An Explanation for Sheila Bair's Erratic Behaviour

It was obvious from the start that FDIC head, Sheila Bair, was pushing for Citigroup to acquire Wachovia at a sweetheart price, then Wells Fargo stepped in to bid on Wachovia and screw up Bair's early Christmas gift to Citi.

It is now clear that Citi is a financial wreck and Bair was most likely attempting a stealth bailout of Citi via gifting it Wachovia. Oh my, what regulators can do.

John Hempton of Bronte Capital had some early speculation on what was going on n this blow-by-blow analysis

GE Gets FDIC Gurantee On $139 Billion of Its Debt

The FDIC guarantees non-bank debt? $139 billon worth.

Keep in mind, GE last month started using a new Federal Reserve program designed to revive demand for commercial paper amid the global crisis.

Where does it stop?

GE Capital is not a bank. The technicality that is allowing the FDIC to offer the gurantee is do to the fact that GE’s GE Capital subsidiary also owns a federal savings bank and an industrial loan company, both of which already qualify. But the debt guranteed has little if nothing to do with the banks.

FDIC Insurance Increase: Ground Cover for Paulson Bill

WSJ is reporting that according to Sen. Christopher Dodd, the Senate will vote on raising the FDIC limit to $250,000 from $100,000 for one year.

It will be inserted as part of the $700 billion Paulson "Bailout" Plan. The insert will provide cover for legislators who vote for the bill. "Hey, I voted for it because it raised FDIC coverage."

What Are These People Thinkng?

As of June 30,there was $2.5 trillion in uninsured deposits in the banking system, that is for the most part money that exceeds the $100,000 per bank, per person FDIC maximum insurance. What are these people thinking?

The BIG question: As news from the Wall Street crisis dominates the headlines, how much of this money will be pulled form weak banks in coming days, causing bank failures?

-Robert Wenzel

Your Friday Bank Closing Special

Integrity Bank of Alpharetta, Georgia, was closed by U.S. regulators today, the 10th bank to collapse this year.

Integrity Bank, with $1.1 billion in assets and $974 million in deposits, was closed by the Georgia Department of Banking and Finance and the FDIC. Regions Financial Corp., Alabama's biggest bank, will assume all deposits from Integrity, which was run by Integrity Bancshares Inc. The failed bank's five offices will open on Sept. 2 as branches of Regions, the FDIC said.

U.S. regulators this year also closed Columbian Bank and Trust of Topeka, Kansas, on Aug. 22; First Priority Bank of Bradenton, Florida, on Aug. 1; Reno-based First National Bank of Nevada and Newport Beach, California-based First Heritage Bank in July; Staples, Minnesota-based First Integrity Bank and ANB Financial in Bentonville, Arkansas, in May; Hume Bank in Hume, Missouri, in March; and Douglass National Bank in Kansas City, Missouri, in January.

More FDIC Activity To Prepare For Coming Bank Failures

The Federal Deposit Insurance Corp. is preparing to sign a five-year lease to add five floors of space at its Dallas regional office, people at the FDIC report.

The FDC will add 125,000 square feet to the 185,000 square feet it rented last year.

Dallas is the headquarters of the agency's Division of Resolution and Receivership, the unit that handles failed banks.

FDIC Increases Loss Estimate for IndyMac

Very interesting report from the FDIC via Reuters:

The Federal Deposit Insurance Corp said on Tuesday it now expects IndyMac's failure in July to cost its insurance fund $8.9 billion, compared with the previous expected range of $4 billion to $8 billion...

Diane Ellis, the FDIC's associate director of financial-risk management, said IndyMac's expected hit to the fund blossomed because analysts have had more time to value IndyMac's assets and have assigned some higher loss rates.

Also, some deposits that the FDIC originally thought were uninsured are actually insured, Ellis said.

Note the last paragraph. Did a depositor have a powerful attorney that explained how an uninsured deposit became an insured deposit? Remember this is an $8 billion plus hit for the FDIC, so when they bring up a change in insured they aren't talking a $100,000 difference or even juat a millon dollar difference.

FDIC Cash Flow Problems May Force It To Borrow From Treasury

The expected wave of bank failures may force the Federal Deposit Insurance Corp. to borrow money from the Treasury Department, FDIC Chairman Sheila Bair said yesterday.

Bair said the borrowing could be needed to cover negative short-term cash-flow caused by paying depositors immediately after the failure of banks. The FDIC, clearly, doesn't have the cash on hand to handle the expected onslaught. The borrowed money would be repaid once the assets of that failed bank are sold.

The last time the FDIC borrowed funds from Treasury came at the toward the end of the savings-and-loan crisis in the early 1990s when thousands of banks failed.

FDIC Says 117 Banks In Trouble, More To Follow

The FDIC said 117 banks and thrifts were considered to be in trouble in the second quarter, up from 90 in the prior quarter.

