The New Banking Crisis, The FDIC's Coffer, Legal Drugs and More!

Posted On Aug 24, 2009 By

by Addison Wiggin & Ian Mathias

  • Banking crisis takes turn for the worse… four more banks fail, one big enough for history books
  • Can the FDIC handle it? One compelling chart, plus Dan Amoss’ analysis
  • Stocks rise again on no news… Chris Mayer on what “makes investing particularly difficult now”
  • Mexico today, USA tomorrow? Strapped for funds, Mexico legalizes drug possession
  • Plus, the credit card debate continues… readers, The 5 square off

  The bank failure scene in the U.S. turned a shade uglier over the weekend. By this time tomorrow, it’ll probably be even worse.

  For starters, Guaranty Financial of Texas went belly up late Friday and secured a spot in the history books. With $13 billion in “assets,” the bank is the third largest to fail this year and tied for the 11th biggest bank failure in U.S. history.

Even more interestingly, the FDIC brokered Guaranty’s assets to Banco Bilbao Vizcaya Argentaria, a bank from northern Spain. We’re surprised on two fronts here: 1) That a bank from Spain — strapped with double-digit unemployment and a wretched housing bust — wants to bring their euros to I.O.U.S.A. 2) That BBVA already has a huge presence in Texas. With this acquisition, they will be the fourth largest banking chain in the Lone Star State. That could be an interesting trend to watch.

  Three other banks failed along side Guaranty: CaptialSouth, First Coweta and ebank. That brings the yearly total to 81.

  This should put the FDIC’s deposit insurance fund on its last legs. At the beginning of 2008, the FDIC’s bank failure war chest had over $52 billion. At the end of the March 2009, the last time the FDIC has given us a look into the DIF, they had $13 billion left. 60 banks have failed since, including Guaranty and Colonial, which by themselves took out half of that remaining $13 billion. Only the FDIC can say with accuracy if there is any money left, but this chart gives you a pretty good idea of how the trend is shaping up:

The DIF does have a source of income — it taxes member banks a significant “insurance fee.” But we have to think that the DIF is still in bad shape, perhaps even empty… and that the FDIC will soon be hitting up someone (Tim Geithner, Joe Taxpayer and/or U.S. banks) to refill their coffer.

The FDIC will provide their second-quarter report tomorrow, which among other things will include a look into the DIF and their infamous bank “problem list”… could get ugly. We’ll keep you up to speed.

  “Recent bank failures remind us of the problem loans festering on small and regional bank balance sheets,” writes Dan Amoss, “and that many of them are marking loans at fantasy levels. The secondary market value for some of the worst loans, like construction loans, is 20 or 30 cents on the dollar.

“There’s a backlog of at least a few hundred insolvent banks that need to be shut down and sold into stronger hands. Bank stock bulls are ignoring the credit losses yet to be recognized, so there are lots of shorting opportunities in the sector. Many banks will not be able to “earn their way out” of their credit losses.

“The problem is, there aren’t many strong buyers with lots of capital out there. Those that are, like private equity groups, are buying only after the FDIC agrees to eat most of the credit losses, and the buyer is gifted with the remaining shell — the profit-making engine of spread lending.

“It’s understandable that the FDIC doesn’t want much publicity about the Deposit Insurance Fund; it wants to maintain the public’s confidence that it can ‘insure’ all deposits with just a few basis points of capital reserves and skimpy premium income. The fund is clearly not adequate to cover the bank failures still in the pipeline, so we’ll see another ‘special assessment’ imposed on all other banks, which will ultimately be passed on to depositors via lower interest rates.”

Critical banking analysis has been one of the hallmarks of Dan’s Strategic Short Report. His brand of scrutiny gave readers 162% gains betting against Allied Capital, 220% on PNC Financial and the whopping 462% winner shorting Lehman Brothers. Today is the last day we are offering his latest financial short play for just $1. Capture this truly rare opportunity by clicking here… midnight tonight, the deal’s off.

  And one more word on this matter: Georgia… what’s up with your banks? ebank and First Coweta were both Georgia institutions, which brings the state’s 2009 failure total to 18. That’s easily the most failures of any state… even though Georgia is only the ninth largest state by population.

Sam Buker, one of our resident writers, told us the other day that, “At the start of the housing collapse, Georgia had 334 banks. That’s more than in California, which has four times Georgia’s population.” Sam had a nice breakdown of Georgia’s banking woes in her latest Whiskey & Gunpowder piece, which you can read here.

