Lack of Bank Closures = Bad

As there have been no bank closures by the FDIC, we cannot provide an update of the Bank Closure Report this week. Instead, we will therefore take a moment to point out that it's a very bad thing indeed to see no bank closures this week.

During the Savings & Loan Crisis, the collapse of the S&L banks was greatly exacerbated by inaction on the parts of the regulators. The Federal Savings and Loan Insurance Corporation, which was the Federal regulator of the S&L banks, was eventually rendered insolvent by its lack of proactive closings of insolvent institutions.

To put it bluntly, it looks that the FDIC is continuing to head toward a similar fate. According to our data, any bank closed by the FDIC at this point will be insolvent to the tune of 25% of total assets... and that number is rising, not falling. The insolvency in the U.S. banking system is pervasive and destructive, and the longer the FDIC does not aggressively cleanse the system, the worse the eventual implosion of the system will be.

As a public service, and in closing, we've developed an honest and realistic method of rating the nation's banks, called The Frugal Scotsman's Bank Rating System. It is a 1 to 5 scale, where 5 is the 'best,' and 1 as the worst. It goes as follows:

5: Salvageable.
4: Cross your fingers.
3: Pray hard.
2: The tellers are holding the doors for the regulators.
1: Your money is already gone.

Is the FDIC Inept, Panicked, or Corrupt?

We looked over the latest bank closures by the Federal Deposit Insurance Corporation (FDIC), and we noted with some alarm how costly these closures were. Putting the cost to the FDIC in terms of losses/assets, the four closures (as of 25/04/09) were insolvent to the tune of 26% to 39% of assets! This level of insolvency is horrible, and marks an incredible deterioration of the health of the United States' banking system. Below is a chart of the losses/assets of all bank closures since December 2007 to April 25, 2009(the beginning of the Depression). We used the data from the FDIC's failed bank list to construct the graph.
Needless to say, the closures by the FDIC are not getting better; we suppose the bright side it that they're not getting worse, either.

Let's look at the hard data: Total assets of all FDIC-failed banks, December 2007 to April 25 2009, and including Washington Mutual (WaMu), in millions, is $388,388.03 - that's $388,388,030,000. The cost to the FDIC for these failures was $18,783.20, in millions. That's a losses/assets percentage of 4.84%; not bad, we suppose...

But WaMu didn't cost the FDIC anything, so let's throw out their assets ($307,000 in millions) from the equations. Revised total assets becomes a modest $81,388.08 in millions, while the cost to the FDIC stays $18,783.20. Sitting down, dear Reader? The losses/assets percentage on these numbers is a whopping 23.08%! On average, approximately a full quarter of every failed bank's assets are trash, and if the latest percentages continue to get higher, that number will be getting much, much worse.

The horrifying insolvency of these FDIC-failed banks begs the question in our post's title: is the FDIC inept, panicked, or corrupt? Bear with us as we ponder each in turn.

All jokes about the Government aside, it is quite possible that the FDIC's leadership is indeed inept. Many other policy-makers in the U.S. Government are showing themselves to be very inept, so we can't rule out the FDIC. However, we don't feel the FDIC is necessarily inept in the classic sense; we posit the FDIC is instead following in the footsteps of the Federal Savings and Loan Insurance Corporation. Simply put, the FSLIC sat on its hands at the beginning of the Savings and Loan Crisis, hoping that the situation with the thrifts would solve itself. Instead, the situation deteriorated and the FSLIC itself went insolvent, and its mission was absorbed by the FDIC. We would be hardly surprised of the FDIC is likewise hoping that the banks will heal themselves. Perhaps by sitting on its hands, the FDIC is rendering itself insolvent, and therefore dooming its mission to be absorbed by a bigger Government agency... oh, perhaps the Federal Reserve.

Instead of inept, let us assume that the FDIC is, instead in a panic. The leadership knows that the greater part of the U.S. banking system is horrifyingly insolvent. They also know that the FDIC insurance fund is completely unable to absorb the losses incurred from fast and hard failures of all the insolvent banks in the U.S. (i.e. most of them). So, instead of having a proactive plan for dealing with the major problems within the banking system, the FDIC instead is reactively lurching from one super-insolvent bank to another with no cohesive plan of attack - or, indeed, of how to pay for all the damage. This panic is only allowing the problems in the banking system to fester, thereby creating even bigger problems down the road. Those could come sooner than anyone might imagine...

Finally, let's assume that the FDIC is corrupt. In this situation, the FDIC's actions are planned and carefully implemented. They are starting with the smallest banks in the nation, and slowly forcing mergers into larger ones, selling off the good assets to the bigger banks and holding the bad assets on its books. As the banking crisis continues, the FDIC will work its way up the food chain, successively cleaning out the banks, until the only remaining banks are the nineteen (or so) super-huge money-centre banks. At this point, the best assets in the U.S. will be in the hands of quasi-private banks, while the worst will be on the books of the Federal Government. Simply put, all losses will be paid for by the American Citizenry, while all potential profits will accrue to the super-huge banks.

Frankly, we can see aspects of all three possibilities at work; any and all combinations thereof would not surprise us. The big question in our mind is, which one is dominant?