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Failed Banks and the Deposit Insurance Fund
Submitted by
CalculatedRisk on Sat, 08/29/2009 - 7:29am (84 comments)
in
Good Morning!
Good thing we can print money
So many banks...so little time...even less DIF. Are we going to see a financial "total solar eclipse" that doesn't ever end?
CR, has any print media contacted you about a job as a financial journalist? If not, that's part of the problem with media--they hire the wrong people.
How To Brainwash A Nation in 4 easy steps
LiveLeak.com - How To Brainwash A Nation
Demoralization
Destabilization
Crisis
Normalization
Morning, all
Let me ask this question for the Nth time - Why is DIF a meaningful concept? What does it represent? Why should one care about it?
FDIC is not a private insurance company, which needs to ensure that its loss reserves are adequate to cover likely losses.
The FDIC's ability to protect depositors is driven not by the size of DIF, but by the size of the overall FDIC balance sheet as well as liquidity reserves it has access to (and those reserves include access to Treasury).
It is even more absurd than to look at the size of loss reserves at Fannie/Freddie relative to losses in their portfolios and start worrying about their insolvency.
One can discuss scenarios of partial or technical default by UST on its obligations, yes, but outside of these scenarios FDIC running of cash because its DIF dried up is not a plausible scenario.
H1N1 news:
WHO Warns of Severe Form of H1N1 Virus - Health News | Current Health News | Medical News - FOXNews.com
Here, hope that helps
FDIC: Press Releases - PR-153-2009 8/27/2009
Chairman Bair distinguished the DIF's reserves from the FDIC's cash resources, which included $22 billion of cash and U.S. Treasury securities held as of June 30, as well as the ability to borrow up to $500 billion from the Treasury. "A decline in the fund balance does not diminish our ability to protect insured depositors," Chairman Bair concluded
MRM
i think you are right on the money.
pavel, you might find this development curious
Aug. 29 (Bloomberg) -- General Motors Co. negotiators urged the German government to pressure Magna International Inc. into making an offer for GM’s Opel unit without Russian backing, Spiegel reported, without saying where it got the information.
GM told German officials a sale of Opel to Magna would stand a better chance getting approval from its owner, the U.S. government, if there was no Russian involvement, the weekly newspaper said in a pre-released story from its next edition.
Germany rejected the request, saying it had made promises to Russian President Dmitry Medvedev. Magna’s investment partner is Moscow-based OAO Sberbank.
Hi everybody.
The momster had never heard of the Baltimore Bank.
She read the paper and told me that 81 banks has failed.
No, I say, it's up to 84 and yesterday was bff.
She sez, the FDIC is almost out of money.
I say, yes, by it has a half t line of credit.
Her: but who has that kind of money?
Me: the govt.
Her: the gov't hasn't got any money.
Me: You, me, the taxpayers.
Her: where are we supposed to put our money?
Me: ????
MrM - pretty much agree but for one item - as the DIF drops, assessments go up, so a low DIF means a larger hit on bank "profits" to restore the fund as the FDIC increases assessments.
Ms Bair is correct about having a very substantial credit line. It means that the FIDC could still work on a cashflow basis, even if its liabilities exceed its assets. Any tax professionals on here? I believe that is the IRS definition of insolvency.
However, normal definitions of insolvency may not apply when you have the power to levy assessments.
Is anyone else unable to sort the table based on the column headers?
MrM - the interesting thing here for me is the apparent co-dependence of Germany and Russia, and not only in the case of Opel.
The only thing that makes it interesting is where the new money will come from. Additional levies on "healthy" banks, and a requirement for even more borrowing by the Treasury.
I believe that they are required by law to take action to bring the amount in the fund up to a certain percentage of deposits, even though they have the credit facility.
reloaded the page and the sort works now - interesting that WaMu was the only failed bank that caused no loss.