The FDIC doesn't reveal the names of the banks on the list, but it does give the total assets of these institutions.

That number was $78.3 billion during the quarter, up sharply from $26.3 billion the previous quarter.

"More banks will come on the list as credit problems worsen and assets of problem institutions will continue to rise," said FDIC Chairman Sheila Bair in a press conference.

In its latest quarterly report on the industry, the F.D.I.C., also said earnings at banks and thrifts declined 86 percent from April to June, to $4.96 billion, from $36.8 billion a year earlier.

Alert: Problem Bank List Due Today

The list that the FDIC maintains of "problem" banks will be publicly updated today. The last list, issued in March, totaled 90 institutions with $26.3billion in assets.

The FDIC does not list the individual banks, just the total number of banks and total assets of the banks. Both are expected to be much higher.

FDIC Increasing Staff for Expected Increase in Bank Failures

The FDIC is starting to increase its staff for what it expects to be a large number of bank failures. Currently, the FDIC has 4,600 employees. It is hiring 70 new employees and bringing back 70 retirees.

The FDIC's Atlanta regional office, which covers seven states from West Virginia to Florida, also recently boosted its bank examiner and professional staff by about 10 percent, to about 300.

The agency is also expected to soon raise the insurance premiums it charges banks and thrifts to begin rebuilding its reserves.

The list that the FDIC maintains of "problem" banks totaled 90 institutions with $26.3billion in assets at the end of March. The confidential list is expected to be much higher when an updated version is released tomorrow.

Late Friday Bank Closure News

The Columbian Bank and Trust Company, Topeka, Kansas, was closed today by the Kansas Bank Commissioner J. Thomas Thull, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Citizens Bank and Trust, Chillicothe, Missouri, to assume the insured deposits of The Columbian Bank and Trust Company.

The nine branches of The Columbian Bank and Trust Company will reopen on Monday as branches of Citizens Bank and Trust. Depositors of the failed bank will automatically become depositors of Citizens Bank and Trust. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage.

Over the weekend, customers of The Columbian Bank and Trust Company Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of June 30, 2008, The Columbian Bank and Trust Company had total assets of $752 million and total deposits of $622 million, of which there were approximately $46 million in uninsured deposits held in approximately 610 accounts that potentially exceeded the insurance limits. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers.

The Columbian Bank and Trust Company also had approximately $268 million in brokered deposits that are not part of today's transaction. The FDIC will pay the brokers directly for the amount of their insured funds.

Customers with accounts in excess of $100,000 should contact the FDIC toll-free at 1-800-523-8209 to set up an appointment to discuss their deposits.

"A Thousand Banks Could Fail"

Billionaire vulture investor Wilbur Ross this morning told CNBC's "Squawk Box" that a thousand banks could fail before the financial crisis is over.

"Not very big ones necessarily," he said. "But a thousand banks is going to be a lot."

A thousand banks will mean billions upon billions in losses

And the impact on the credit crunch could be severe.

"Each dollar of bank equity that gets lost takes out about 12 or 13 dollars of loans so there's a tremendous magnifier effect of small changes in bank equity," Ross emphasised.

Do we need to emphasise that no one should have more than the maximum FDIC insured amount of $100,000 at any one bank?

Vineyard National Bank Ordered to Stop Accepting Brokered Deposits

No connections in DC for this bank, its the cold turkey treatment here.

LaTi reports:

F]ederal regulators have ordered Vineyard National Bank of Corona to stop accepting so-called hot-money deposits ...

Vineyard has nearly $2 billion in deposits, with branches in Orange, Los Angeles, Marin, Riverside, San Bernardino and San Diego counties. ... Vineyard had nearly $2 billion in loans as of June 30, of which 48% were to home builders and developers.

In its filing with regulators Monday, Vineyard estimated that about $660 million of its nearly $2 billion in deposits are above those standard insured limits.

$660 million out of $2 billion is above FDIC insured limits, who banks like this?

FDIC Warns Four Banks

The Federal Deposit Insurance Corporation revealed late today that it had issued warnings to four small US banks that lacked sufficient reserves to cover potential loan losses.

The cease-and-desist orders issued in June said the four banks needed to raise more capital, expand their loss allowances and better oversee and diversify their loan portfolios. A fifth bank was cited for violating consumer protection laws.

The banks receiving cease-and-desist orders in June were MetroPacific Bank in Irvine, California; Bank Haven in Haven, Kansas; Clarkston State Bank in Clarkston, Michigan; and Hastings State Bank in Hastings, Nebraska.

The FDIC instructed the banks to reevaluate their allowances for potential losses. MetroPacific in California was also told to stop issuing credit “for speculative construction and land development purposes.”

The fifth bank – Columbus Bank and Trust in Columbus, Georgia – received a cease-and-desist order because its credit card program violated consumer protection laws.

