FDIC PLANNING FOR HUGE BANK FAILURE?

Late reports this evening are citing an anonymous source that says the FDIC is preparing some sort of superfund that could handle the failure of a large “systemically important financial institution.”

Reuters reports:

“Another source familiar with the FDIC’s plans said on Tuesday that the agency was considering seeking to create a new fund to help deal with any resolution of systemically important financial institutions.”

The details on this story out of Reuters are very vague so this is mostly speculation, but such a development would not be shocking to anyone familiar with the state of the U.S. banking sector.  FDIC losses are quickly mounting and they are certainly ill-prepared to handle a major failure.  Shoring up the FDIC is a wise insurance policy if nothing else. Or they could be preparing some U.S. banks for the same fate as Chrysler and GM.   A welcome development in my opinion.

As regular readers know, the recent government induced rally created the perfect environment in which to raise capital, but these capital raises only place band aids on axe wounds.  The patient is suffering from cancer and we’re performing chemo to no avail.  The tumors must be removed.  Instead, we continue to allow the banks to operate with the toxic assets on their balance sheets.  The government knows real estate losses and credit card losses are mounting.  They also know the TALF & PPIP will not succeed as the banks have no incentive to sell assets.

Is there a chance the economy rebounds sharply and these banks are able to earn their way out of this crisis?  Certainly, but the odds of a prolonged and sluggish recovery are far too high in my opinion to allow these banks to operate in their current state.  The government knows they can’t prop up 8,000 banks forever and I suspect they are none too pleased with the stress test results if the economy were to remain sluggish for longer than expected.   The only resolution: FDIC receivership.  In this case, perhaps a rather large one….

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Sounds like the Resolution Trust.

    A place for banks to dump their toxic waste without taking a mark?

  2. What kills me is how the prudent banks will continue to get punished to bail out the BofA, C of the world. The added FDIC insurance costs on deposits are now being passed onto customers…how irate would you be if you are a public funds company with $80MM in deposits and you are now being told you have to pay an FDIC surcharge on your deposits to cover a depleted FDIC reserve.

  3. TPC,

    Stress tests are a joke brother. As Reggie Middleton has aptly pointed out, the “adverse” scenarios ARE CONTRADICTED BY THE FED'S OWN WEBSITE.

    In other words, the Fed already expects it to be worse. Wonder if 2Q is gonna bring “record profits' for these banks. lol.

    • I've been banging that drum for almost two months here. PPIP, Stress Tests, M2M – one of this actually dealt with the real problem – the toxic assets.

      Nothing is different now from two months ago except that people trust Obama to get us out of this.

      • All Main Street cares about is that the stock market is higher and they think the President is cool.

        If things go wrong, go the Huffington route and blame Bush.

        We lived in a world that was infinitely levered. The administration knows we can live a lie. They want us to do it again but not let a crisis go to waste. With minimal resistance, an agenda will be pushed out that the next administration will have to deal.

        Meanwhile, people will be lining up to see the movie “Change”, starring The Fresh Prince Will Smith as our King, Barrack Obama.

        • The sad thing is that we know the problem with the patient and keep performing Chemo on him rather than actually cutting the tumor out. All of these bank plans have accomplished nothing. The cancer is still there on the balance sheets eating a hole in the banks. They think they can earn their way out of this – yeah, that works so long as the real estate market stops going down and the banks actually sustain Q1 earnings, but that's just not realistic at this point.

          It's time for the bondholders to take some losses.

  4. This site is nothing more than a fear blog. America is not going away, nor are our ways. Lie, cheat,steal,scam,print, whatever it takes.

    We get the job done–like it or not.

    This is America–And Id advsie not to bet against it

    • give me some insight then as to why America won't take a huge nose dive? Try and find definitive proof that the worst isn't yet behind us. Numbers would help your case, not some blanket statement just because you said so.

    • A fear blog? I’d recommend reading more than just one post before making blanket statements like that. I was bullish in early March when everyone else was fearful. I have since become much more negative as investors have become wildly bullish. The government has confirmed my every prediction. Our government would do us all a big favor to just take some of these banks into receivership. You think they’re doing us some huge favor by propping up the zombie banks? Study Japan…..

  5. TPC, seems you are good at predicitions….where do you predict the S&P will close tomorrow?

    • Hmmm….let me dust off this crystal ball I have on my desk. I am not a good predictor of stock movements. Just a good risk manager….

    • The date is on the front page and at the bottom of each single post. It's a little hiddent. I didnt make the template….

  6. Is this kind of hoax? the government just engineered a perfect opportunity for them to raise capital through worthless bank shares; now fdic tell us that they could handle the truth: US bank insolvent and they want to receive them?

    want to con us ? for what purpose?

  7. The date is on the front page and at the bottom of each single post. It's a little hiddent. I didnt make the template….

  8. Is this kind of hoax? the government just engineered a perfect opportunity for them to raise capital through worthless bank shares; now fdic tell us that they could handle the truth: US bank insolvent and they want to receive them?

    want to con us ? for what purpose?