Since the Great Depression, a period marked by widespread runs on banks, the FDIC has done a good job of fulfilling its mandate. So how are they doing in this crisis?

In a nutshell, they are in trouble.

The FDIC insures 8,246 institutions, with $13.5 trillion in assets. Not all of them are going bankrupt, of course. Yet as of late July, a disturbing 64 banks had gone belly up this year – the most since 1992 – costing the FDIC $12.5 billion. At the end of Q1, the agency was already asking for emergency funding.

And worse, much worse, is likely yet to come. The following chart shows the total assets on the books of the FDIC’s list of 305 troubled banks. The list doesn’t include the biggest banks that are considered too big to fail, as they are being separately supported with bailouts. By contrast, if the banks on this list fail, the FDIC is on the hook to have to step in and take them over and, of course, make depositors whole.

Other measures of how serious the losses at banks are becoming can be seen in the chart below, which shows charge-offs and non-current loans at all banks. You can see that the Net Charge-offs remain stubbornly high, with banks charging off almost $40 billion in bad loans in the last two quarters alone. And the number of non-current loans – loans where payments are not being kept up – is soaring.

Together, these measures indicate the potential for more big failures and more big bailouts coming down the pike.

Into the battle against bank insolvency the Fed brings a level of reserves that can best be described as paper-thin. From almost $60 billion last fall, the FDIC’s reserves have been drawn down to only about $13 billion today, a 16-year low. A quick look at the FDIC’s own data shows us how inadequate those reserves are compared to the deposits they are now insuring.

The chart below says it all:

As you can see, the Federal Deposit Insurance Corporation currently covers each dollar on deposit with a trivial 2/10ths of a penny.

And even that understates the seriousness of the situation: the $4.8 trillion in deposits the FDIC is providing coverage on doesn’t include the expansion that now extends insurance coverage from $100,000 to $250,000 for normal bank accounts. That likely brings the exposure of the FDIC closer to $6 trillion. But that’s pretty inconsequential at this point: using any reasonable accounting method, the FDIC is already bankrupt and will require hundreds of billions of dollars in government bailouts just to keep the doors open.

So, given the dire shape of its finances, what measures is the FDIC taking, you know, to batten down the hatches and all that?

For starters, they are expanding their mandate by guaranteeing bank loans – $350 billion and counting at this point. And the government has tapped the FDIC to play a pivotal role in guaranteeing the loans issued to buy toxic waste through the government’s highly problematic and fraud-prone new Private Public Investment Partnership (PPIP). The FDIC’s commitment to the PPIP is and may become limited based on its resources.

It is hard to draw any other conclusion but that hundreds of billions in new funding will be required to keep the FDIC operating. Given the catastrophic consequences of the FDIC failing, starting with a bank run of biblical proportions, there’s no question it will get whatever funding it needs. By loading the new loan guarantee responsibilities and the PPIP onto the FDIC’s back, the administration will go back to Congress and ask for the next large bailout.

Of course, in the end, all of this falls on the taxpayer, either directly in the form of more taxes or indirectly via the destruction of the dollar’s purchasing power. Another bale of straw on the camel’s back, and another reason to be concerned about holding paper dollars for the long term.

Regards,

Bud Conrad

Source: The FDIC is in Trouble

• The Conference Board said yesterday (Tuesday) that its Consumer Confidence Index now stands at 44.9, up from a revised 38.8 in October. Last month’s reading was the lowest since the research group started tracking the index in 1967.

• Home prices plunged in the third quarter, according to the S&P Case-Shiller Home Price index, which posted a 16.6% drop for the three-month period. That outpaces the second quarter’s record 15.1% decline.

• The number of problem U.S. banks and thrifts soared to 171 in the third quarter, up from 117 at the end of the June, according to the Federal Deposit Insurance Corp. (FDIC).  The industry-funded reserve to back deposits was $34.6 billion as of September 30, 23.5% smaller than in the previous quarter. Bank industry income fell 94% from the previous year to $1.7 billion in the third quarter.

• Oil prices again fell yesterday (Tuesday), sliding almost 7% to settle at $50.77 a barrel. “The focus in the oil markets is again on softening demand in the wake of a weak GDP,” Phil Flynn, an analyst at Alaron Trading, told Reuters.

• Grupo Financiero Inbursa SA, a bank controlled by Mexican billionaire Carlos Slim, scooped 26 million Mexico-traded shares of Citigroup Inc. (C) for about $134 million, Bloomberg reported. The buy amounts to less than 1% of Citigroup’s stock.

• Shares of homebuilder D.R. Horton Inc. (DHI) rocketed 38% yesterday (Tuesday) despite posting a fourth-quarter loss of $799.9 million, or $2.53 per share. Analysts cheered the company’s existing cash flow, “likely indicating aggressive pricing strategy for” 2009, a Credit Suisse Group AG (CS) report said.

