Commentary on the FDIC Bank Failure Report (12 March 2010)

New York City was the scene of much action this week, with the closures of LibertyPoint and Park Avenue Banks. It was also a very strange circumstance, as well, because LibertyPointe was closed on a Thursday, which is very much not how the FDIC likes to do business. The why is not exactly clear, since - as far as we can tell - LibertyPointe was actually not all that badly off. The worst bank this week was Old Southern Bank ($315 million in assets, $319 million in deposits. Oops.), and that bank managed to politely sit pretty (and insolvently) until Friday evening.

Additionally, LibertyPointe's recoverability was not all that bad: 87.93 cents on the dollar. That's actually the best recoverable value in our records! So go figure; there must have been something especially exciting going on at LibertyPointe for a mid-week closure, but unfortunately it is invisible to our financial analysis. Whatever was going on, though, we have the strong suspicion that the FDIC knew all about it, and had taken the traditional regulator stance toward fraud: do nothing.

Speaking of fraud, we notice a trend of recent weeks, regarding the recoverable value of the banks which the FDIC closes. Except for the closures on 6 January 2010, all have been sharply over the overall trendline of ~57%. This week alone was 86.78%, one of the best weeks we've seen, if not the best ever. This makes us wonder: is the FDIC targeting their end costs ever more closely? If so, that means the FDIC is not necessarily closing the worst of the banks, but rather the banks they can afford to close. Remember, Dear Reader, the FDIC will not be receiving any quarterly insurance payments for a little under two years now; they have no source of regular income. Whatever is in the coffers is pretty much what they have to work with, barring either A) tapping the Treasury credit line, and B) a special insurance assessment.

However, the first has been vicoferously written off as an "extreme emergency measure" by Chairwoman Sheila Bair (translation: Goldman Sachs needs pin-money), and the second is likely not politically palatable, considering that banks would prefer to hunker down and park their money in Treasury Bills. Even if the FDIC should decide to tap their Treasury credit line, they will still have to pay the interest on the funds thus extended. As many people are discovering in this Depression, it's pretty hard to pay off debt when one does not have any income.

Sure, the FDIC could levy special insurance assessments to pay the interest, but that is a one or two trick pony; if the FDIC should try to levy multiple special assessments, the banking system would likely rebel. Congress would apply pressure to the FDIC, and force it to back down; at the very extreme, Congress would attempt to force out Sheila Bair for someone more light-handed. The banks, after all, are tolerant of the FDIC, so long as it does not interfer excessively in their operations.

Bringing this back to our original comment, a constricted income is likely the driving force behind the targeted closure programme which we posit the FDIC is undertaking. Capital is presently scarse, and it will be two years until new, dependable income will resume; therefore, the FDIC has every impetus to conserve their resources as carefully as possible.

This, Dear Reader, brings us to fraud: if the FDIC is closing, not the worst banks in the United States, but rather those banks they think the can close with minimal outlays of precious capital, they are shirking their fundamental mission. They are not protecting depositors by closing the cheapest banks to close, but rather attempting to instill a false sense of health and solvency in depositors, to protect the truly horrible banks. By supporting the perception of solvency and deposit protection, the FDIC serves to shield insolvent banks (Citibank, anyone?) from sudden, disasterous outflows of capital.

Such a disastre can be seen in the capital flight from Greece, which - as of 23 February - amounted to 8 billion out of the 30 billion under management in private Greek banks (originial article here, subscription needed). 25% loss of a country's private capital base spells D-O-O-M for the banking system.

The FDIC-as-shield-for-banks, let us repeat, is fraud, if it is indeed the case. Innocent depositors are being duped into believing that their banks are in sound financial shape, since 'only a few banks are getting closed,' and 'the recovery is underway!', et cetera. We do not believe there is a recovery, nor do we see one in the future; the next leg down of the ongoing Depression, whenever it arrives, will likely take be a gut-punch to the FDIC. It's then that we expect bank runs to begin, and when the so-called insurance offered by the FDIC will be seen as the farse it really is.