FDIC Closes Three More Banks

This brings the 2009 total to 20 banks down and counting. The latest three are:

• FirstCity Bank of Stockbridge, GA, had total assets of $297 million and total deposits of $278 million. At the time of closing, the bank had approximately $778,000 in deposits that exceeded the insurance limits. In English this means tomorrow some people will realize they are $778,000 poorer.
  
• Colorado National Bank, Colorado Springs, CO, had total assets of $123.5 million and total deposits of $82.7 million. The FDIC will share 80/20 percent in the losses with Herring Bank (who assumes Colorado Natl's deposits) on approximately $62 million in assets covered under the agreement.
  
• TeemBank, National Association, Paola, KS, had total assets of $669.8 million and total deposits of $492.8 million. The FDIC will share 80/20 percent in the losses with assuming bank Great Southern Bank on approximately $450 million in assets covered under the agreement.

And thanks to vigilant readers who pointed out this new twist: the U.S. placed two credit unions under conservatorship: U.S. Central Federal Credit Union (Lenexa, KS) with $34 billion in assets and Western Corporate Federal Credit Union (San Dimas, CA) with $23 billion in assets...

The two corporate credit unions were placed into conservatorship to protect retail credit union deposits and the interest of the National Credit Union Share Insurance Fund (NCUSIF), as well as to remove any impediments to the Agency’s ability to take appropriate mitigating actions that may be necessary. Service continues uninterrupted at both U.S. Central Corporate Federal Credit Union and WesCorp, and members are free to make deposits and access funds.

The Federal Credit Union Act authorizes the NCUA Board to appoint itself conservator when necessary to conserve the assets of a federally insured credit union, preserve member assets and protect the NCUSIF.

$57 billion in assets? This is more than all FDIC-seized bank assets in 2009. Has the FDIC been merely attempting to distract from the real troubles at the National Credit Union Administration?

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Sheila Bair: FDIC Reserves To Hit Zero

When I wrote about this issue a week ago, I thought I was going to be called out for prognosticating gloom and doom as usual...Well, no such luck, in fact quite the opposite. Sheila Bair came out with some very scary words for depositors everywhere:

“Without additional revenue beyond the regular assessments, current projections indicate that the [depositor investor] fund balance will approach zero,” Bair said.

In the words of Lewis Black, I will repeat that, because it bears repeating:

“Without additional revenue beyond the regular assessments, current projections indicate that the fund balance will approach zero."

This is actually one of the most terrifying news I have heard in forever, as it goes to the heart of depositor confidence problem, with a next step being the global bank run that Kanjorski was fuming about.

The reason for Bair's statement is to attempt to explain the need for the recently instituted fee increases for TLGP participants.

"Even though this increase comes at a difficult time, I strongly believe that keeping deposit insurance industry-funded will be better for you and your customers when this crisis is over."

“I’m optimistic that Congress will soon act on the borrowing authority increase,” Bair said. “This should give us the breathing room we need to reduce the special assessment, while covering all projected losses, with industry funds.”

Oh yes, let's not forget that Chris Dodd of such recent fame as the AIG bonus scandal, is trying to plough even more taxpayer money into a cause worthy of... saving taxpayer money... Still not too sure I understand how that works. But let the law of unintended consequences strike as it may.

Bair also had some very favorable things to say of the recent accounting changes proposed by the FASB which I wrote about yesterday (of course Bair will be a proponent of opacity: last thing depositors need to know is that DIF is negative among other things).

There is a minor light at the end of the tunnel.

Bair said she wants to “end too-big-to-fail” models that have shaped U.S. policy and wants financial firms to reduce systemic risk by “limiting size” and “complexity.” She said regulators “need to impose higher capital requirements” to ensure banks have enough capital to withstand worsening economic scenarios.

In the meantime, Bair is praying that nobody realizes that there is no money left to insure America's deposits, and that everyone absorbs the optimism spewing forth from the lips of CNBC's Steve Liessman like a wet sponge.

The only appropriate ending to this post are the following words:

"I cannot imagine any condition which would cause a ship to founder. I cannot conceive of any vital disaster happening to this vessel. Modern ship building has gone beyond that."

Captain Edward J. Smith, Commander of Titanic

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More Bank Bashing Fodder

When the execs of the biggest banks came to congress two weeks ago to be on the wrong end of some populist lynching, one of the questions asked was how much money had the banks earned by collecting underwriting fees by issuing FDIC-backed bank bonds, i.e. debt in which there is no risk. Intuitively this is a great question, as underwriters collect fees only when there is exposure risk, essentially they are paid to find buyers for a risky issue in which they are the primary purchasers. If there is no implicit risk, as in when they are issuing government backed debt and the bank is merely a pass thru of a government guarantee, it is mindboggling that banks should be compensated for this form of "underwriting."

The FT has done some investigative journalism into this topic. Turns out banks have pocketed nearly $1 billion in underwriting fees from placing government-backed debt. While European banks charge 0.15% on FDIC guaranteed bank bonds, their US counterparts demand twice as much or 0.3%. While at first glance this is a mere fraction of the fees that banks demand to issue Investment Grade and High Yield bonds, at 1% and 3% respectively, the numbers quickly start to add up when one considers the total size of the FDIC backed market. Morgan Stanley estimates that $634 billion worth of new bonds could be sold this year using European government guarantees. The situation in the US is likely comparable, implying over $1 trillion in FDIC debt is poised to come to market. If one assumes a blended 0.2% fee on this new debt, banks are set to pocket over $2 billion in fees for something which one can argue they should receive no fees for whatsoever, for two reasons: i) without these FDIC backed instruments, banks would likely not function at all as they would have no way to access the capital markets by traditional means and ii) the fees are going straight from the taxpayers' pockets to pad for bonuses for bond traders and salespeople in TARP-recipient banks, who are the largest underwriters of FDIC guaranteed bonds. Granted, the government does take a small portion off the top from banks selling guaranteed bonds, but it is nominal compared to the total potential and actual revenue stream.

The biggest abuser of this loophole is easily JP Morgan, which not only charges an arm and a leg for FDIC issuance, but also pockets fees for bonds that it itself issues! If there was ever a massive conflict of interest, this is it: apparently, the house of Dimon shared $123 million in fees with underwriters for raising $30 billion in debt. But as one bond banker said, the FDIC-backed asset class has become "one of the best fee-earners" for banks in recent months. It is likely that TARP recipients will fight tooth and nail from losing this one last remaining source of revenue against the worst underwriting and advisory investment banking climate of all time. Sphere: Related Content

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