Source: Global Investing Roundups Wednesday, November 26th, 2008

Foreclosure activity saw a huge spike in the third quarter, as one in every 475 U.S. homes either received a default or auction sale notice, or was repossessed by a bank, according a report released yesterday (Thursday) by industry group RealtyTrac. It was a 71% jump over third quarter foreclosure activity in 2007 and a 3% increase from the second quarter of this year.

Foreclosure filings actually decreased 12% in September from August, but not due to an improving housing market.

“Much of the 12% decrease in September can be attributed to changes in state laws that have at least temporarily slowed down the pace at which lenders are moving forward with foreclosures,” said James J. Saccacio, chief executive officer of RealtyTrac, in the statement announcing the results.

A California law that requires lenders to give homeowners 30-days notice prior to filing a notice of default led to a 51% drop in that state.

The U.S. Treasury Department is working to implement a program that will modify the loan terms of struggling homeowners and guarantee those loans for banks that participate in the new program. The incentive for the government to stem the flood of foreclosures includes much more than just helping people hold onto their homes.

“We have never seen a foreclosure cycle like this one before,” Rick Sharga, RealtyTrac senior vice president, told CNNMoney.com.

A slowing economy generally precedes periods of elevated foreclosure rates. However, “in this cycle, we have foreclosure problems that have caused an economic downturn,” Sharga said.

Speaking in testimony before the Senate Banking Committee yesterday, Sheila Bair, head of the Federal Deposit Insurance Corp. (FDIC) and Neel Kashkari, head of the newly formed Office of Financial Stability, both spoke in favor of government assistance to homeowners facing foreclosure.

“We are passionate about doing everything we can to avoid preventable foreclosures,” Kashkari said.

Bair outlined how the government’s $700 billion bailout legislation includes provisions to help homeowners.

“Loan guarantees could be used as an incentive for servicers to modify loans,” Bair said in her prepared testimony, The Associated Press reported. “By doing so, unaffordable loans could be converted into loans that are sustainable over the long term.”

Bair pledged the FDIC’s support for the eventual Treasury Department plan.

Source: Treasury and FDIC Team Up to Aid Homeowners at Risk for Foreclosure

The Federal Deposit Insurance Corp. is preparing to sign a five-year lease to add five floors of space at its Dallas regional office as the agency prepares to increase scrutiny of failing and troubled U.S. banks.

The federal agency, which insures deposits and disposes of failed banks and their assets, will add 125,000 square feet to the 185,000 square feet it rented last year at 1601 Bryan St., a 49- story tower in downtown Dallas. That agency will add about 300 staff at the building, including some of the 69 retirees it is bringing back to help handle the increased workload, said spokesman Andrew Gray.

The FDIC will soon have 5 more more floors of office space to conduct it’s business of backing up failed banks… but it doesn’t have the money…

The FDIC’s $53 billion simply isn’t enough to cover the assets held by the growing number of “problem” banks. The FDIC’s list has increased from 90 at the end of March to 117 in June. Total assets affected now stand at $78 billion.

If even a portion of the these banks go under, says Adam Lass in Taipan Daily, the XLF December 20 puts (XLF XT), which track the S&P 500’s Financial Select Sector, could gain of some 52%.  He says:

You might, if you searched long enough, find the buried memo the FDIC has sent off to the Treasury Department, complaining that its funds are now so depleted that it would be unable to cover this expected wave of failure with out delving deeply into the public till.

Yes, that’s right: The semi-independent insurance corporation whose sole job is to bail out banks is in need of a public bailout itself. In fact, it is right in line behind those other semi-private giants, Fannie Mae and Freddie Mac.

Wait — wasn’t their job to assure the public of our economic stability, too? None of this sounds too terribly stable to me. I am not assured one bit.

I am told that in a good year, some 13% of the banks that appear on the FDIC’s list go under. That means that some 15 more banks are virtually guaranteed to go bankrupt in the near future. Even if the Feds do manage to gin up enough cash to cover depositors (and how they will manage that feat is a worrisome thought worthy of an entirely separate column), a fair number of investors will get screwed out of every penny.

These are not wild-eyed speculators plunking down play money on pie-in-the-sky tech dreams. These are not shifty Florida real estate flippers. The sober upstanding folks who bought into these banks and into the mammoth Washington outfits that insured them are retirees, orphans and widows who were told that these investments were veritable “Rocks of Gibraltar.”

Unbeatable, and indeed untouchable. Sound as an American dollar. Good as gold.

So I am more than a little curious. And perhaps a little angry.

In fact, I am in the mood for a little revenge.

And since living well is always the best revenge, I propose the following: When the next wave of defaults hits the newswires, the S&P Financial SPDR (XLF:AMEX) — the ETF that bundles together the biggest players like Bank of America (BAC:NYSE), Citigroup (C:NYSE) and Wells Fargo (WFC:NYSE) with regional outfits like Wachovia (WB:NYSE), SunTrust (STI:NYSE) and Fifth Third Bancorp (FITB:NASDAQ) — ought to fall at least two or three bucks.

A drop from current levels ($20.37 as I sit to write) to, say, $18 would push the XLF December 20 puts (XLF XT) from $179 to $272 per contract, for a gain of some 52%.

