COUNTERCOLUMN: All Your Bias Are Belong to Us

A year after Washington rescued the banks considered too big to fail, the ones deemed too small to save are approaching a grim milestone: the 100th bank failure of 2009.


There are now a number of companies... private insurers... who have more in cash reserves backing their own promises than the FDIC has available to back the banking system...

While the parade of failures still represents a mere fraction of America’s small banks, it underscores a growing divide between them and large institutions like Goldman Sachs, JPMorgan Chase and U.S. Bancorp, which are slowly growing stronger as the economy improves.

Leave it to the New York Times to fall for the 'rich get richer' divide. I mean, they already went for "grim milestone." Why not go whole hog for the stupidity? News flash for the Times: It's called "consolidation." Solid banks get a chance to purchase distressed assets of failing banks at a discount and thank God they do! It's good for everyone, and is saving the system from collapse right now.

Burdened by worsening commercial real estate loans, many small banks’ troubles are just beginning. Many analysts say that the now-toxic loans could sink hundreds of small lenders over the next few years and place a significant drag on the economy.

Already, the bank failures are placing enormous strain on the F.D.I.C. and its fund, which keeps depositors whole. Flush with more than $50 billion only two years ago, the fund recently fell into the red.

The prospect of more failures has led the F.D.I.C. to seek new ways to replenish the fund with higher and earlier payments by healthy banks, even after setting aside reserves for future losses.

Those commercial loans aren't turning around yet, either. And there's a new wave of ARMs due to reset soon, which should trigger a new round of foreclosures.

Yippee.

The initial wave of failures has also unsettled some communities, even though most of the troubled institutions have been bought by other banks rather than shuttered. While deposits are safe thanks to federal insurance, the new buyers often do not have the same ties to local businesses as the former owners.

More stupidity. Deposits are safe? Only deposits up to $250,000. And that's not really sustainable, because we upped the limit from 100k to 250k without a supporting increase in premiums. Oh, and what's this "federal insurance?" Kemosabe?

In some cases, they tighten lending and make it harder for longtime customers to obtain loans or favorable terms. In other cases, managers of the new bank make other changes, like ending offers for high-interest certificates of deposit and calling in certain lines of credit. In the longer term, some new owners are likely to close branches of the bank they have acquired in order to cut costs.

Ok, time to hit the Times reporter over the head with a clue-bat: Larger banks don't pull back on CD rates because they're out of touch with local businesses, moron. They do it because they aren't desperate and stupid. There's a reason banks offer above-market CD rates. Think about it: They are trying to raise cash in a hurry, to stave off a short-term crisis. Often it doesn't work, and the bank fails. Sometimes, the smart money sees their bank offer a significantly above-market CD rate, and they yank their money, and the bank fails as a result of what amounts to a large-depositor run on the bank. (Small depositors tend to be lazier.)

Once the bank is acquired by a healthier bank, the crisis is past, and banks no longer have a reason to offer CD rates significantly above market.

(Here's another clue: If you are looking for a good deal on a loan, don't go to the bank offering crazy-good CD rates! They're not looking to lend, and will be very picky and jack up rates to exceed their new higher cost of capital.

This calls for a song!

Labels: banking, economy, finance, New York Times

I wrote earlier this year that the FDIC promise is paper thin.

It's getting thinner.

The Federal Deposit Insurance Corp. may take the unprecedented step of ordering banks to prepay about $36 billion in premiums to replenish the deposit insurance fund that has been severely depleted by a rash of bank failures.
The FDIC board likely will call for "prepaid" bank insurance premiums at its public meeting Tuesday to discuss the issue, three industry executives and a government official said. The banking industry prefers that option over a special emergency fee — which would be the second this year. The executives and the official spoke on condition of anonymity because the decision has yet to be made public.

It would be the first time the FDIC has required prepaid insurance fees. Under the plan, banks would have to pay in advance their insurance premiums for 2010-2012, bringing in about $12 billion for each of the three years, two of the executives said. That is the normal amount of insurance fees, though it could vary somewhat according to growth in total insured deposits — the basis for determining the fees.

Labels: banking, economy, FDIC, finance, I told you so

There's a bipartisan effort afoot in Congress to pry open and audit the Fed's books.

I say, beware the law of unintended consequences.

One of the reasons the federal reserve's discount window operations are effective in preventing bank runs and collapses when member banks encounter short-term liquidity problems is because discount window operations are confidential. If we blow this, we take away an important arrow in the Fed's quiver.

Large depositors are very careful with their investors' money - and are not protected by FDIC. They maintain a watchful eye on bank strength and solvency.

If discount window transactions are not confidential, then the mere act of seeking much-needed assistance at the fed discount window is likely to create a run on the banks, thereby creating the liquidity disaster that the fed discount window was designed to prevent.

Congress is playing with fire, and not more than a handful of them know how big that fire is, or even that they've got matches in their hands.