Today, a press release from TrimTabs Investment Research shows that insiders are selling at a pace not yet seen; insider selling is 30.6x greater than insider buying! This is the highest ratio on record since TrimTabs began tracking this data in 2004.
but the CEO of TrimTabs certainly has an opinion.
“The best-informed market participants are sending a clear signal that the party on Wall Street is going to end soon…
Investors who think the U.S. economy is recovering are going to get a big shock this fall. Companies and corporate insiders are signaling that the economy is in much worse shape than conventional wisdom believes.”– Charles Biderman CEO of TrimTabs Investment Research
Morning Pavel - saw that last night - hope they're on the ball...(Blackberry not conducive to prolixity).
Terry - The increase in FDIC premiums is precisely the crux of the problem.
The situation with large banks (Citi, BofA, JPM, Wells) is patently absurd: the government wants them to become as profitable as possible and as quickly as possible, so it shovels free money into their vaults like there is no tomorrow. At the same time, the FDIC is going to charge them more for deposit insurance. So it is really about Bair vs. Geithner/Summers/Bernanke. The big banks are not going to be impacted by the outcome of this fight so long as they continue getting their life support from the government.
On the other hand, smaller banks, those without access to the government largess, only get squeezed by the rising FDIC premiums.
Talk about the two-track economy
The Two-Track Economy « The Baseline Scenario
More On The Two-Track Economy — From The WSJ And Others « The Baseline Scenario
Then pause and think about what's left of the difference between the US and places like Russia, China of Indonesia, where government connections are the most important determinant of commercial success of any private company above certain size.
Pavel, sorry to attempt to divert you, but if you have time, I'd be interested in your take on the video referenced by Min of Truth just above. It's a short one, 80's vintage, from a purported KGB operative who defected in '70. Seems to me to be on target, but squatting dachshunds usually are.
And the moral of the story - become too big to fail.
I agree - the regional and community banks and their shareholders are the ones paying for the bailout - in addition to the taxpayers
I heard on NPR the other day, a former FDIC chair (can't remember his name) said that $10B in the DIF includes a $30B writeoff in anticipated bank failures. So, he said the balance of the DIF is actually $40B. Is this what you all understand?
One can discuss scenarios of partial or technical default by UST on its obligations, yes, but outside of these scenarios FDIC running of cash because its DIF dried up is not a plausible scenario.
I hadn't realized that anybody was discussing the FDIC running out of operating cash, since we all know about the line of credit from the Treasury.
More intriguing to me is whether or not the American populace will be interested when the FDIC needs to go to the Treasury.
Psychology is strong in the economic landscape, especially now. The Green Shoots meme is alive and well... actually negate that. It seems to me that the "Keep Dancing Until the Music Stops" meme is really what is in full force now. Or maybe the "don't fight the fed" meme?
regardless, IMO when a market is so heavily dependent on psychology alone then that market is subject to brute gyrations if sentiment changes.
Is the FDIC going to Treasury enough to change sentiment?
I used to think so... but now I think people have gotten used to the idea of bank failures and FDIC insolvency. they may view it as a "nothingburger" since it's just one of many many many bailouts.
the apparent co-dependence of Germany and Russia
A new concept for the new century!
Although it could also be a response to what the Germans perceive as the American heavy-handedness - the deal was already agreed upon with participation of the heads of state before GM decided to change its position.
My personal economic indicator: My doddering aunt, who knows nothing about stocks except that they're in her 401k, called me up and asked about rebalancing 90/10 short term bonds/equity from 30/70 bonds/equity. She doesn't trust the rally. This is the same person who I begged to get out of stocks before the crash, who said she just doesn't understand them and prefers not to think about them, and then refused to open her statements through the lows.
Edit: when she asked to rebalance, she didn't phrase it as I did. It was more like, "Think I could go out of stocks to the safe thing you told me about?
indicating that he's watched TRIN and C side by side and has seen a very strong correlation.
....If we look at just the NYSE trading of these firms, they are accounting for about 40% of NYSE volume.
