Commentary on the FDIC Bank Failure Report (05/02/10)

Because the basic FDIC Report is getting quite technical, we've decided to separate out our commentary from the body of data. Both will continue to be published, and when something is particularly shocking, we'll make a point of it, both in the commentary, and the Report proper.

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The bank closed last week was both small, and relatively well-invested, considering how attractive a 72% recoverability is, compared to the overall recoverability of 52%. However, this still is terrible news: a bank should not be so malinvested, that its assets take such a spectacular hit. And that is presumably after the stockholders and bondholders have already been wiped out, as well. It is imminently possible that the closure was far worse than what the FDIC's numbers, after our crunching of them, would suggest.

We would posit that a recoverable value around 75% is a very hopeful case, and it would be unwise for an individual with funds in an American bank to expect such a glowing number. If the FDIC should be rendered impotent, perhaps through utter collapse of the Deposit Insurance Fund and the Treasury credit line, this means that the best a depositor could hope for, all other things being equal, is the recovery of 75¢ on the dollar. A worst-case scenario, such as IndyMac, would result only in 22¢ on the dollar; average is hovering presently around 56¢ on the dollar.

Needless to say, if it weren't for the FDIC making depositors whole, there would be massive destruction of savings and deployable real capital throughout the United States. This makes the FDIC indespensible for maintaining public faith in the U.S. banking system... faith that, we think, is already too much.

On a technical front, we believe we now have sufficient depth of data to begin comparing assets of closed banks to the population of their State of domicile. This will allow us to retire the comparision of raw number of bank closures to State population. We expect to have this ready for next week's closures, assuming that the FDIC can dig itself out of the snowbanks.