  Despite the worsening banking crisis, the stock market rages on. The S&P 500 opened up 0.5% this morning after Friday’s 1.9% shot. There’s actually not a shed of significant earnings news or economic data out today… just more hope that blue skies are ahead.

  Central bankers of the world fanned the flames of stock optimism this weekend in their annual retreat to Jackson Hole, Wyo. In his prepared remarks, Ben Bernanke told Wall Street exactly what it wanted to hear: That “prospects for a return to growth in the near term appear good,” without any mention of raising interest rates or a post-crisis exit strategy.

  “What makes investing particularly difficult now,” notes Chris Mayer, “is that the distortion in prices, as if reflected in a fun house mirror. Normally, market prices should reflect underlying demand and supply. As in a vegetable stand, the prices come from the buying and selling of people in the market.

“But with all the artificial stimulus money floating around, you can never be sure of what you see. Is this a real recovery or is it an artificially ripened tomato, and hence an imposter? When the stimulus money stops flowing, will the recession get worse? It’s hard to say.”

  Look for plenty of big data points later this week. Consumer confidence data and the latest S&P/Case-Shiller home price index come out tomorrow. Wednesday brings durable goods orders, new home sales and crude oil inventory numbers. A second-quarter GDP revision and initial jobless claims will print on Thursday. Personal income and spending and the University of Michigan consumer sentiment survey hit Friday. Stick with The 5 for highlights.

  Given the good vibes still permeating stocks, the dollar’s holding up pretty nicely. The dollar index is just above Friday’s close as we write, at 78.1.

  “Cash for clunkers” ends tonight at 8 p.m. EDT. Thank heavens… we’ll let you know the damage soon.

  Today’s hot rumor: The White House’s Office of Management and Budget is rumored to be expanding its 10-year deficit forecast by $2 trillion. The OMB will release its delayed 2010-2019 projection this week. Their previous deficit forecast for this period was around $7.1 trillion. Word on the street is that they’ll bump it to $9 trillion.

  Oil’s on the rise today, along with stocks. Light sweet crude is just below $75 a barrel as we write, a 10-month high.

  Gold is holding steady after Friday’s rise. It jumped $15 at the end of the week, to $955 an ounce, and it’s stayed there since.

  Last today, a sign of the times: Mexico has essentially legalized drug use. A law enacted late last week made it legal to carry small amounts of almost any drug in Mexico. With GDP plummeting as fast as their oil reserves, the Mexican government can no longer afford to fight drug cartels and keep its prisons filled to the brim with small time addicts.

Here in the U.S., we can still afford to arrest roughly 800,000 people a year for marijuana possession… wonder how long that will last.

  In the inbox today… have we touched a nerve?

  “You really don’t get it on the credit card companies,” a reader writes in response to our lack of sympathy Friday. “I have never made a late payment and have had a couple of credit lines reduced just because I have high balances. I run my business with those lines of credit and have for years. I was told that there have just been too many problems and they are taking measures against both good and bad customers. The person who wrote in is exactly right. Every offer I have from the credit card companies was from their mailings, not from my end. I DO understand the terms and abide by them.”

The 5: You make it sound as though you have a God given right to high lines of credit. Times are a-changin’… why aren’t you?

  “I’ve had my Capital One card for many years,” writes another. “There hasn’t been a balance on it in almost as many years. You are right about personal responsibility, but these credit companies are hurting those who have maintained outstanding excellent credit. Last months’ statement (and I was still shocked) was at my bargained rate of 4.99%. This month, because I made a $6 purchase, I checked the rate (as I have every month) and there, right before my eyes, they raised it to 13.99%. No warning, no reason, nothing. They just DID IT! So now I just did it and canceled. Too bad, let them eat the dust from those they will never collect from. They punish the good because of the bad. Their loss.”

The 5: Sounds about right. Capitol One has done a lousy job running its business, so you take your dough elsewhere… just like the millions of free-market decisions we make around the country every day.

We think folks are making such an exceptional stink about credit cards because — even though it’s easy to criticize our old subprime, easy credit ways — most people still want those 2007 free money byproducts… like 0% APR and fees that can be fixed with a phone call. Nothing financial is the way it was two years ago, and just about every lender is doing whatever it takes to make a buck and whatever it takes not to lose a cent… why would you expect better from modern-day loan sharks?

Cheers,

Ian Mathias

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