Welcome to yet another addition of FDIC Friday.  This weekend see the closing of three banks of modest size:

• Century Bank, Federal Savings Bank, Sarasota, Florida (total assets of $728 million and total deposits of approximately $631 million)
• Orion Bank, Naples, Florida (total assets of $2.7 billion and total deposits of approximately $2.1 billion)
• Pacific Coast National Bank, San Clemente, California (total assets of $134.4 million and total deposits of approximately $130.9 million)

The cost to the FDIC fund this week is roughly $986 million dollars.  Remember back at the end of September the FDIC said they were going to be running in the red (out of money) and they were looking at “all options”.  Well, they’ve picked their option – on Thursday, 11/12, the FDIC finalized their 3 year, forced pre-payment of fees, raising about $45B for their funding needs.

Does this decision make sense to anyone?

As banks will need to find this cash to pay the FDIC what will that impact? Their desire to lend.  In a time where financial institution are holding back financing from even some of the best potential borrowers, why would the FDIC give banks an excuse to lend even less?

The other fear I have about this decision comes down to repeat behavior.  Much like a crack addict looking to score his hit, what happens if the FDIC funds run out before the 3 year period ends?  Will demanding 3, 4 or 5 years of payments become the norm for the industry and, if so, what impact would that have?

Just let that noodle around in your head for some time.

Another Friday and another set of failed banks.  Up this week are a number of small financial institutions – well in comparison to failure this year.

The banks in question are:

• United Security Bank, Sparta, GA;
• Home Federal Savings Bank, Detroit, Michigan;
• Prosperan Bank, Oakdale, MN;
• Gateway Bank of St. Louis, St. Louis, MO;
• United Commercial Bank, San Francisco, CA;

The FDIC expects to report a loss of $1.532B for closing down these fine, outstanding, examples of the business community.

Mish, of Mish’s Global Economic Trend Analysis, has an superb write up about why he and others think Citibank is in trouble.  This is yes another must read, here is a highlight:

Here is the key paragraph in all of these articles.

Perhaps what we’re really seeing is a business reacting to hidden deterioration of asset bases that are not known by investors and the public due to the legitimation of bogus accounting that happened this last March, but which is known by company executives!

Ding! Ding! Ding!

We have a winner. Citigroup needs money, and needs money badly. Moreover, there is no reason to believe this is all credit card related. In fact, there is every reason to believe Citigroup (and other banks) are in trouble on multiple fronts.

But as Shelia Bair said yesterday – Don’t worry, we are the government, we will never run out of money.

Most people questioned the viability of the “Stress test” performed a few months ago. What was the standard used and how realistic was the Federal Reserve in the estimates used. Turns out a big factor in the test was unemployment, and thus far, the unemployment numbers are significantly worse than what was expected as a “worst case scenario”

Take a look at this graph Calculated Risk put together:

Now U.S. regulators are waking up to the fact that “woops, we messed up” and are suggesting yet another stress test.

In a report released Tuesday, the Congressional Oversight Panel for the government’s $700 billion financial rescue effort found that the Federal Reserve used a “conservative and reasonable” approach to assessing the health of the nation’s biggest banks.

But, the panel added, the Fed’s worst-case scenario does not go far enough. For example, the “stress tests” conducted by the Fed were based on the 2009 unemployment rate average of 8.9 percent. Unemployment in May climbed to 9.4 percent.

“While no one should gainsay the potentially positive results of the tests, it would be equally unwise to think that those results reflect a diagnosis of all of the potential weaknesses or create a necessarily sufficient buffer against future reverses for the banking system,” the panel wrote.

Now, here is my big question – if banks are all of a sudden able to pay back their TARP loans, and the financial sector is no longer in collapse (as the Fed would want us to believe), why is it the government is pushing for another stress test?

How about a poor earnings across the S & P and this is a proactive measure. Maybe. What about regulators simply doing their job. Possible. Could it be that the economic situation is much more dire than anyone is willing to admit? Likely.

Last August I wrote a piece about “The Syk Falling” or the banking collapse. My position then reflected my belief that what the nation was facing at the time was NOT a banking collapse, but part of a free market boom and bust.

Shortly after I commented, the FDIC came out with their update in the hopes of providing a bit of stability to the market. The highlights they pointed to:

• bank profits are down 86%
• 117 banks and thrifts are considered to be in trouble
• 8500 banks reserved $50.2 billion to cover losses from bad mortgages

The results at that point were very ugly. By no means a total banking collapse. So what would be total collapse? How about the closure of 9000 financial institutions, much like 1930 to 1933? That is a collapse. What the public is seeing now is the “key” financial institutions facing rough times and having government money pumped into them. Even if the Top 5 banks failed – with trillions of dollars in securities under their umbrella – they would be picked up by other institutions and life would go on.

