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….

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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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