The FDIC: Obligated to Report it is Insolvent? How About Those Bank Failures?

Sunday, September 13, 2009 , , , 0 Comments

Save your outrage for the moment. It's a natural reaction but there will be plenty of time for outrage later.

JS Kim is such a fun read:

On August 15th, when BB&T (BBT) purchased failed US bank Colonial Bank, it wrote down Colonial Bank’s loans and real estate collateral by 37% and Colonial Bank’s construction loans by 67%. Yes, 67%! The severe markdowns of Colonial Bank’s assets should have set off warnings akin to a five-alarm fire among the financial media, but it did not, for the media increasingly caters to the interests of the elite bankers of this world at the cost of truth and freedom. If there are several things we can deduce from Colonial Bank’s failure, it is the following.

Though the Federal Deposit Insurance Corporation (FDIC) refuses to disclose the names of the banks on its “watch list”, it can be safe to assume that a bank just does not go bankrupt overnight and that the process of going bankrupt can be predicted many months in advance by personnel with access to a bank's financial statements and knowledge of its true financial condition. In fact, various newspaper articles reported that Colonial Bank was in negotiations with the FDIC as early as March, 2009, yet not one time, did the FDIC force Colonial Bank to come clean regarding its true financial health before it finally shuttered the bank five months later.

The fact that the FDIC is spotting massive trouble in the American banking system and covering it up should be massively worrisome to Americans. Because revelations regarding the truth about a US bank’s health only seem to occur after it fails, the favored handling of American banks with kid gloves by the FDIC should immediately beg the question, “How many more US banks are legitimately bankrupt today and just operating on fumes?”

Personally, I would not be surprised if sometime within the next six months, a considerably larger US bank failure causes a massive ripple effect of much greater consequence. Banks that are currently struggling with unreported and covered-up deepening problems of loan delinquencies such as Wells Fargo (WFC), may be among the large banks that are candidates for future bankruptcy despite the public categorization of such institutions in the “too-big-to-fail” category. Unfortunately, Wells Fargo, from a political standpoint, does not have the “most favored bank” status of a Citigroup (C) or JP Morgan (JPM), two institutions deserving of bankruptcy but clearly favored by the US Federal Reserve and the US government.

Mr Kim is also a brilliant investor and therefore probably hasn't spent that much time in trenches with his tin foil hat strapped tight, did no one let him know that JPM *is* the Fed?

As for Colonial, the FDIC wasn't the only agency who may have known there was a problem. So if SIGTARP is getting ready to raid a bank, don't you think the bank's depositors should, oh I don't know, get some sort of smoke signal?

Anyway. The scenario Kim describes, one in which the FDIC knowingly allows banks to continue operating under the guise of solvency, is in fact the exact purpose of "deposit insurance" so there's no need to get outraged and say "OMG HOW CAN THE FDIC DO THAT?!" because, well, that's what they are there to do.

But at some point the FDIC is obligated to throw its hands up and say "you know what? They're all insolvent. And so are we!" - this might not be too clear to them so we're hoping Sheila gets a guilty conscience and gets real about the severity of her agency's issues.

The FDIC admits its mission and acknowledges the cons of a system built upon the rocky road of moral hazard, so that's nothing new:

In a report on its Web site, the FDIC explains the "moral hazard" of deposit insurance. "The argument is that deposit insurance reassures depositors that their money is safe and removes the incentive for depositors to critically evaluate the condition of their bank. With deposit insurance, unsound banks typically have little difficulty obtaining funds, and riskier banks can obtain funds at costs that are not commensurate with their levels of risk."

After an incredibly rough Bank Fail Friday this past week that could include being on the hook for $2 billion in the Corus failure alone, the FDIC will likely be banging down Treasury's door any second now asking to tap that $500 billion line Congress was naive enough to extend. Panic? You haven't seen panic yet, but don't worry, we'll get there. I recommend keeping your camera charged.

But wait, is the FDIC really the worst of the bad guys? The Fed's Inspector General has some concerns regarding that point - their own Inspector! Don't worry, we'll get to that later.

The failure of County Bank, in California, will result in an estimated loss to the FDIC of $135.8 million, or 8 percent of the bank’s $1.692 billion in assets, the FDIC said.

“We believe that the magnitude and significance of County’s asset quality deterioration and credit administration deficiencies that emerged in the summer of 2007, coupled with management’s disagreement with regulators, warranted a more direct and forceful supervisory response,” Coleman wrote.

The San Francisco Fed “did not follow Board procedures that required sending a brokered deposit restriction letter to County” when its capital base fell below a target level, the report added.

“Consistent with the report’s recommendation, the Division will remind the districts to provide timely written notification of brokered deposit restrictions to financial institutions deemed less than well capitalized,” George said in the letter.

Yes, please "remind" the districts to do their fucking job. Maybe if SF Fed weren't always so busy flying bitch in Zimbabwe Ben's helicopter they might have been able to euthanize this thing before the FDIC had to swoop in.

The FDIC is insolvent and has failed. Pull the plug already.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.