But back to “the sky is falling” mentality. Let’s look at just how bad bank industry is doing, based on number of closures this year… and you have 36. Not as bad as some may have you think.

For your records, here is the full list.

So, to sum it up, the economy and the banking industry face a number of hurdles. Interest rates are expected to say low in order to stimulate lending, and more banks will fail. But we are not at a system wide collapse.

At 5:00 PM this afternoon, the bank “stress test” results were published.  From the looks of it, a number of banks need significant amounts of capital (originally posted at Calculated Risk):

Once you look past the fact that roughly $75B more is needed, one has to ask “what does this really mean?”

I’m afraid to say that the results may mean nothing.  Yes, $34B for Bank of America is a boat load.  Same goes for the $15B Wells Fargo and $11.5B for GMAC need, but what if the additional funding does not help in the long run?  I ask this question simply because there is significant doubt around the credibility of the stress test results.

The assumption the test is based on is that these 19 financial institutions could potentially face another $600B in losses under “the worst conditions” but what if it’s more?  What if there is another $1.2T in losses? Will the banks be able to turn to the private markets in order to raise capital, as Wells Fargo is already saying they will do?  Would the investment community continue to throw money down the hole, or would Uncle Sam need to act as backstop once again?

I still believe the worst is yet to come.

If one listens to the press, all of a sudden the economic world that was in total free fall all of two months ago is suddenly not that bad.  So, which is it?  Is the world on the verge of total economic collapse or are we all living in a world where we just might make it out alive.

I don’t know, I’m not an economist, but I will point out a few things and let you decide.

Foreclosures continue to rise while property values continue to plummet.  Not fall, plummet.  Some areas of the nation are seeing property values falling by nearly half.

Bank or America, JP Morgan Chase, Goldman Sachs and Citibank have all reported better than expected results but there is significant discussion on how and when to release the bank stress test results.  Doesn’t that seem odd to you?

Both California and North Carolina have record unemployment

General Growth Properties, the second largest shopping mall operator in the world, declared bankruptcy due to unmanageable debt and a loss of contracts.

Venture Capital investments are at their lowest in 12 years, this means new ideas are now being fueled… new businesses are not starting….

The US has lost 4,197,371 jobs since February 2008 and the layoffs continue in waves

For some reason Ben Bernanke sees positive signs in the economic situation and is “fundamentally optimistic” about where we are doing.

So, what do you think?

Maybe Bernanke and company is looking at information unavailable to the rest of the public but all that I see is negative.  I want to see true signs of recovery, I want to see that the nation – and the world – is turning around but I simply don’t.  I simply cannot believe that things have turned for the positive.  If the banks were strong – truly strong – the stress test results would be released without debate as to how to do so.  If things were bottoming – let alone growing – the layoffs would not be continuing at such a large clip.

Bottom line, for me, I think the worst is yet to come.  GM and/or Chrysler will go into bankruptcy, major banks will go under or be nationalized, and unemployment will continue to rise – I still believe 10% is going to happen this year.

So, what do you think? Am I missing something?

While I had originally doubted Nouriel Roubini, I have come to believe he is one of the very few economists who continues to publicly state the true market conditions. He holds no punches, he appears to have no fear at what others think about his predictions and… he is not swayed by the political landscape.

Today, Mr. Roubini sends another warning:

“The stock market is a bit ahead of the real macroeconomic and financial news,” Roubini, a professor at NYU’s Stern School of Business and the chairman of consulting firm Roubini Global Economics, said in an interview with Bloomberg Television in London today. “We’ll have some major banks going belly up that will need to be taken over.” 

..

Roubini, who predicts loan and securities losses in the U.S. will reach $3.6 trillion, said the stress tests will reveal that some banks need to be taken over and have their good and bad assets separated before being sold to the private sector. He didn’t name which companies he thought would need to be rescued. 

What will the U.S. Bank Stress test show?  I have a feeling that Roubini is on target with his assessment that some major banks will go bell-up.  That is why when I hear an organization, such as Citibank, say they’ve suddenly become profitable, in the hardest of economic conditions the market has witnessed in years, after over a year of unprofitably just doesn’t seem right.  It’s nearly impossible, and I believe the stress test will show just how vulnerable the institution (and others) really are.

It has often been said the Stock market anticipates what conditions will be like 6 months from now.  If that is the case, the market is being overly optimistic right now.   Major banks need to be addressed, unemployment will continue to rise during the year and retail sales are nowhere near recovery. 

