Memo to FDIC: Hope isn't a strategy

From the market insider:

The agency's insurance fund already has dipped to $13 billion, with more than 300 battered banks and thrifts still on an undisclosed FDIC list of problem institutions.

That's an interesting point about the increase in costs-per-failure. These banks aren't just insolvent, they're massively insolvent.

As of the FDIC being down to $13 billion -- yeah, that's bad, especially if there are a few more Colonials out there.

I am not sure of many things but one of the things I am sure of is that as soon as the funds are depleted they will be immediately replenished by congress. Nothing will kill a recovery like a nationwide bank run...that will lead to some serious liquidity and counter party issues.

In addition to the 77 bank closures this year there is an estimated 100 more banks on life support including Corus and Guaranty Bank which have negative tier one capital ratios. This is problematic because it is against the law for this to happen. When a bank has negative tier one capital ratios they are defacto insolvent and should be euthanized or nationalized or some other -ized. In this day and age the -ized these banks will get is "Super Sized" ;o) .

So if the FDIC knows they have 100 more banks to shut down why don't they do it? I suspect the reason is that shutting down 100 banks would be as an admission that the economy really isn't as good as the media thinks it is, so the FDIC whistles past the graveyard.

This policy is based on the fact that most of the banks troubles are based on residential and commercial real estate. IF Jim Cramer is right and the housing market has bottomed...no worries these banks will be solvent in no time flat. I for one hope he is right but reality sometimes has a nasty way of interjecting itself.

From ABC News:
Despite recent good news about increasing home sales and moderating price drops, there is still no relief in sight when it comes to foreclosures. RealtyTrac will report Thursday that a record 360,149 homeowners received a foreclosure filing in July, up 7 percent from the previous month and up 32 percent from a year ago.


http://abcnews.go.com/Business/story?id=8311623&page=1

and from the Boston Business Journal:
The 18.1 percent price drop was the biggest quarterly decline in the 25 years since the index has been published. The second-biggest drop in a quarter was the fourth quarter of 2008 when the quarterly decline was 10.6 percent.

http://www.bizjournals.com/boston/stories/2009/08/03/daily12.html


Memo to the FDIC: Take off your rose colored glasses and do your job, the process of recovery cannot begin until we at least acknowledge the problem. Put another way if you let a wound fester it's going to be a bigger problem than it originally was.