...the directionality of the involvement suggests that large financial institutions are systematically buying the beaten-up shares of the poster children for TARP: C, FNM, FRE, AIG, and the like.
It is worth noting in this regard that other major (healthy) financial firms, such as GS and JPM, have seen no such surge in their volume or their trading prices.
...If you were the government and you saw that these institutions were on the verge of a major fail, with billions of taxpayer dollars at risk, I'm not sure you'd announce that to the world. Nor, at this point politically, could you ask for yet another bailout package. But you would only pour money into those stocks at a frantic pace (capable of detection) if you perceived a dire need for the capital.
I'm not inclined toward conspiracy theories, but it's difficult to imagine a scenario in which this is not a (frighteningly necessary) coordinated capital infusion, with taxpayer dollars ultimately at work in financial markets.
TraderFeed: The Recent Concentration of Volume in Financial Stocks: Coordinated Capital Infusion?
OK, I see in the press release that MrM posted: "Total reserves of the Deposit Insurance Fund (DIF) stood at $42 billion... The contingent loss reserve, which totaled $28.5 billion on March 31, rose to $32.0 billion as of June 30, reflecting higher actual and anticipated losses from failed institutions."
FDIC: Press Releases - PR-153-2009 8/27/2009
Hoopa - similar experience - was back visiting my mom and dad last spring after my mom had some surgery, and my dad was telling me how well he was doing in the stock market - I talked to hm for five days straight about how someone in their mid-80s should not be holdings stocks, and his reposne was that the CD's did not pay shit. After I went back home, he called me and said he sold the stocks. luckily, he sold right at the top - he would have lost over half his retirement if he had stayed in.
Good for you, Terry.
And great that your dad listened.
Commonly-accepted wisdom says that we can inflate our way out of our debt crisis.
Ben Bernanke and Paul Krugman apparently think we should force inflation on the economy. University of Oregon economics professor Tim Duy thinks the U.S. will ultimately try to inflate its way out of debt
But as I have previously noted, UBS economist Paul Donovan has demonstrated that governments can't inflate their way out of debt traps, saying:
The problem with the idea of governments inflating their way out of a debt burden is that it does not work. Absent episodes of hyper-inflation, it is a strategy that has never worked.
Washington's Blog
Liz - I just chuckle - he sold his CAT stock on the very day it hit it all time high - he thinks he was a financial genius for doing that.
$$$$$$$$$$$$$$$$$$ on
poor and lower middle class people
might cause some inflation, but
otherwise I don't think it can be done.
MoT - Thanks a lot for the link!
I have not heard of this fellow before, but he did sound quite credible.
Just replace Marxism-Leninism with "unabashed free economy supported by financial innovation" and the parallels become eerily close.
While I do not believe in a centralized conspiracy by think tanks, the Bilderberg group etc, the system can organize itself quite easily to produce the same outcome.
The FDIC gets paid DIF assessments from banks on Sept 30.
From Shiela's press conference:
We review the adequacy of the contingent loss reserve every quarter, and make adjustments as warranted. As illustrated in this chart, we have been shifting large sums to the contingent loss reserve as our failure projections have grown. The total reserves are now over $42 billion.
So the DIF is at $10.4B. But there is $32B in contingent loss reserves.
I found this statement strange.
DIF balance has already been adjusted downward for the cost of failures that are expected to occur over the next year.
Maybe the bank assessments are already counted in the DIF? I don't know, as the FDIC and banks calculate their assessments based on end of Q2.
One of my bankers was not happy as the first of my CD's came due and the rates stink. Told her I was going to by houses and the justification to me was providing my own mortgage at 7% compared to 1-2% CD's. FDIC insurance is now just another theft by taxes for the Banksters.
Buy houses or provide hard equity loans.
'Course it could be the same thing.
I enjoyed reading some of the naievte regarding HR1207 audit the Fed bill. Of course it's going to get rolled into financial regulation and water'd down.
Without Russia, Germans would freeze in the winter and their cars would run out of gas on the Autobahn.