Splash, out

Jason

Labels: banking, Congress, Economics, economy, finance, investing, The Federal Reserve

This is pretty cool!

The Internet has taken a lot of the paperwork out of banking, but there is no avoiding paper when someone gives you a check. Now one bank wants to let customers deposit checks immediately — through their phones.

USAA, a privately held bank and insurance company, plans to update its iPhone application this week to introduce the check deposit feature, which requires a customer to photograph both sides of the check with the phone’s camera.

“We’re essentially taking an image of the check, and once you hit the send button, that image is going into our deposit-taking system as any other check would,” said Wayne Peacock, a USAA executive vice president.

Customers will not have to mail the check to the bank later; the deposit will be handled entirely electronically, and the bank suggests voiding the check and filing or discarding it. But to reduce the potential for fraud, only customers who are eligible for credit and have some type of insurance through USAA will be permitted to use the deposit feature. Mr. Peacock said that about 60 percent of the bank’s customers qualify.

Innovation is a good thing! I wasn't too impressed with New York Times's line: "USAA is an unlikely innovator."

What the hell does THAT mean? USAA isn't from New York, Connecticut or California? Just why IS USAA an unlikely innovator, in the eyes of the NY Times?

No word on what the fee is, if any. It would seem that this would be much cheaper than processing a paper check.

Splash, out

Jason

Labels: banking, finance, insurance, soldiers' issues, USAA

Gas prices seem to be forecasting a recovery - and so long as the Persian Gulf remains as stable as it usually is (HA!), I see seasonally-adjusted increases in energy prices as good news, rather than bad, for the exact same reason I viewed the abrupt decline in gas prices a negative sign last summer, rather than a good sign.

But lookie here: Institutional buyers of consumer debt are not pricing in a recovery. Far from it - they're pricing in a further collapse in the economy!

An executive from a fund that buys "distressed assets" held a luncheon audience spellbound Monday as he talked about what his firm thinks assets such as consumer debt are really worth.

The holders of delinquent credit card debt are valuing the paper at about 14 cents to 15 cents on the dollar on their books, and they are willing to sell the debt for 2 cents to 5 cents on the dollar, Timothy Clark, a senior partner at CarVal Investors, Minneapolis, said at an insurance industry conference organized by Standard & Poor’s, New York.

If the bears are wrong, the bulls will make a mint, buying consumer debt at a nickel on the buck.

Because the U.S. population is aging, Americans need to increase their savings rate to about 8%, from 1.8%, over the next decade simply to fund their retirement. That alone could cut U.S. consumer spending about $800 billion per year, Clark said.

Yes, and it's about the only thing supporting bond prices right now! With the mint printing money like it's going out of style and Congress slopping out spendulus without regard to our children's ability to shoulder this debt burden, and with Geithner's lip-service to "a strong dollar" turning our Treasury Secretary into a laughing stock in China, the only thing left to support bond prices is going to be rapid inflation, coupled with a massive increase in the savings rate.

I fell in to the same trap too, some years ago: I was among those who resented the tendency of libtards to use America's relatively low savings rate compared to Europe's to bash America with. I argued that unlike Europeans, who could fall back on a cushy safety net on the government dime in their golden years, Americans had to be more entrepreneurial with their capital. I argued that Americans were FAR more likely to hold equities in 401(k)s than Europeans, and more likely to own home equity, which could be converted into retirement income later. (I did not consider cash value life insurance at the time, but only because I was a rank noob. I should have.)

I see now that we had substantially underpriced the risk in the equity and real estate markets, of course.

But holy crap... consumer debt at less than a nickel on the dollar!!!! Geez!

Splash, out

Jason

Labels: banking, Economics, economy, finance

FDIC Chief says bank guarantee fund could be insolvent by year-end.

You read it here first:

Typically, the FDIC's been able to carve out 50 cents on the dollar of saleable assets from banks it has had to shut down. But that's in an environment where asset prices were overinflated and there were buyers available. It wouldn't get anywhere close to 50 cents on the dollar today. Meanwhile, there would be all kinds of family-friendly entertainment as the FDIC struggled to sell its own assets (mostly treasuries) and rescue what was left of its cash and cash equivalents in its reserve fund to pay off depositors.

The FDIC was designed to pick up the occasional local bank failure, and one or two larger banks, so long as they didn't happen too close to one another.

It cannot absorb the Citigroups. It cannot absorb the Bank of Americas. One of these would wipe out the fund. Once FDIC was wiped out it would cause a run on the others. Congress would have to authorize another 500 billion or a trillion overnight to make good on FDIC promises and recapitalize FDIC. They would HAVE to. And then pray that there were still treasury buyers out there. If there is still a market for treasuries, it's going to be at the expense of the money markets, as public debt crowds out private.

The FDIC promise is paper thin.

Splash, out

Jason

Labels: banking, economy, finance, investing, mortgages, stupid