FDIC Bank Closures as of April 30th, 2010

FDIC Friday Folly (as some people call it) is picking up the pace again after a relatively quiet February.

The first four months of the year 2010 saw 64 bank closures. In comparison, the first four months of 2009 saw 29 bank closures; the first four months of 2008, 2.

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FDIC Failed Banks in 2009: 140

Sorry for the tardy posting.

January 2010 already started with a robust number: 15 banks failed.

And remember, FDIC is broke. As of September 2009, its DIF (Deposit Insurance Fund) was negative $8.243 billion. When FDIC releases its Quarterly Banking Profile for the 4th Quarter 2009 sometime this month, it's safe to assume it is in the hole for over $10 billion, guaranteeing $5.3 trillion (or more) deposits.

These days, numbers in billions fail to surprise anyone, don't they? If this is not inflation, I don't know what is.

For this inflated perception, we can thank Henry M. Paulson for throwing $700 billion number for the bank bailout - any number that's big enough to scare people into passing the bill. Up till then, George Bush's stimulus of over $100 billion was considered extravagant spending.

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Now We Have HAFA within HAMP to Stem the Housing Crisis

In plainer language, we have the Home Affordable Foreclosure Alternatives Program, a new program announced on November 30, 2009, which is part of the Home Affordable Modification Program courtesy of the U.S. Treasury Department under Obama Administration.

Home Affordable Foreclosure Alternatives Program (HAFA)
(National Association of Realtors)

"On November 30, 2009, the Treasury Department released guidelines and forms for its new Home Affordable Foreclosure Alternatives Program (HAFA). HAFA is part of the Home Affordable Modification Program (HAMP). HAFA provides incentives in connection with a short sale or a deed-in-lieu of foreclosure (DIL) used to avoid foreclosure on a loan eligible for modification under the HAMP program. Servicers participating in HAMP are also required to comply with HAFA. A list of servicers participating in HAMP is available at MakingHomeAffordable.gov.

"HAFA applies to loans not owned or guaranteed by Fannie Mae or Freddie Mac, which will issue their own versions of HAFA in coming weeks."

HAFA seems to be in response to the criticism that the administration's loan modification program (HAMP) is not working. The article lists the program features of HAFA in bullet points. They include:

• Allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds).
• Prohibits the servicers from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6 percent).
• Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).
• Provides financial incentives: $1,500 for borrower relocation assistance; $1,000 for servicers to cover administrative and processing costs; and up to $1,000 for investors for allowing a total of up to $3,000 in short sale proceeds to be distributed to subordinate lien holders (on a one-for-three matching basis).

The 2nd bullet point looks like the result of lobbying effort by the realtors. But that aside, my question is: What's in it for investors?

Other than up to $1,000 for giving some scraps for the 2nd lien holders?

I think I know the answer.

Many investors who bought distressed mortgages may be already backstopped by FDIC. If a house is foreclosed or sold on a short-sale, and if the realized amount from foreclosure/short-sale is less than the amount the borrower owes on the house, the investors of the loan will receive 80 to 95% of the difference from FDIC under loss share agreement like the one FDIC has with the investors who purchased IndyMac. (FDIC is, by the way as you know, broke).

The kicker here is that these investors probably paid for a fraction on a dollar for these mortgages. If FDIC's asset liquidation is any indication, they are sold at anything from 3 cents on a dollar (non-performing) to 70 cents (performing) on a dollar.

Let's say here's a house in danger of foreclosure. The mortgage outstanding on the house is $500,000. The market value is determined to be $350,000. Now the investors agree to a short sale at that price. To compensate for the loss, FDIC will give $120,000 (80% of $150,000 loss) to the investors. But wait! These investors purchased this mortgage at $250,000 (50 cents on a dollar). So by agreeing to sell the house at $350,000, they will already have made $100,000. On top of that, FDIC will give another $120,000. Total of $220,000 profit on $250,000 investment. 88% return. The return would be much higher if they used leverage (PPIP anyone?).

