The State of the Banking Industry vs Economic Recovery

Does it matter anymore if we are FDIC insured?

Is The Economic Recovery Underway?

According to our government, the recession has now bottomed out, with economic indicators rising for a fourth straight month. I find it ironic that while we’re seeing reports like this proliferate along with the fact that the stock market is at its highest point in so many months (the DJIA is over 9,000 points!), we’re coincidentally seeing stories about troubled banks going under. I’m somehow not entirely convinced that we’re really on our way to economic recovery at this point.

Just recently, Colonial BancGroup went under and had to be closed for good. Because of the continuing bank failures that are occurring, the FDIC (or Federal Deposit Insurance Corporation) is coming up with regulations that are designed to encourage suitors for these troubled banks, hoping to work out partnerships, mergers and acquisitions. And for good reason! The FDIC is watching their bottom line: their goal is to try to keep themselves solvent and to avoid having to pay out funds whenever a bank goes under, unless there’s no other recourse for depositors to get their money back. The FDIC is the last resort for depositors, so if someone else can rescue an ailing bank, they’re off the hook and everyone (supposedly) is happy.

So how is the FDIC planning to make this work? They’re doing a few things:

• On one hand, they are offering to share in the losses of some of these failing institutions so that anyone who steps up to buy them won’t have to bear the brunt of the losses.
• They’re revaluing banks’ toxic assets in order to make it more affordable and cheaper for private equity banks to absorb them.
• The government is also determining whether cheap financing can be offered to those buyers who will be taking over the assets of failed banks.
• They’re working on auctions for loans and assets of failed banks on an ongoing basis.
• The FDIC has been divvying up banks into good and bad pieces, allowing vulture investors to bid on the “bad” while hoping to sell the “good” (or better) assets to traditional buyers using what is called a “loss sharing guarantee” with the FDIC.

The State of the Banking Industry

While job claims are stabilizing and the stock market appears to be picking up, you’d think there’s cause for some mild celebration here. But I’m not all too excited just yet, especially after seeing what state our banking industry is in after all the drama that unfolded last year in the finance world. The fundamentals aren’t that great in some sectors of our economy and by the looks of it, it’ll take time to have these problems unwind through the system before I can feel convinced that we’re out of the woods. Imagine this:

• The FDIC had $52.8 billion a year ago in its coffers. By April of this year, they’re down to $13 billion.
• Many troubled institutions are small banks with large losses so many of them don’t seem all that attractive to bidders.
• Bank buyers aren’t interested in taking on illiquid, toxic assets such as real estate loans that have gone bad.
• In 2009, 77 institutions have failed (vs 25 last year). The FDIC has worked out bank mergers and acquisitions for 69 of those banks.
• More bank failures are on the way, particularly among the smaller banks that are crumbling under the weight of toxic assets and bad real estate loans.

What Happens If The FDIC Runs Out of Money?

Could the FDIC run out of money? It certainly could! Not a pretty picture is it? If banks continue to fail at the current pace, analysts are now saying that the FDIC will soon enough go broke. And what then? Well guess what, the Treasury Department may then have to implement an emergency borrowing program that involves tapping us taxpayers for those funds that will cover any short term loans that the FDIC and government are helping finance. So on top of the TARP bailout funds that the government has used to finance the banking industry, here comes the potential threat that more taxpayer money will be demanded in order to bailout the FDIC. Basically, if the FDIC runs out of money, your pocket will be “raided” next!