FDIC Friday

by Larry Levin

In its own attempt to help rig the market, the FDIC holds back bank failures to Fridays; thus the name: FDIC Friday. This way, the FDIC keeps bank failures from occurring during regular market hours and therefore not adversely affecting the market. This past Friday was no exception: Colonial Bank of Alabama failed along with two others.

From Bloomberg we read - Colonial BancGroup Inc., the Alabama lender facing a criminal probe, had its banking operations closed by regulators and taken over by BB&T Corp. in the biggest bank failure since Washington Mutual Inc. collapsed last year.

Branches and deposits of Colonial, Alabama's second-largest bank, were turned over to Winston-Salem, North Carolina-based BB&T in a deal brokered by the Federal Deposit Insurance Corp., the regulator said today. The failure of Montgomery-based Colonial followed a Florida expansion that saddled the lender with more than $1.7 billion in soured real-estate loans.

Colonial's failure will deplete the FDIC's deposit insurance fund by $2.8 billion, the agency said. The fund, which the agency uses to pay customers of a failed bank for deposit losses up to a $250,000 limit and is generated by fees paid by banks, stood at $13 billion at the end of the first quarter, according to the FDIC. The agency has set aside an additional $25 billion for bank failures, agency spokesman David Barr said.

Maybe the next bailout from Congress will be the FDIC? It's almost tapped out. Good thing money grows on trees in Washington DC.

As you all know by now, I am not in favor of any bailouts; however, this one will get my reluctant approval. After all, the FDIC insures our deposits and you and I had nothing to do with the near total meltdown of the financial system.

The folks at Saxo Bank Research believe the FDIC is broke. Below are some of its findings. For the whole paper and the graphs, please see FDIC's Shrinking Deposit Insurance Fund - A Testimony of Current Accounting Standards.

http://www.tradingfloor.com/EN/Documents/Research%20Note/2009-08-12%20Saxo%20Bank%20Research%20Note%20-%20FDIC%20DIF.pdf

As late as in the end of April just before the release of the bank stress tests, Ms. Bair Chairman of the FDIC said they would not need any additional bailouts from the U.S Treasury within the immediate future according to The Bulletin. After three new bank failures last Friday, the FDIC's Deposit Insurance Fund (DIF) diminished by another $185 million for a total remaining balance of $648.1 million.

Below is a graph showing the DIF capital as a percentage of total bank deposits insured by the FDIC. Note that this graph is based on the old insurance limit with a maximum coverage of $100.000/account. This limit has been changed to cover up to $250.000/account until January 1st 2014. Estimates say that the change increases the deposits covered under FDIC insurance to approximately $6 trillion in total.

The current reserve ratio of 0.014% strongly indicates how bad this crisis has affected U.S financial institutions. However, this is not the entire story. If we take a closer look at non-current loans and charge-offs from banks one realizes that the FDIC still has a lot of work to be done. Combined non-current loans and charge-offs amounted to nearly $100 billion in Q109 compared to $15 billion/quarter pre-crisis. Moreover, according to analysts at the Royal Bank of Canada the U.S still has banking failures in the thousands to face before the crisis is over. In turn that should result in the FDIC requesting the pre-approved funding signed by the Congress in May 2009, including $100 billion from the U.S Treasury Department.



Previous Day's Trading Room Results:

Trade Date: 8/14/09

E-Mini S&P Trades*
(before fees and commissions):

1) OTF sell @ 10:00am at 997.00 = +1.50 (1 lot)

2) Engf sell @ 11:30am at 994.25 = b/e (1 lot)

3) Algorithm positions (2)

4) "Reading the Tape" positions (10) ...combined Secret's, Algo, & "Reading the Tape" total...+10.25


Electronic (YM) Mini-Dow:

1) None today



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