FDIC R U OK?

“Bank failures are caused by depositors who don’t deposit
enough money to cover losses due to mismanagement.”
—Dan Quayle (44th Vice President of the U.S.)

Staying Positive


Oh that Dan Quayle – he may have actually nailed it! That said, we’d like to again open by reminding our readers that while there is a lot of tough reality going on out there – we maintain our positive outlook. That outlook is based on our belief that a bear market in one thing is often a bull market in another. And bull markets are what we hunt.

Bank Failures Increase


The latest bank closings by regulators have raised the number of failed banks in the U.S. to 84 for 2009.[1] Banks have been closed at the fastest rate in 17 years, and the possibility looms that the worst is not yet over.[2] Most eye-catching to us is the recent data released by the FDIC – which shows 416 banks with assets totaling $299.8 billion have failed the agency’s grading system for asset quality, liquidity and earnings for the second quarter.[3] That’s quite a disconcerting statistic as the rapid pace of bank failures has drained the FDIC’s deposit insurance fund from $13 billion in the first quarter to $10.4 billion at the end of the second quarter.[4] Alarmingly, the emergency fund has shrunk 40 percent in 2009.[5] The failures of Colonial BancGroup, Inc. and Guaranty Financial Group, Inc. this year, which were handled by the FDIC – were the 6th and 11th largest bank failures in the history of the United States.[6]

The rise in bank failures has caused the FDIC to charge banks an emergency assessment to raise an additional $5.6 billion for its insurance fund, which has fallen to its lowest level since the savings-and-loan crisis in 1993.[7] As we listen to FDIC Chairman Sheila Bair say the agency will probably charge banks another fee this year in an attempt to again refresh the deposit insurance fund[8] – we wonder how much more the state-banking industry (which the FDIC regulates) can handle in assessments. If the FDIC’s insurance fund is depleted, the regulator has the ability to access a line of credit at the Treasury Department which was extended by Congress earlier this year to $100 billion – along with the ability to borrow $500 billion through 2010.[9]

Chairman Bair has recently said the FDIC doesn’t expect to tap the Treasury line of credit – and that, “The FDIC has ample resources to continue protecting insured depositors as we have for the last 75 years.”[10] As we survey the heavily jobs dependent housing market, which so many banks are tied into – and add in the faltering commercial real estate market – we don’t believe her at all. If things are so O.K., why the ongoing need for FDIC assessments on banks for additional $billions to replenish its insurance fund? And then there are the 500,000 option ARM’s (option adjustable rate mortgages) scheduled to reset over the next four years, at rates many homeowners may not be able to afford.[11] This is especially disconcerting as nearly 25% of U.S. mortgage holders already owe more than their houses are worth[12] – with 48% of mortgaged properties forecast to be upside-down as prices continue to fall through 2011.[13] To us, it all seems to add up to the potential for more borrowers becoming unable or unwilling to pay their mortgages. All of which could contribute to new large-scale shock-waves throughout the lending community.

Thus – we’re not listening to the politicians and bureaucrats. It’s our opinion another potentially massive government bailout may loom on the horizon – this time of the FDIC. All with newly printed money of course.

Speaking of Banks


In trading activity on September 1, financial shares fell as apprehension increases over whether banks may incur more losses.[14] The shares of government controlled Fannie Mae and Freddie Mac dropped by over 11 percent – while government bailed out AIG dropped by 16 percent.[15] All 24 companies in the KBW Bank Index fell.[16]

We’ve long been wary of the financial sector – and remain so today. In our opinion, much of the sector, without the government to bail it out and prop it up could well have been annihilated already. Instead, the taxpayer foots the bill as the government prints money to come to the rescue. And before we all get a bit self righteous about how wrong this is – perhaps we should take a look at ourselves in the mirror. In our opinion it is wrong for big Wall Street investment banks who took ridiculous risks to get bailed out by the government while they continue to pay large bonuses. But is it not as wrong for the average person to walk into a bank and require FDIC insurance on their deposits (which allows the bank to perhaps act more recklessly)? Perhaps if institutions and investors, large and small – were left to sink or swim based on how responsibly they behaved, and the due diligence they performed – we’d all be better off.

Then again, we’re aware that’s not how the game is being played in America today. And we advise our clients accordingly.

As we enter this critical time – now, more than ever – we believe investors need to focus on their investment strategies. Those readers who are clients are fully aware of the strategies we’re implementing in light of unfolding economic circumstances. Others may feel free to contact us to learn more.

Stephan R. Ernharth, JD, AIFA
Vice President
Ernharth Group
www.ernharth.com
Go to www.ernharth.com/economic-commentaries to read past articles from our Economic Commentary series.

  1. Bloomberg; “Regulators Shutter Three U.S. Banks, Bringing 2009 Toll to 84″; August 29, 2009
  2. Ibid.
  3. Ibid.
  4. Ibid.
  5. Bloomberg; “FDIC Problem Bank List Surges, Putting Fund at Risk”; August 27, 2009
  6. Bloomberg; “Regulators Shutter Three U.S. Banks, Bringing 2009 Toll to 84″; August 29, 2009
  7. Bloomberg; “FDIC Problem Bank List Surges, Putting Fund at Risk”; August 27, 2009
  8. Bloomberg; “Regulators Shutter Three U.S. Banks, Bringing 2009 Toll to 84″; August 29, 2009
  9. Bloomberg; “FDIC Problem Bank List Surges, Putting Fund at Risk”; August 27, 2009
  10. Ibid.
  11. New York Times; “Loans That Looked Easy Pose Threats to Recovery”; August 26, 2009
  12. Bloomberg; “U.S. Underwater Mortgages May Reach 30%, Zillow Says”; August 11, 2009
  13. Ibid.
  14. Bloomberg; “Banks Lead Drop in U.S. Stocks on Concern Over More Losses”; September 1, 2009
  15. Ibid.
  16. Ibid.