When Will the FDIC's Bailout Come to Fruition?

The slew of bank failures that typically accompany a Friday night have inspired many people to approach these bouts of creative destruction as if it were a sport - say college football - worthy of following, documenting, and parsing. I am one of those people. That being said, I think it's about time that I devote some attention to the arguably mythical creature known as the FDIC's Deposit Insurance Fund (DIF). This fund is theoretically used to bridge the gap between the value of the deposits recovered in a bank failure, and the total value of bank depositor's claims that are insured by the FDIC. The DIF is largely funded via an assessment (read: tax) on FDIC member banks. A couple years ago, nobody paid that much attention to the DIF; it's balance remained relatively stable throughout time, and was only affected by the occasional bank failure. Presently however, the FDIC is in the midst of a 92-bank-failure-year which has reduced the balance of the DIF from $45.217B at the end of June '08, to a mere $10.386B as of the quarter ended June 30th, 2009. It is this fact alone which most discredits comparisons between today and the S&L crisis; although the S&L fiasco saw a much longer list of bank failures, consolidation within the banking industry over the past 20 years has led to fewer - yet much larger - banks today. For instance, last night's failure of Chicago based Corus Bank will cost the FDIC's DIF $1.7B.

It's become clear that the FDIC will be unable to prevent the depletion of the Deposit Insurance Fund; the question is how long it will be before the FDIC officially receives it's "bailout" from Treasury, in the form of a "loan" from the taxpayers. Well, we know that the DIF's balance is still in the billions of dollars, although it is certainly in the single digits by now. I can also state that a reasonable number of monthly bank failures - for the next 6-8 months at least - is between 15 and 30 banks per month. However, the total number of bank failures doesn't offer a very predictable estimate of DIF losses; as we've observed over the past year, the range of failed banks total assets/deposits is very large. My most reasonable estimate is that monthly DIF losses will range between $100MM and $3B; this doesn't allow for any black swan events of course, but those are useless to attempt to forecast. That being said, the FDIC could require a Treasury bailout in as soon as 2 months, or in the best case scenario, as far into the future as May/June 2010. If I were a bookie, I would probably set the under/over date for an FDIC bailout at December 15th, 2009. It's probable that I could balance my books with a date like that, however, my personal bet is that the bailout will have to occur before the end of October 2009. Sphere: Related Content

FDIC Closes 24 Banks in July; Random Event or Wilting Economy?

In what has become as much a staple of Friday nights as drunkenness itself, the FDIC on Friday conducted "seizures" of the following five banks:

1. Mutual Bank (Harvey,IL)
   
2. First BankAmericano (Elizabeth, NJ)
   
3. Peoples Community Bank (West Chester, OH)
   
4. Integrity Bank (Jupiter,FL)
   
5. First State Bank of Altus (Altus,OK)

Despite the fact that JP Morgan and Goldman Sachs continue to earn(?) healthy profits, the plight of the nation's small community banks appears substantially more imperiled. The familiar Fridays that used to feature a single bank failure are now characterized by a new tradition which dictates that at least four - and possibly five banks must fail each Friday. The rate and magnitude of recent bank failures does not correspond well with the popular belief of the day; being that we have "turned a corner", "stopped the tailspin", "stabilized" or any other number of foolish statements currently in vogue. To take a look at some data that slaps the recovery hypothesis right in it's face, let's take a look at the past thirteen month's bank failures, by the number that have occurred each month. (Source: FDIC: Failed Bank List):

Month-# of Bank Failures
July '08: 3
August '08: 3
September '08: 4
October '08: 4
November '08: 5
December '08: 3
January '09: 6
February '09: 10
March '09: 5
April '09: 8
May '09: 7
June '09: 9
July '09: 24

It's immediately apparent that July's number of failures represents a severe departure from normal. The question is, did we just experience a run of the mill anomaly that occurred independently of economic conditions, or do the numbers indicate something more troublesome? To say that 24 bank failures in one month alone is NOT an indication of economic deterioration, one would have to suppose that there is an element of randomness to the number of failures that occur each month. If that is so, we should be able to apply some elementary statistics to the situation to discern just how probable it is that July would randomly produce 24 Bank Failings.

Running the numbers on the 12 months ended June 2009, we calculate that the mean number of bank failures for a single month is 5.58, and the population standard deviation is 2.33. For the uninitiated, this means that - assuming the Failures are distributed normally - the number of financial institutions collapsing in a single month will be between 3.2 and 7.9, approximately 68% of the time. Taking the exercise a step further, we can state that 97.5% of the time, a given month will produce 10.23 or fewer Friday night FDIC raids. To calculate the probability of the 13th month in the series (July 2009) bearing witness to a full 24 FDIC seizures, one must first arm himself with spreadsheet software capable of displaying results to the Quadrillionth (Google's spreadsheet program is just barely able to do so). The probability-value associated with such an event is 1.18755X10^-15, or 0.0000000000000018755.

