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.

Pent up Supply???? June Housing Report In.

First a couple of facts: People want a new (different) car every 2.5 years and a new (different) house every 5 years. After these time periods pass consumers develop an "itch" to change. In economics this is called pent up demand, it is the reason we usually explode out of recessions. We HAVE to have the latest, greatest car/neighborhood etc. Since "the consumer" is 70% of economic activity in this country this itch coupled with easy credit is a recipe for economic success. Unfortunately I am not seeing this happening right now.

From Barron's (Click on blog title to go to article):

The median price of an existing single-family home dropped to $174,100, the most in records dating to 1979, the National Association of Realtors said today. Total sales rose 3.8 percent to a seasonally adjusted annual rate of 4.76 million from the first quarter and fell 2.9 percent from 2008’s second quarter.

So we must be at a bottom right? Prices are going to rocket from here, right?

“I don’t think we’re at a bottom yet in home prices,” said Scott Anderson, a senior economist at Wells Fargo & Co. in Minneapolis. “There’s also a pretty big shadow supply of houses. People are kind of waiting for the bottom but there’s a pent-up supply out there.”

Pent up supply???? Don't you mean pent up demand? Most people have mortgages on their properties, when they sold their house in 2006 the could do 2 things with the equity: Spend it on jetskis, cars, vacations, or a myriad of other things they didn't really "need" or they could have rolled it into their new house letting them buy a bigger house than they could otherwise afford in a sense leveraging themselves up. Turns out home values have gone down and all that equity is gone, how much the homeowner is underwater is dependent on how much they put down on their "new" crib. Between being underwater, having the moving itch, and/or being unemployed the consumer just wants the pain to end and is looking for any bounce in the market to sell their property. In the stock market they call it "being trapped" and believe me there is tremendous supply above these levels with people waiting to liquidate their 401k's.

That is just consumer supply. The banks also have alot of supply on their books and also are looking for any sort of market bounce to unload their foreclosures/delinquent loans. Theoritically they should just take the hit and liquidate them but then they would have to realize the loss on their books. Once these loans enter the stormy waters of mark to market accounting ( a fancy word for how much something is actually worth) then the banks would be exposed for the insovent insitiutions they are.

From the Congressional Oversight Panel (http://cop.senate.gov/documents/cop-081109-report.pdf )

The uncertainty created by the financial crisis, including the uncertainty attributable
to the troubled assets on bank balance sheets, caused banks to protect themselves by
building up their capital reserves, including devoting TARP assistance to that end. One
byproduct of devoting capital to absorbing losses was a reduction in funds for lending and a
hesitation to lend even to borrowers who were formerly regarded as credit-worthy.

As far as I can tell the only way out of this dilemma for both the banks and the consumer is inflation. On the plus side the Federal Government is excellent at spending money.....