With such a perverse incentive in place, investors don't have much interest in loan modification; they would rather foreclose and pocket the quick money than going through a slow process of loan modification. So now the government has stepped in again and is telling the servicers/investors to be a little less greedy; instead of foreclosing, how about short-sale? "You will still get compensated for your "loss", but it may just take a bit longer. It will make you look good in the eyes of distressed homeowners, you know, if you give the appearance of taking some hit ..."

Now, the next question is: Who are these investors?

Or put it another way: Do you know who owns your mortgage?

At this point, it is very safe to assume the bank who gave you the mortgage no longer owns it. It's been sold long time ago. Occasionally, you may get to know who owns your mortgage when there's a change of a loan servicer. Then you may get to know that your loan is actually owned by a bank other than the originating bank, Fannie Mae or Freddie Mac (the wards of the state who have just been given an unlimited ATM card by Uncle Sam), a hedge fund that manages billions of dollars, or that your loan has probably been turned into some kind of securities (MBS, CDO, squared, cubed, who knows) as you may see a combination of alphabets and numbers as the investor.

A hedge fund manager has this to say in a New York Times article ("U.S. Loan Effort Is Seen as Adding to Housing Woes" 1/1/2010) about "clearing the housing market" by allowing foreclosure and short sale:

“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”

Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.

Yes, that may be all true. But it is probably a good bet that his firm is invested in residential mortgages outright or in a securitized form, which they probably purchased on the cheap. He'd rather see his fat profit sooner than later, wouldn't you think?

So, again and again, the government is there for the big boys, making sure that they profit handsomely.

What will the distressed homeowners get after the short sale under this HAFA? No house, battered credit record, and $1500 for relocation. Oh and the peace of mind that the first lien holder cannot come after you for deficiency. No guarantee though of the 2nd lien holder...

Here's the link to the November 30, 2009 Supplemental Directive announcing HAFA within HAMP (27 pages of the total 43 pages are sample forms and exhibits).

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FDIC's DIF Is Minus $8.2 Billion to Cover $5.3 Trillion

DIF-insured deposits. How?

The government institution that I love to hate, FDIC, has released its Quarterly Banking Profile report for the 3rd quarter that ended on September 30.

They already admitted that the DIF (Deposit Insurance Fund) went negative at the end of September, which was highly unusual as FDIC is not known for timely disclosure of their own problems. Sure enough, DIF is in the hole for $8.243 billion as of September 30. Since then, FDIC has closed 29 banks.

What has caught my attention though, is the sudden jump in DIF-insured deposits in the 3rd quarter. It went from $4.817 trillion in the 2nd quarter to $5.308 trillion in the 3rd quarter, a 10.2% jump. This additional $491 billion, I believe, is roughly the same amount that has been yanked out of money market funds this year. The Treasury Department stopped the guarantee on money market funds in mid September.

FDIC Chairman Bair already mandated that the banks, from "too big to fail" to "too small to bother", prepay 3-year worth of DIF premiums to fill the hole, unduly punishing the more prudent, small banks. All the extra burden on the banks will be passed on to the depositors in increased fees and other inconveniences (such as having their accounts shut down).

Why is Sheila Bair still keeping her job remains a mystery to me. But then, it's a mystery to me that Geithner is still heading the Treasury Department...

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October Bank Closures Jump to 20

Highest since July.

And as Chairman Bair of FDIC expresses her anger against banks "resisting the reform" (the article is linked below the chart), her own organization remains technically insolvent. In fact, it has been insolvent since June 2008 when the reserve ratio dipped below the mandated 1.15% (see my post), and all the while she has kept repeating the mantra "No one lost money with us, your money is safe with us." (Of course it is safe, who does she think it is ultimately back-stopped by? Us! We pay money so that we may have our money back.)

Anyway, bank closures in October ballooned toward the end of the month to 20, the second highest this year after July (24). By their own admission, DIF was already negative at the end of September.

And here's Chairman Bair's anger, as summarized by an article by Reuters:

"Sheila Bair, chairman of the Federal Deposit Insurance Corp, said on Monday that some in the financial services sector are trying to argue that regulatory reform would stifle innovation and impede economic growth.

""That makes me angry," Bair said in a text of remarks prepared for a lecture at Kansas State University.

"Bair said the extreme market interventions that have occurred during the recent financial crisis have been difficult for her as a life-long Republican and market advocate.