Based upon the monthly rate of bank closings during the most recent 13 periods, it's apparent that the random forces of nature are, in all likelihood, not responsible for the FDIC's hectic July schedule. We must then conclude that the responsible party is none other than a deteriorating economy. To be more specific, the recent spike in bank failures is a reflection of the rapidly deteriorating economy on Main Street a.k.a those who did not receive a bailout and continue to either fear or experience job losses; consequently, straining the ability of these individuals to honor the obligations made to many smaller, community oriented banks.

*no positions Sphere: Related Content

Guaranty Financial On the Precipice of Collapse

A new and distinct phase of the financial crisis is beginning to materialize, characterized in part by the fragile(please excuse the euphemism) state of Guaranty Financial Group Inc. (GFG) - a financial institution that declares itself to be the second largest publicly traded bank in the state of Texas. The speculation over Guaranty Financial's ability to avoid FDIC seizure has intensified in recent days, due in no small part to the startlingly grim language contained in the bank's most recent 8-K concerning "material impairments" to the business. From the SEC filing:

As previously disclosed in a Current Report on Form 8-K filed on June 29, 2009, Guaranty Financial Group Inc. (the “Company”) has been working on a plan to raise substantial capital for it and its wholly-owned subsidiary, Guaranty Bank (the “Bank”) through an open bank assistance transaction with the Federal Deposit Insurance Corporation (“FDIC”) and the Office of Thrift Supervision (“OTS”) and with private investors, including the Company’s current principal stockholders. On July 17, 2009, at the direction of OTS, the Bank filed an amended Thrift Financial Report (“TFR”) as of and for the three months ended March 31, 2009. This filing reflected substantial asset write downs as described below, which resulted in the Bank having negative capital reflected in the TFR as of that date.

The Company believes that these write downs foreclosed the possibility of applying for open bank assistance. Our primary stockholders have not affirmed their willingness to commit to a capital infusion in support of such an application. As a result, the Company no longer believes that it will be possible for the Company or the Bank to raise sufficient capital to comply with the Orders to Cease and Desist described in the Company’s Current Report on Form 8-K filed on April 8, 2009. In light of these developments, the Company believes that it is probable that it will not be able to continue as a going concern.

With nearly a billion dollars in annual sales, and over two thousand employees, the collapse of Guaranty Financial would be no small event; it wouldn't however, pose an immediate threat to the stability of the financial system as a whole. In the latter months of 2008, the size, reach, and breadth of the most at-risk financial institutions was such that the after-shocks of failure could have brought our financial system to it's knees. Round #2 - a round that is gaining clarity on a daily basis - is most accurately described by the old saying "death by a thousand cuts". Bank failures of a magnitude similar to Guaranty Financial will not produce the immediately recognizable reverberations seen post-Lehman. What these "small" failures will do though is slowly exacerbate the crippling forces that presently plague the economy, drain further the FDIC's already depleted "rescue fund", and contribute to the decidedly deflationary trajectory of the United State's economy.

*no position in GFG Sphere: Related Content

Which is Worse: 467,000 Jobs Lost, or 7 Failed Banks?

In case anyone was too busy to notice, the Labor Department announced yesterday that US non farm payrolls shrunk by 467,000 in the month of June. Needless to say, these numbers, which will likely be revised further downwards next month, are a direct blow to the Economic Cheerleaders we are fond of mocking on this site. We bid farewell, at least until next month, to all "second derivative" arguments.

In other news, the FDIC apparently decided that, due to the 4th of July holiday, it would would shift it's customary bank seizure day from Friday to Thursday. Likely, when the mobile bank seizure squad learned that it's docket would consist of seven financial institutions this week alone, it's member cringed at the thought that such activity might interfere with whatever plans they had made. Below is the list of those financial institutions that did not live to see the 233rd anniversary of US independence:

Founders Bank, Worth, IL
Millennium State Bank of Texas, Dallas, TX
The First National Bank of Danville, Danville, IL
The Elizabeth State Bank, Elizabeth, IL
Rock River Bank, Oregon, IL
The First State Bank of Winchester, Winchester, IL
The John Warner Bank, Clinton, IL



If the question above were put to a vote, we suspect that the jobs number would win; 467,000 would undoubtedly cast a vote the way of the jobs, plus, each of the 467,000 has adversely affected at least two other individuals, whose fear of losing their own job has just been amplified. Ultimately though, we will admit the irrelevancy of the question we just posed. What is relevant though, is the fact the underlying logic behind the claim that "Prosperity is just around the corner" has been dealt a severe blow, and will likely test the imaginations of those people who stand to benefit from the propagation of this false theory. It shall be interesting, we think. Sphere: Related Content