainly be much higher. In light of shrinking tax revenues the only way to fund these costs will be through increased debt and unrestrained quantitative easing. Any suggestion to the contrary is pure fantasy.
Compiled and presented by:
CIGA Richard B.
Courtesy: www.jsmineset.com