"But she said they were necessary and that government needs even more tools to discourage financial firms from getting so large that taxpayers are forced to provide assistance if the firms become unstable.

""The government has been going into places where we don't want to be," Bair said, but she added: "We simply cannot afford to maintain the status quo.""

Her institution bends over backward to maintain the status quo by helping big banks in every way she can so that they not only survive but prosper. Remember the backdoor deal that almost went through last year regarding Wachovia? Citigroup was going to get that bank at a bargain price, with all the bad assets backstopped by FDIC.

And talk about financial innovation. Again, her institution is on top of that too. FDIC has been backstopping assets of the failed banks as purchased by new owners and backstopping bond issues by financial institutions while failing to maintain even a ridiculously low reserve. Compared to FDIC, Bear Stearns and AIG are the paragons of conservative operation.

One of the unintended consequences of FDIC's backstopping the mortgage losses of the failed banks is that the new owners would rather foreclose on the property because it is so much more profitable for them. It's free money. (For more, please read the first link (Is FDIC Killing Short Sales?) in my post in early October.)

To me, for her to say she is angry at the financial institutions is totally laughable. I even get angry myself when I hear her squawk about protecting consumers while FDIC backstops mortgage losses for billionaire investors who foreclose on the homeowners. I share the sentiment that Karl Denninger has about her.

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A New (Toxic) Asset Class to Be Created By FDIC?

FT Alphaville cites this from Structured Finance News (10/27/2009):

"The Federal Deposit Insurance Corp. (FDIC) has seen a growing volume of assets acquired from failed banks in its role as receiver of these institutions.

"Michael Krimminger, special advisor for policy, office of chairman at the FDIC, spoke at Information Management Network’s 15th annual ABS East conference in Miami.

"As part of his speech, Krimminger said that the FDIC has acquired more than 100 failed banks and it is likely that the agency might consider securitizing the assets from these financial institutions."

The conference was from October 25 to 27, and Mr. Krimminger was a panelist on an October 26 event.

A security created out of assets held by failed banks that FDIC couldn't sell. If someone can somehow manage to slap on even an "A" rating, it should sell like hot cakes among savvy investors (pension funds, university endowments, money market funds...). That should boost the confidence and morale in the financial markets, no doubt.

After all, with the reputation of the rating agencies (Moody's, Standard & Poor, Fitch) in tatters, it may not matter much anyway whether the security is rated AAA or BBB.

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FDIC Admits It Is Broke

Zero Hedge's Tyler Durden reports that FDIC now admits its DIF (deposit insurance fund) is negative as of September 30. FDIC is insolvent.

FDIC Discloses Deposit Insurance Fund Is Now Negative
(9/29/09 Zero Hedge)

"In an unprecedented disclosure, the FDIC has highlighted that it expects the DIF reserve ratio to be negative as of September 30. As there are a whopping 48 hours before that deadline, one can safely assume that the DIF is now well into negative territory: as of today depositors have no insurance courtesy of a banking system that has leeched out all the capital of the Federal Deposit Insurance Corporation. Let's pray there is no run on the bank soon."

For FDIC to announce something like that is indeed extremely unusual. They are not known for timely disclosure. Their Quarterly Banking Profile Report, for example, is not filed until after nearly 2 months after a quarter ends.

In this case, it is also highly deceptive. It was just last month, August, when the chairman Sheila Bair said in the press conference when FDIC (finally) released the Quarterly Banking Profile for the 2nd quarter that she was not planning on doing anything about DIF anytime soon, and that FDIC had enough money. "Our resources are strong. Your insured deposits are safe," she repeated. Uh-huh.

Zero Hedge has the FDIC document discussing the negative DIF embedded in the article, and also has this choice words for the situation:

"First Mary Schapiro [SEC chairman] has failed at her task of "regulating" anything on Wall Street, and now Sheila Bair presides over a newly insolvent institution. Chalk one up to Washington's success at "containing" the crisis. Zero Hedge wishes Ms. Bair all the luck in the world in returning the DIF to its statutory minimum requirement of 1.15% of all insured deposits (a shortfall of a mere hundred billion or so). Maybe she can convert the FDIC to a REIT and have Merrill Lynch do a concurrent IPO and follow-on offering (while Goldman raises it to a Conviction Buy which incorporates the firm's expectations for 10% GDP growth in 2010 coupled with projections for $1,000 per barrel of crude)?"

