While the stock market was beginning its 376 point plunge yesterday, the Federal Deposit Insurance Corporation was quietly putting the best face it could on a banking system in serious trouble. In a press release to update the status of the insurance fund, the big positive headline was, “FDIC-Insured Institutions Earned $18 Billion in the First Quarter of 2010–Net Income Highest in Two Years.” FDIC Chairman Sheila C. Bair said, “There are encouraging signs in the first-quarter numbers . . . Industry earnings are up. More banks reported higher earnings, and fewer lost money.” (Click here for the complete FDIC press release.)
I can appreciate Chairman Bair’s positive attitude, but “encouraging signs” do not mean we have turned the corner and brighter days are ahead. The Deposit Insurance Fund, or DIF, has a negative balance of -$20.7 billion. That is just a $200 million improvement from the all time record deficit of -$20.9 billion at the end of 2009. I don’t see how these numbers are “encouraging.”
I talked with FDIC spokesman David Barr yesterday about the shortfall in the DIF. He said, “The FDIC is not broke.” It has an additional “$63 billion in cash.” He told me there is about $46 billion in three years of prepaid deposit insurance premiums and an additional $17 billion in cash for a grand total of $63 billion in “liquid resources” to close insolvent banks. Let me get this straight–nearly 75% of the FDIC’s bailout money is from fees collected up front. What happens when the FDIC burns through that? Will they collect another 3 years of fees?
Barr told me the FDIC is expecting to spend “$40 billion” closing troubled banks in the next 12 months. He said, “It could be less and it could be more.” Simple math says it will be more, way more. There have already been 72 failed banks so far this year. According to Barr, at the same time last year, there were only 33 failed banks. In 2009, there were 140 total banks closed. Bar freely admitted, “The pace (of bank closings) is greater this year.” Barr expects more banks to fail in 2010 than 2009, but he would not give a number. He said, “We don’t provide numbers because to us it’s not the numbers, it’s the cost.” The latest list of “problem” banks from the FDIC now stands at 775. 73 banks were added to the list since the end of 2009. That is nearly a 10% increase in less than 5 months.
Reggie Middleton is an investor and analyst who owns BoomBustBlog.com. He was one of the earliest to warn of the impending downfall of Lehman Brothers and Bear Stearns. Middleton told me, “If the FDIC had more money and manpower, it would be closing a lot more banks.” Middleton also said, “Many of America’s 8,000 banks are insolvent or close to it because of mark to market accounting.” Because of accounting rule changes, banks are allowed to value toxic assets for whatever they think they are worth, not what they actually are worth. Some call this “mark to fantasy accounting.” Middleton warns, “There is more risk now (in the banking system) than during the Lehman crisis because the pool of banks is smaller.”
When I look at residential and commercial real estate, I see no “encouraging signs.” I see frightening headlines like the one that came out just this week that says, “One in 7 U.S. homeowners paying late or in foreclosure.” (Click here for the full story) Commercial real estate doesn’t look any better. Some experts are forecasting $1 trillion in CRE losses before the banking crisis is finished. The FDIC is acting more like the Resolution Trust Corporation of the early 90’s than a deposit insurance fund. Let’s hope it does not run out of money anytime soon.