A real rout, you know, the sort that brings on bank holidays, would drop the XLF below its August low of $16.77, rounding your put gains over 79%.

But there won’t be much to report.

Although the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) meets Wednesday, the group doesn’t have much room to maneuver: If the Fed cuts rates to stimulate growth, already troublesome inflation could escalate out of control. But if the FOMC raises rates to reign in inflation, the entire economy could drop into a deep-and-lingering recession.

To be sure, Fed policymakers are sure to engage in some spirited debate: The debates will include such topics as pricing pressures vs. slow growth and strong energy prices vs. the weak housing market. There will even be talk about extending the emergency-borrowing program, or about expanding oversight over financial-services firms.

But if Federal Reserve policymakers do much of anything more than just debate the issue – and try and take some kind of action, using interest rates as their weapon of choice – there’s almost certain to be a negative impact on the U.S. economy.

The data coming out this week will focus on the consumer as personal income/spending and consumer credit reveal just how active folks have been during these uncertain times. As the summer (of discontent) winds down, travelers may be able to get in a last minute trip or two as gas prices have declined over the past few weeks. And retailers are hoping to benefit from the “back to school” shopping crowd. And second-quarter earnings reports continue as consumer giant, The Procter & Gamble Co. (PG), and insurer American Insurance Group Inc. (AIG) headline the reporting companies.

The final question: Will there be any new surprises as the season comes to a close?

Market Matters

As earnings season plugs along, just as many questions and concerns about the strength of Corporate America remain unanswered as when Alcoa Inc. (AA) was first on the clock a few weeks back.

At mid-week last week, just over half of the Standard & Poor’s 500 Index companies had reported and the results actually looked halfway decent (relatively speaking, that is). About two-thirds of those companies announced earnings that exceeded expectations, while only 20% or so missed on analysts’ targets.

Financials dominated the “good” news companies, as four of the five leading banks bested Street estimates (though, that often meant lower losses instead of better profits). However, when the dust finally settles, the second quarter will represent the fourth-straight period of declining earnings as S&P companies are headed for a double-digit drop from last year.

Of course, the massive plunge among financials greatly contributed to the negative results. Looking forward, the eternal optimists remain confident that positive earnings will return for the second half of the year. These optimists even believe that the financials may lead the way as commercial banks and investment banks finally move beyond the period of “never-ending” write-downs. However, if such optimism does not come to fruition and annual earnings decline for the second full year in a row, Corporate America will have accomplished something not experienced in quite a while – not even during the bear market (and recession) of the early 2000s.

So, let’s review last week’s numbers. Energy companies benefited from the surge in oil and gas prices as Exxon-Mobil Corp. (XOM) posted the best quarter ever by a domestic company (though it still managed to fall short of Street expectations). Royal Dutch Shell PLC (RDS.A, RDS.B) and Chevron Corp. (CVX) reaped some strong results as well [For a related story on Exxon and Shell, please click here. For Money Morning‘s recent “Buy, Sell or Hold” feature on Chevron, please click here].

United States Steel Corp. (S) took advantage of the rise in commodity prices, while Verizon Communications Inc. (VZ) and Motorola Inc. (MOT) both recognized better-than-expected profits. On the downside, General Motors Corp. (GM) experienced its third-worst quarter ever. Tyson Foods Inc. (TSN) struggled as increased grain prices hindered chicken sales. Sony Corp. (ADR: SNE) was victimized by a decline in consumer spending. And one-time telecom-sector darling Alcatel-Lucent (ADR: ALU) reported another terrible quarter and said goodbye to both its chairman and its chief executive officers at the same time.

Shifting to the financial world (where there’s no rest for the weary), Merrill Lynch & Co. Inc. (MER) plans to write-down another $5.7 billion as it sells off much of its underwater mortgage portfolio and looks to raise another $8.5 billion through a common stock issuance. (Some analysts believe Citigroup Inc. (C) has another $8 billion in write-downs in it, as well). First National Bank of Nevada and First Heritage Bank joined IndyMac Bancorp Inc. (OTC: IDMC) as they were taken over by the Federal Deposit Insurance Corp. (FDIC).

Volatility emerged in the energy market as oil prices fell to their lowest level in two months and even declined in July by almost $16 a barrel from previous record highs. A late-week rally pushed prices higher, though the general trend may have shifted. Some untimely comments from the Organization of the Petroleum Exporting Countries (OPEC), and turmoil in Nigeria (not to mention Iran) threaten to shift that newly upbeat mood back into a negative one.

Gasoline fell below $3.90 a gallon after hitting a high of $4.11 at mid-month. Stocks experienced quite a bit of volatility as daily triple-digit price movements (up or down) seem to have become the norm. Weaker economic data (see below) helped end last week on a sour note, while bonds benefited from a flight-to-quality that sent the yield on the 10-year below 4% again. All in all, another ho-hum summer week (if +/- 200 daily price moves can be considered ho-hum).