Haha. One more thing: Goldman Sachs will short the hell out while putting it on their Conviction Buy list and recommending it to their clients (not the ones in the 'huddle', who will short alongside Goldman's trading desk).

DIF reserve ratio dropped below the statutory minimum in the 2nd quarter of 2008 (see my post). Sheila Bair was appointed the chairman at FDIC in June 2006 for a five-year term. She could have raised the fund to replenish DIP, well before the financial crisis hit in full force in September 2008. She either decided to sit on her hands or was told to; I don't know which. Incompetency (or appearance of it) is highly rewarded in Washington D.C., it seems. She is still the head of FDIC.

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Bank Closures in September 2009

Georgian Bank in Atlanta, Georgia was closed by FDIC today, bringing the September bank closures to 11. This year, 95 banks have failed so far, compared to 29 in 2008.

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FDIC Wants to Be Bailed Out

by banks, not by Treasury.

FDIC, whose DIF (deposit insurance fund) was meager $10 billion (see my post) at the end of June to cover close to $5 trillion deposits (and remember that was before the record bank closures in July and very costly closures in August. The fund must be very close to zero, if not negative already), wants to borrow money from the banks from which it collects deposit insurance fees.

FDIC could seek bailout from banks (9/22/09 AP via Yahoo Finance)

"WASHINGTON (AP) -- Regulators have approached big banks about borrowing billions to shore up the dwindling fund that insures regular deposit accounts.

"The loans would go to the fund maintained by the Federal Deposit Insurance Corp. that insure depositors when banks fail, said two industry officials familiar with the conversations, who requested anonymity because the plans are still evolving.

"Regulators also are considering levying a special emergency fee on all banks, charging regular fees early or tapping a $100 billion credit line with the U.S. Treasury, the officials said."

Let's say I am an insurance company. I insure your home, but times have been good and we are all prosperous so I will not collect insurance premiums from you for a decade. Don't worry nothing will happen. Then, Santa Ana wind blows and lightening strikes, and voila there's a massive fire in your area. Your home burns down. But I'll say, sorry, no money to give to you. In fact, I am broke. So I am going to borrow from you so that I can pay you and others. I'll pay you good interest on it, how about 25 basis points above the Fed funds rate? While I'm at it, I'll assess one-time emergency fee to replenish my insurance fund quickly. What do you say?

You would take me to court.

But wait, there is a possibility that this may be another disguised "rescue", actually, of big, national banks. There is also a possibility that this is a coordinated move with the Federal Reserve. Without the details known at this point, it is my pure conjecture. But here's what I see may be happening:

1st possibility: disguised "rescue" plan

FDIC would accept "loan" in the form of any type of asset from the big banks. Instead of cash or cash equivalent, the banks would give loans (of dubious quality) on their books as "loans" to FDIC, and FDIC would accept at face value and pay interest on the "loans" on top of it. (Where would that interest payment money come from?)

2nd possibility: coordination with the Fed to control excess reserves

The banks will create new loans to FDIC out of the excess reserves at the Federal Reserve. The Fed would be happy that the excess reserves are not escaping into the real economy to cause inflation. Banks would be happy that it would earn (probably) better interest than at the Fed, and their balance sheet get stronger with very safe loan to FDIC (ultimately backed by taxpayers). FDIC would be happy to have freshly minted money knowing it actually didn't cause much distress to the big banks anyway.

Just last month when FDIC issued the quarterly banking profile for the 2nd quarter (it is linked in my post), FDIC chairman Sheila Bair didn't sound much worried about the dwindling DIF, and kept repeating the mantra of "Our resources are strong. Your insured deposits are safe."

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Bank Closures 1st Week of September 2009

The first week of September ends with five banks closed on Friday.

I do hope the July number was a blow-off top formation, but there are people calling for 1000 more bank failures in the next two years. That would be 10 failures per week for two years..

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FDIC Update: August Bank Failures 15, DIF $10 Billion (Do They Have A Plan?)