I’m not trying to be to be negative, people need to be realistic about what we are facing.

Hello, pot… this is kettle calling again… just wanted to point out that you are black.

At a news conference today, Treasury Secretary Tim Geithner said that move the administration are currently making are aimed at “restoring trust” in the financial system. If that is the case, if President Obama wanted to restore trust, wouldn’t it make sense to fire Tim Geithner? Larry Kudlow, economist and journalist, thinks so as well:

Geithner never answered the question put to him by senators Kyl and Bunning: Would he have paid his back taxes if he were not nominated to run the Treasury? His issue has never been resolved. He will never have the full trust of the country…This is a matter of personal character and accountability. It is a matter of honesty. Too many of our leaders suffer big deficits in these areas.

How can we trust a man who “forgot” to pay his taxes for a few years to restore trust in the system?

Compensation limiting for executives tied to bailout money?

Not to be ringing the socialist alarm once again, but what does limiting the compensation of executives sound like to you? In no way am I advocating that people should be making millions a year for driving a company into the ground but this has the potential to open the door to other such actions in the name of “market stability”.

Actually, I’ll go one step further and say that a case can be made for why a company that requested funds should be limited to how the money is spent. Ok, that sounds fair… until you hear one name: J.P. Morgan

J.P. Morgan/Chase was forced to take TARP funds from the government.

J.P. Morgan was not in need of capital funding, nor did they request it, so why should J.P. Morgan/Chase be limited to what they pay their management? I understand the need to limitation, but when you start forcing companies to do thing – like take the funding, then what executives should earn – is a very dangerous.

ion Television

No clue what cable channel ion Television is but Heat, the Michael Mann classic and arguably one of the top 10 movies of the last 30 years, is on right now. I know what I am going to do….

UPDATE 2/5/09, 3:32 PM – it turns out that J.P. Morgan and Goldman Sachs will not be limited when it comes to compensation.

Here are a number of thoughts I’ve had for the day, let’s dig in.

The economic stimulus

We are in a new political era, right?  The days of hardcore bipartisanship are gone now that President Obama is in office, right?   If that is the case why is it that the economic stimulus passed the House today by a vote of 244-188?  That may seem like an odd question on the face of it but add in the fact that ONLY Democratic members of the House voted yes, except for 11 who voted no, and EVERY Republican in the House voted no?

That doesn’t seem as if both parties are attempting to work together to find a solution.  I am attempting to find information as to how the proposed stimulus is to be spent, but here is the big question I have – how, exactly, will this create jobs?  The politicians say that public works initiatives will create/save the jobs in the economy but a large number of the people who have lost their employment where white collar workers.  I don’t see too many aerospace engineers, network administrators or bankers going out to build bridges, do you?

Bad Banks

When the original TARP package was announced, the one I believed the former administration was going to implement, I was all for it.  Why?  Because the government was going to buy “toxic” corporate assets. Essentially, tax the bad debt off the balance sheets of banks in exchange for some penalty.  

Made then, makes sense now, as it allows the “toxic” assets to have a value placed on them by the government.  In turn, the real estate market could start to bottom simply because mortgages have a backstop – a known minimum value – and we could start moving forward.

Why the previous administration did not actually take such action is beyond me, but I’m quite happy to see the current administration talking forming such an entity.

My post on life from yesterday

A friend had commented that, maybe, I am over analyzing life and that I should simply go with the flow a bit more.

A put some more thought into this comment, and it’s a very good comment, but I came to the conclusion that I’m actually doing as little analysis as possible without trying to control everything.  I’m looking at where I am and do I want to be here.  If not, where do I want to be?

Now, here is a big one about going with the flow…  If I did go with the flow a bit more, frankly, I would change everything.  Everything.  Simply because I would be going with the flow (what I was feeling at that time, at that moment).  Sure, I could go with the flow more but I have to restrain myself because… well… if I go with the flow, I would end up making decisions that are very unsound.  

Ok, off to work on something….

No, wait… two other things…

How is it that Starbucks cannot meet their earnings numbers?  I mean, Really?  Every time I go into ANY Starbucks it’s packed.  Is the company that poorly managed?  

Also, the USPS may drop mail delivery down to 5 days a week because they continue to post operating losses year over year.  Mail (“snail mail”) volume is falling at a large clip due to a) email and b) private carriers and what is the response of the government?  Raise rates!  That will make us more money.  Bottom line, the USPS is bloated and should compete directly against UPS or FedEx, let’s see what would happen then…