Germany and Russia
UK and Libya
What's the diff?
Hope so too, energyecon. I was startled enough by the Reuters story re H1N1 that I began to wonder if it was a hoax.
Sorry, don't see that link, Anak.
OT - Very good read, especially for those who believe that government can do no good
The Iraqi who saved Norway from oil
I thought wamu was a loss share
0% seems wrong...
luckily, he sold right at the top
OMG. Your dad caused the crash.
Pavel, here it is if you have time:
LiveLeak.com - How To Brainwash A Nation
I wonder where the cool black guy, and the old fogey white guys
advertising for wamu went after the wamu ad gig.
YLSP (profile) wrote on Sat, 8/29/2009 - 8:32 am
I enjoyed reading some of the naievte regarding HR1207 audit the Fed bill. Of course it's going to get rolled into financial regulation and water'd down.
The commentariat here was pretty solid with their analysis. Are you referring to the great unwashed masses?
Back on topic; the idea that WaMu cost nothing seems hard to parse. If we can close banks that are solvent why not go the next step and close really profitable banks and use the profits to replenish the DIF.
Was talking last night with a local city insider shortly after Affinity was shut. I was the one to break the news. He was concerned because they are very prominent in early development/raw land CRE in the area. "Effective Demand" can name a few I'm sure. His city is already pressured by California withholding many millions in tax sharing funds and even withholding taxes owed where the State is only the collector/aggregator. The city has already made some deep cuts to cover their bond obligations on their ill fated sale of their roads. They actually, get this, used the bond proceeds to pay the bond payment.
This will not end well.
lawyerliz (profile) wrote on Sat, 8/29/2009 - 8:52 am
I wonder where the cool black guy, and the old fogey white guys
advertising for wamu went after the wamu ad gig.
Those old fogeys were JPMorgan Chase execs. Ruh roh!
I listened to that Anak, and it just seemed dated.
Also, it didn't work. Of course our advertisers are more
effective. But it doesn't matter if people have no money to
spend.
Thoughts inspired by that FT article:
Dutch disease - Wikipedia, the free encyclopedia
The classic economic model describing Dutch Disease was developed by the economists W. Max Corden and J. Peter Neary in 1982. In the model, there is the non-traded good sector (this includes services) and two traded good sectors: the booming sector, and the lagging sector, also called the non-booming tradable sector. The booming sector is usually the extraction of oil or natural gas, but can also be the mining of gold, copper, diamonds or bauxite, or the production of crops, such as coffee or cocoa. The lagging sector generally refers to manufacturing, but can also refer to agriculture.
A resource boom will affect this economy in two ways. In the resource movement effect, the resource boom will increase the demand for labor, which will cause production to shift toward the booming sector, away from the lagging sector. This shift in labor from the lagging sector to the booming sector is called direct-deindustrialisation. However, this effect can be negligible, since the hydrocarbon and mineral sectors generally employ few people.[3] The spending effect occurs as a result of the extra revenue brought in by the resource boom. It increases the demand for labor in the non-tradable, shifting labor away from the lagging sector. This shift from the lagging sector to the non-tradable sector is called indirect-deindustrialisation.[4] As a result of the increased demand for non-traded goods, the price of these goods will increase. However, prices in the traded good sector are set internationally, so they cannot change. This is an increase of the real exchange rate.[5]
That seems to be very close to what happened to the US and UK - Dutch Disease, including deindustrialisation, curency and CAD imbalances, caused by the FIRE segment of the economy
Oh, dawg, they just get some credit cards to pay the bond payments and
all will be well.
lawyerliz (profile) wrote on Sat, 8/29/2009 - 8:55 am
Oh, dawg, they just get some credit cards to pay the bond payments and
all will be well.
You anticipated my next comments. He said they spent 80% of the proceeds to repair 20% of the roads and cannot touch access the remainder because the market has cut them off.