So FDIC closed three banks on Friday, bringing the August bank closure numbers to 15. "What an impressive improvement from July, when 24 banks failed!" would be the "green shooters" remark.


On Thursday FDIC finally released its Quarterly Banking Profile for the 2nd Quarter. It must have been a much-awaited event, because I couldn't get on to the FDIC's website for quite a while after the release of the report at 10:00 AM EST. All I was interested in was to find out what happened to the DIF (Depositors Insurance Fund), which was barely $13 billion or 0.27 reserve ratio at the end of March 31, 2009.

At the end of 2nd quarter that ended June 30, the FDIC's DIF, O miracle of all miracles, decreased by only $3 billion from the 1st quarter because, according to Sheila Bair, her institution managed to collect $6 billion from the member banks as additional assessment fees. Still, FDIC has only $10 billion of DIF, or 0.22 reserve ratio, and this is before the massive (so far) bank failures in July and very costly ones (Colonial Bank and Guaranty Bank, $6 billion) in August. FDIC estimates that bank failures will cost them $70 billion through 2013. But the chairwoman had this to say on Thursday's news conference:

"The FDIC was created specifically for times such as these," Sheila C. Bair said. "Our resources are strong. Your insured deposits are safe."

She also said this:

Asked about a possibility of tapping the Treasury, FDIC Chairman Sheila Bair said: "Not at this point in time. I never say 'never,' but not at this point in time, no."

Now, the congressionally mandated minimum reserve ratio for FDIC is 1.15%.

With that in mind, please take a look at this table. It shows the DIF balance and DIF-insured deposits over the 3 years, and the reserve ratio calculated from the two numbers. The reserve ratio dipped below the mandated minimum in the 2nd quarter of 2008, well before the banking crisis hit in earnest in September.

Why didn't the chairwoman act then? Why didn't Congress require that FDIC raise the assessment to the banks or force it to take the line of credit to replenish the fund? Why isn't Congress demanding that FDIC replenish the fund now? And why does Bair still refuse even now to recognize this 0.22% reserve ratio as danger beyond critical stage and refuse to use the line of credit?

She just keeps repeating the mantra "No one has lost the money with us."

Meanwhile, the emergency assessment fee imposed on smaller banks are taking the toll on their bottom line. FDIC has a line of credit of up to $500 billion with the Treasury Department, yet she refuses to draw from it. The only way to raise additional funds for DIF then is to assess another emergency fee, that will further penalize small banks disproportionately.

If I become more cynical than I already am, I would say Ms. Bair is doing it on purpose - to kill off as many small banks as possible to feed the big banks, even the foreign ones, as cheaply as possible. I can easily think of worse possibilities but those are not the good ones to contemplate right before going to bed...

OK, I found more details about DIF and the congressionally mandated minimum reserve ratio. I couldn't believe my eyes.. This is from March 2009 Journal of Accountancy Highlights:

"With the DIF reserve ratio at 1.01% at the start of the third quarter, the FDIC is required by the Federal Deposit Insurance Reform Act of 2005 to establish a restoration plan to raise the ratio to 1.15% no later than five years after establishing the plan. The plan to restore the ratio includes a combination of uniform higher assessment rates and other risk-based adjustments that place a greater burden of increased assessments on riskier institutions."

All the law requires is that FDIC devise a plan, and raise the ratio to 1.15% within 5 years after they devise the plan. So, by law, the chairwoman can simply sit on her hands doing nothing as long as she has a plan. And she doesn't even seem to have a plan, but she assures us "No one has lost money with us."

This is getting surreal.

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Bank Closure Update - 8/21/2009

FDIC closed 4 banks today, including Guaranty Bank in Texas, bringing the August bank closure tally to 12. With the last week's closure of Colonial Bank and this week's Guaranty Bank, FDIC's reserve would be very close to zero at least, if not negative. (For more on later post. Stay tuned.)

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Bank Closure In July 09 - End Of Month

Now that's a green shoot. 24.

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Bank Closures Update 7/24/2009

FDIC closed 6 banks in Georgia and 1 in New York today. That brings the July tally to 19.

