Posted on 10/11/2009 12:17:09 AM PDT by Steelfish
Small Banks Fail at Growing Rate, Straining F.D.I.C.
By ERIC DASH Published: October 10, 2009 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.
In what has become a ritual, the Federal Deposit Insurance Corporation has swooped down on a handful of troubled lenders almost every Friday, seizing 98 since January alone and putting their assets into the hands of another bank.
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.
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.
(Excerpt) Read more at nytimes.com ...
The bubble’s going to burst sooner or later.
The phenom that is breaking the FDIC is the delay in marking small and medium-sized bank assets to the market. The officers of these banks are engaging in willful blindness as to the deterioration of their bank assets. Because there are no cops. The FDIC is in effect an insurance company with very little coverage to pay out claims. 1-2-3%. But because we live in an era where there is essentially no enforcement of banking regulations, by the time the FDIC seizes Joe Blow bank, the assets have deteriorated in value so much that the FDIC has pay out. In a perfect world, it’s not like the FDIC would never seize a bank or banks, but the trouble in the getting-ready-to-fail banks is not being “uncovered” or “revealed” before the wounds get seriously infected, as it were. The FDIC is charged with taking PCA prompt corrective action when an institution whose capital req’ments come close to falling below statuatory levels. We saw this in the biggest of big ways when IndyMac bank failed. We are seeing these banks fail and seeing their assets worth 50-60% of what was claimed mere moments before the failures. These shortfalls should be low single digits. When they are this large, the FDIC has to pump in funds to get another bank to take over the corpse of the failed one.
This is bank fraud, in very real terms, committed by the officers of these banks. But because there are no criminal penalties, the party goes on. And taxpayers get stuck with the tab.
Sweet, 10 more and Obama gets a free toaster over!
over=oven...
Smaller banks and businesses always try to hang on to the last minute thinking they can pull it out. Some of this is more stupid than criminal. Sometimes if you can stretch out some, you can cushion the fall by disposing of non-exempt assets and turning them into exempt ones or cash.
parsy, who has seen it done
Straining?
STRAINING!!!???
What would you call it if your auto-insurance company said they wanted to borrow money from you to cover the claims of their other customers?
What a laugh. It’s going to be funny when the boy king with an ego that the Grand Canyon could comfortably in wakes up one day to the total catastrophe he helped create and Americans demand his removal.
There are “cops,” but they are complicit in not enforcing regulations. It’s all part of the illusion we call fraud and that they call “bringing the economy back from the brink.”
“Some of this is more stupid than criminal.”
No. I understand what you are saying, but banks are a different animal both from the Federal and the state level. As it turns out, the state regulations may end up having a lot more bite than the Federal level. Because what is interesting (if a nightmare can be called “interesting”) is that the Fed regs always seem to be phrased ‘ a bank operating under FDIC supervision shall not....allow their tier capital to decline below ....some fixed fraction of their performing loans. There is an affirmative duty on the part of bank mgmt to notify the FDIC if they get **close** to these levels precisely because taxpayer funds are directly at risk. If the FDIC gets notice of impending doom in time, they can generally operate with a very thin cushion in terms of the amount of slush in their insurance pool. Denninger has a lot of pieces on this.
By the way, when the FDIC seizes a bank, typically they station a bunch of Federal FDIC “employees” around the bank, chase the customers out, lock the doors, and sequester the staff for just about as long as they want...late into that night as they pore over the books. To an outside observer, it would resemble a takeover > hostage situation. They quite seriously and physically swoop down.
But what is galling is that, as Karl says, there is no “or else” in the Fed regs. Banks “shall do” this and “shall do” that...but if they don’t....yes, they are subject to FDIC seizure but there is no consequence for the officers *unless* rampant fraud is later found. This form of willful blindness is not being treated as fraud. This is a lot different than the S&L crisis, in which, IIRC, about 800 banks were closed and about 3000 execs went to prison. Yup.
*However*, on the state level, remarkably, there are far more stringent regulations. In many states, the officers of a bank that accepts one dollar of deposits after determining they are insolvent are guilty of felonies, with multi-year prison terms specified.
This is really the underlying enabling condition of much of what the banking system is going through. There simply aren’t any cops. There is no enforcement. There are no consequences for the actions these bank execs are taking. In many cases, they are paying themselves fat bonuses in advance of coming clean with the deteriorated state of their balance sheets, secure in the knowledge that they are 95% likely to simply get away with it. I’m not trying to make a populist “down with bankers” here; these guys really are lying about their solvency, raiding the assets of the bank when they see the inescapable writing on the wall, and blithely walking off into the sunset leaving a corpse that the taxpayer has to take care of. It is happening at many, many levels in the financial system.
Heck, you make a lot of good points. I think I may be wrong. This is more criminal than stupid. I try to read market ticker every day. Denninger has a good common sense perspective.
parsy, who says thanks for correcting him.
When you do the numbers since wamu went down it's closer to 3,800 - much higher than the first depression
I know that dozing Americans hate the word communist but that is what we are dealing with.
They are communists and they are breaking the country.
They have to create havoc to change the paradigm and enslave all of you.
I’ve known this was coming for a long time and a few people are starting to come to their senses.
The hard-left is in a prime position and they will move against this country and all of our freedom.
As of right now they are winning. Mostly because there aren’t enough Americans that will allow themselves to see the truth.
We can’t fight an enemy while at the same time denying that it exists. This is classic subversion. This is a takeover by stealth.
FDIC needs to triple the fees on prudent private banks to ..um...so that they too can be dragged down.
Then we can all go to the Bank Of Obama on our knees for credit.
There will be no functioning bank system in large swaths of fly over country by 2011.
That is the baseline scenario being used by the NY Fed right now. Anything surviving will be state owned.
Crazy times ahead.
Correct.
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