Speaking of trying to talk sense into our elderly parents, I tried to tell my mid-80s mother for over a year to hold off on buying stocks, etc. In her generation, blue chips were the caddy, and oh, the dividends... She watched BAC go down all the way to 30 and couldn't stand it anymore, jumped in and added to her collection. (If you like it at 30, you're gonna love it at 5...) And now? All those beautiful dividends from her blue chippers, gone, gone, gone... She told me the other day that she is now spending more than she takes in - and she's a double dipper, ss and state pension. With a paid off house. And she's frugal.
I think it's hard for the elders to change gears from trusting big stock corporations to watching even the tried and true crumble. Easier for those of us who never trusted them in the first place.
Edit: Oh, and I don't even want to hear about the annuities that she bought thru the nice man down at the bank...
If I sort by STATE, the 8/21 and 8/28 failures at the end of the list aren't in their correct alphabetical place. A little spreadsheet formula update/tweak is in order, methinks.
Interesting vid:
Ray Kurzweil on how technology will transform us | Video on TED.com
of course, the solvency of the DIF is not really a financial issue, just like Afghanistan is not really a military issue.
they are both political issues.
CR - I'm being a bit lazy, but does the list include the July enforcement actions update from Thursday?
FDIC: Press Releases - PR-154-2009 8/28/2009
C
ManU v. Arsenal kicking off after another two minutes of adverts... I'll be otherwise occupied in a few minutes. Any bettors got money on the Reds or Gunners?
I think the FDIC actually made a big change- by charging its assessment on assets not just deposits as it had in the past.. This forces the big banks to pay a much higher fee to the FDIC based on all their various forms of leverage. They get the double whammy of having to bring the assets on the book from the SIV on which they will have to hold capital(albeit over 7 years) plus pay the FDIC assessment.
Liz, dated in a way that those of our vintage can appreciate? I mean, he references Mondale.
What I agree with in the clip is that broad information availability to a population is insufficient defense against demoralization, and that this is the point where -any- destabilizing series of events (however "spontaneous", no conspiracies necessary!) will pitch a society into crisis.
And of course, the dependency of us all on stabilization being the drug, the resulting opportunistic entry point for, . . . fill in the blank.
for me it's Saturday night follies, and to bed I must go. g'dayal
crazyv - Can you please provide the link to this change?
Just for perspective: let's make a pessimistic assessment of cost to FDIC of failed banks in 2009. How does that compare with other big parts of federal budget, e.g., money spent in Afghanistan in 2009?
http://www.cbanet.org/files/FileDownloads/BankAlerts/FDICSAlert.pdf
Many thanks! I missed that. It seems like a one-time charge, though. Maybe to avoid tapping into that Treasury's line of credit in public
The CBA document linked to this FDIC news release
http://www.fdic.gov/news/board/May22no2.pdf
Allow the FDIC Board of Directors (“Board”) to impose additional special assessments
of up to 5 basis points on all insured depository institutions based on each institution’s
assets minus Tier 1 capital for the third and fourth quarters of 2009, if the FDIC estimates
that the Deposit Insurance Fund (DIF or the fund) reserve ratio will fall to a level that the
Board believes would adversely affect public confidence or to a level that will be close to
or below zero
...
The earliest any such additional special assessment could be imposed under the final rule would be September 30, 2009, with collection on December 30, 2009. Staff recommends that the Board consider whether to impose such an additional special assessment later in 2009.
Staff also recommends that authority to impose any additional special assessment under
the final rule terminate January 1, 2010. The FDIC’s ability to collect any special assessment imposed prior to January 1, 2010, would not be affected.
Has anyone read about this ad campaign coming up?
Casaubon’s Book » Blog Archive » Is It Home Yet?
What a great way to keep squeezing people who have a drop of debt left available...
And this H1N1 follow-up, with some caveats:
Doctors Scrutinize WHO Swine Flu Warning - ABC News
Wow Pavel!
Thanks for sharing. Something to pass on to the parents I work with. Sounds like not too bad for most of us though.
Paying more for risk seem like a good first step.