16 Georgia banks have failed this year, more than in any other state. The 64 bank failures nationwide this year compare with 25 last year and three in 2007.

Dow Jones Industrial Average managed to stay above the psychologically significant 9,000, ended the week at 9,093. It went up 3.99% this week. S&P 500 ended at 979, up 4.13% for the week. Nasdaq ended at 1,965, up 4.21% for the week. Small Cap Russell 2000 outperformed the major indices, up 5.63% for the week.

Financials ended the week flat. Commodities did very well, with the Commodity Related Equity Index (CRX) up 6.02% for the week.

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Bank Closure In July 09 - Mid-Month Update

July is shaping up to be the worst month in terms of bank closures since the current recession started. On Friday July 17, FDIC closed four banks (2 in California, 1 in South Dakota, one in Georgia). The total number of banks closed so far in July is 12.


Just remember: FDIC's reserve ratio as of March 31, 2009 was 0.27%. In other words, FDIC had $13 billion at hand at the end of March. This week's 4 bank failures cost FDIC over $1 billion.

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No Bailout For CIT

Just as I thought, only 2 days ago on Monday.

CIT talks fall apart, bankruptcy may loom
(7/15/09 Reuters via Yahoo Finance)

"WASHINGTON/NEW YORK (Reuters) - CIT Group Inc (NYSE:CIT - News), a major lender to small- and mid-sized U.S. businesses, said on Wednesday that talks with the government to bail out the company had ended, a development that could make bankruptcy likely.

""Discussions with government agencies have ceased," the New York-based company said in a statement. "There is no appreciable likelihood of additional government support being provided over the near term."

"The announcement came after last-ditch talks in which Treasury Department had been concerned about a worsening liquidity crunch at CIT over the last few days, and that government aid would not put the lender on a path to recovery.

"CIT said its management, directors and advisers were evaluating alternatives. It did not elaborate.

"A bankruptcy filing would mark one of the largest for a U.S. company since the global credit crisis accelerated last September."

CIT had received $2.3 billion of TARP money. No more, says the Treasury. I suspect CIT lacked a strong connection to the present administration.

I also find FDIC's attitude very amusing:

"The FDIC has been reluctant to do so [granting CIT access to its government debt guarantee program], however, because the program is designed for healthy institutions, and it believes CIT's participation involves too much risk."

FDIC has granted access to numerous institutions that are not the best examples of health (Citigroup and Bank of America come to mind). FDIC itself is no such example either, with reserve ratio of paltry 0.27% as of March 2009. It would need a massive bailout from the taxpayers more than any private sector financial institution.

But no matter. The government has decided who will be the winner and who will be the loser. CIT is the latter, but won't be the last loser as the government continues to extend its grabby hand into every aspect of our lives.

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CIT Group's Looming Bankruptcy Threatens Small Businesses

CIT Group Says Its Failure Risks Demise of Customers (7/13/09 Bloomberg)

"CIT Group Inc., the century-old lender that hasn’t been able to persuade the government to back its debt sales, says its demise would put 760 manufacturing clients at risk of failure and “precipitate a crisis” for as many as 300,000 retailers.

"A collapse would ripple across the “small and medium-sized businesses who rely on CIT to operate -- to pay their vendors, ship goods to their customers and make their payroll,” the New York-based lender said in internal documents obtained by Bloomberg News that make the case for its importance to the U.S. economy. CIT spokesman Curt Ritter declined to comment on the documents.

"A failure of CIT, run by Chief Executive Officer Jeffrey Peek, would be the biggest bank collapse since regulators seized Washington Mutual Inc. in September. CIT reported $75.7 billion in assets and $68.2 billion in liabilities, including $3 billion in deposits, at the end of the first quarter. "

The government seems reluctant to assist CIT, despite the dire consequence that its collapse would pose for their clients, mostly small to mid size companies in manufacturing and retail. The officials are saying "a CIT failure would not cause system risk to the financial markets".

Both the Treasury Department and FDIC are saying they only help "credit-worthy" companies. Such as?? AIG? Citigroup? Fannie and Freddie?

(And how "credit-worthy" is FDIC, anyway? FDIC's reserve ratio as of March 31, 2009 was 0.27%.)