People with no money aren't gonna buy furniture no
matter how they are advertised to.
People I know are still indulging in their kids, but nobody
is buying furniture.
We just bought (debted) a truck big enough to live in. We'll make some curtains for it
Most of my coworkers (state employees) are broke, no matter how much they make. They've either spent it up or didn't plan well, but no one is out blowing money on household furnishings...
I think I read that the more you make the more you overspend,
so after a certain point you are better off making less,will be in
less debt.
Joanna created some mooonnneeeeey.
Joanna creeated some moneeeeey.
Nanny nanny boo boo.
these banks haven't failed. they are merely pre-owned.
failure is no longer an option. hence the problem.
HAHAHAHAHhahahahahahahahahahahahahah and
Monetize.
LOLOL!
Truck pic here - Seven Trees: Shiny!
We shopped so hard for that rolling debt pile. Still, can't say it isn't fun to drive and electric blue full-sized truck with a v8.
Now I have to can enough veggies from the garden & sell enough eggs to take up some of the grocery bill
Watching this dribble of bank failures is somewhat like watching live sports where all of the action is in slo-mo. At this rate the game will never end.
FDIC has had lots of time to add staff, so the pace of closures must be a political/policy decision rather than capacity.
In the meantime, the Big Boys/Girls (Timmy, Ben and Sheila) don't seem to realize or care that a very large number of folks don't believe any banks are trustable (solvent), and are getting very fed up with 'savings' not earning any interest for their risk/reward.
In the meantime, the Big Boys/Girls (Timmy, Ben and Sheila) don't seem to realize or care that a very large number of folks don't believe any banks are trustable (solvent), and are getting very fed up with 'savings' not earning any interest for their risk/reward.
...................
We taking a big risk and assuming we'll be able to keep our house through thick & thin. So most of our ready cash goes towards infrastructure with the best rate of return. House upkeep, new windows, paint, etc.
Only then will we look around for someplace (aside from the basic bank accounts) to stash more money.
I talked to a RE agent yesterday.
She is one of only 2 I trust to give me the skinnee. I asked her about the local market (central virginia). Land is dead. The market is foreclosures. Since this is considered a declining market foreclosures can used for comps and, therefore, killing deals on non foreclosures. Said banks have wised up and are dribbling out REOs which are met with multiple bids with the winner often being above list. Still houses that were going north of $400K two years ago are going for ~$200K. Wonders if the banks have thought of winterizing their shadow inventory. Haha, there are two shadows in my subdivision and from the looks of them 'out of sight out of mind'.
the central chart there (and a nice one it is) assumes that "inflation" takes wages and GDP with it. that's a bad assumption, IMO.
Congrats joanna on the sweet harvest........I showed the pics of the beets to
and she started mooing. 
doesn't like beets - so she just sniffed and walked away. Seriously, I'd die for onions like that. [applause].
In the meantime, the Big Boys/Girls (Timmy, Ben and Sheila) don't seem to realize or care that a very large number of folks don't believe any banks are trustable (solvent), and are getting very fed up with 'savings' not earning any interest for their risk/reward.
I will never get tired of re-posting this link. Hear it from The Maestro himself (if in rush, fast forward to the 4th minute)
Video: Alan Greenspan | The Daily Show | Comedy Central
My recollection:
Stewart: So when you lower the interest rate and drive money into stocks, you lower the return people get on their savings. You've made a choice to favor people who invest in the stock market and not those who keep their money in the banks.
Greenspan; Yes, that's the way it comes out, but that's not the way it is.
Monetizing is such a dirty word, use futurazing, borrowing money from future savings.
I suspect that a lot of the insider selling has to do with the fact that the HELOC ATM has run out of cash. Insiders are selling more just to stay afloat/shop @ Nordstroms
Thank you BSR!
Onions seem to like it here, so we grow a lot
And I love beets. I still have to process those, and we have like 21 quarts canned already. Time to harvest carrots now, and can more beans. Dry some broccoli.....whew!