"CIT is in “active discussions” with regulators on a “series of measures to improve the company’s near-term liquidity position,” it said in a statement distributed by Business Wire today. The talks include CIT’s application for FDIC funds and measures such as the transfer of assets to CIT Bank, it said.

"CIT’s internal report outlines the potential effects of a failure on customers to which it’s committed $3.9 billion of bank lines.

"A “substantial portion” of clients “would not have easy access to additional revolving credit without CIT,” according to the documents. “This could lead to business failure for those who lack additional liquidity.” "

My take: As long as it is the Main Street (small/mid size manufacturers and retailers) that takes the hit, the government will "tighten the belt", claiming painful but necessary adjustment. GM and Chrysler were essentially taken over by the government for the puny amount of loans compared to what the government has given and will continue to give to the financial institutions.

Large financial institutions like Goldman Sachs and hedge funds are probably stuffed with credit default swaps (CDS) on CIT's debts. They would rather see CIT dead.

Here's Yahoo's Tech Ticker video. Aaron Task and Henry Blodget seem to think if the government bails CIT out it's a slippery slope. Hello, the slope's been slippery for very, very long time now. But do not worry. I have a feeling that the government will show a firm stance of not "wasting tax payers' money" any more. Certainly not on a financial firm that actually lends to small businesses.

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7 Banks Closed By FDIC In 1st Week Of July 2009

7 banks failed today, according to FDIC. That many banks failed in entire month of May, and this is just the 1st week of July.

The closures will cost FDIC $314.3 million. FDIC's reserve ratio as of March 31, 2009 was 0.27%.

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FDIC Will Dictate The Interest Rate on Deposits

Not a single day passes without more government entrepreneurship intruding into once-private, market decisions.

FDIC restricts interest rates at weak banks (Reuters UK, Friday 5/29/09):

"U.S. banks that are struggling to stay afloat will not be allowed to aggressively ratchet up interest rates to attract customer money, a top bank regulator said on Friday.

"The Federal Deposit Insurance Corp voted to bar a bank with insured deposits from paying interest rates that "significantly exceed" prevailing market rates if the bank is deemed not well capitalized. The new rule better defines what constitutes normal market rates, the FDIC said.

"The interest-rate rule comes as many smaller regional banks are weighed down by bad loans and credit losses. The FDIC said on Wednesday that the number of banks on its "problem list" grew 21 percent in the first quarter to 305 institutions -- the highest number since 1994."

Soooo, let me get this right. Many US smaller regional banks are struggling. They need to attract more money from the depositors. They think they can offer a higher interest rate than the big national competitors. In comes FDIC and tells them they are not allowed to offer a higher rate, and FDIC will tell them what's the fair market rate is. [Ummmm if FDIC decides what the market rate is, it's no longer a "market" rate, is it?]

I went to FDIC's site, and found this new interest-rate rule, here. It says "An institution not choosing to use the national rate [which FDIC will calculate (simple average) and publish weekly] can define its market area and support its position to the FDIC that prevailing rates in that area exceed the national average. "

So, banks will have to defend their position if they want to offer more than this FDIC-determined national average.

It seems FDIC is telling these struggling regional banks to get lost, literally.

How "well-capitalized" is FDIC itself? The answer is NOT AT ALL. FDIC's Deposit Insurance Fund (DIF) plunged to just $13 billion, which insures [HOW??] $4.8 trillion. That's 0.27%. FDIC is also supposed to be covering those corporate bonds issued with FDIC guarantee.

That sounds far worse than AIG writing away CDS, doesn't it?

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How FDIC dismantles a bank

Almost every Friday evening we hear the news: "So-and-so bank was shut down by Federal Deposit Insurance Corporation". Since the beginning of the year we have had 32 bank failures, according to FDIC. (In comparison, there were 25 bank failures in entire 2008, and 3 in 2007.)

Inquiring minds want to know... how do they do that?

Then I ran into this: "Anatomy of A Bank Takeover (NPR)"
It gives a good glimpse of how FDIC goes in and does their work. Quite fascinating. It is like an espionage operation of some sort. And from the description of it, it is also quite efficient and thoughtful (surprising, coming from a government agency).

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