Paulson: GSE's Now Funding 70% of Residential Mortgages

At a news conference held today to promote "covered bonds" as a method to increase mortgage financing and improve underwriting standards, Treasury Secretary Paulson pointed out that:

The housing government-sponsored enterprises, Fannie Mae, Freddie Mac and the Federal Home Loan Banks, and the Federal Housing Administration are funding more than 70 percent of residential mortgages during these months of market stress.

Covered bonds are debt securities backed by cash flows from mortgages or public sector loans. They are similar in many ways to asset-backed securities created in securitization, but covered bond assets remain on the issuer’s consolidated balance sheet.

Because the assets of covered bonds remain on the balance sheet of the issuer, the issuer has incentive to make sure the assets issued are quality assets, unlike under asset-backed securities where issuers have no further obligation with respect to assets securitized.

Lew Rockwell On Supposed "Bankrupt Banks"

Lew Rockwell, on his blog, provides some odd advice, today. Rockwell under the headline "Bankrupt Banks" writes:

The whole system is shaky because of fractional reserves, of course, but if you have more than $100,000 in Wachovia, WaMu, or Downey, GET IT OUT.

But, why single out these banks, and try to play bank analyst? The prudent thing to do, since FDIC coverage is good for only $100,000 per bank, is to never have more than $100,000 at any one bank.

FDIC Reports Two More Bank Failures

As of June 30, 2008, First National of Nevada, Reno, NV had total assets of $3.4 billion and total deposits of $3.0 billion. First Heritage Bank, Newport Beach, CA had total assets of $254 million and total deposits of $233 million. Both have been taken over by the FDIC

The cost of the transactions to the FDIC is estimated to be $862 million.

Sheila Bair Is A Bit Concerned, So Am I

The San Francisco Times reports:

The federal agency insuring bank deposits learned that it can't afford to ignore the blogs following its seizure this month of IndyMac Bank, the largest bank failure since the 1980s.

"The blogs were a bit out of control," Sheila Bair, chairman of the Federal Deposit Insurance Corp., told the San Francisco Business Times after a speech in San Francisco this week.

That's putting it mildly. Following the FDIC's takeover of IndyMac on July 11, widely followed blogs were speculating on bank runs on some of California's largest banks based on nothing more than people waiting for their branch to open or large deposits moving between financial institutions.

The FDIC plans to pay closer attention to the blogosphere in the future.

"We're very mindful of the media coverage and blogs in controlling misinformation. All I can say is were going to continue to stay on top of it," Bair said. "The misinformation that came out over the weekend fed a lot of depositors' fears."

"Pay closer attenton," that doesn't sound promising. Sounds like they would like to regulate bloggers if they could.

My bit of concern is that government thinks it is God, is all knowing and gets everything right. Thus, as far as the government is concerned, they would lke to watch everything and control everything.

Of course, in truth, they are only human, obnoxious controlling humans, but just humans. They will bring us such debacles as the FDIC's embarrassing management of Superior Bank and the crème de la crème of bad forecasting, the New York Federal Reserve economists Jonathan McCarthy and Richard W. Peach 2004 analysis that we were then not in a housing bubble.

All government regulators do is regulate out options. It's their way or the highway. Thus when mistakes happen they are super jumo in size, because alternatives are regulated out of existence.

Government Isn't God: FDIC Sticks Banks With Bad Loans and Sticks Borrowers With Subprime Junk

Those who call for regulators to supervise the financial industry fail to get that government is spelled g-o-v-e-r-n-m-e-n-t, not g-o-d.

In 2004, New York Federal Reserve economists Jonathan McCarthy and Richard W. Peach wrote a paper Is There A Bubble in The Housing Market Now? Their answer was decidedly, "No".

I issued a reply to their paper, at that time writing under a pen name because of other business commitments:

...the record climb in housing prices is, indeed, a bubble... the Federal Reserve study fails to consider past declining interest rates as a cause of the bubble. The faulty conclusions reached by Federal Reserve economists Jonathan McCarthy and Richard W. Peach may make many potential new home buyers comfortable about a purchase, when, in fact, we are very near the top of a housing market that will experience substantial declines in prices...

They reach the conclusion that because of ....[the] "fundamental factor" of low nominal interest rates, higher housing prices are justified.

But does this mean real estate prices will not drop? Our answer is decidedly no. Indeed, McCarthy-Peach report that "since 1995, real home prices have increased about 36 percent, roughly double the increase of previous home price booms in the late 1970's and late 1980''s." We view this increase as largely the result of the Federal Reserve's lowering of interest rates and the pumping of liquidity into the banking system, thus producing the byproduct of higher housing prices. But by incorporating falling nominal interest rates as a "fundamental factor" that can not be a cause of a bubble, McCarthy-Peach have literally defined the cause of the current bubble from being taken into consideration....

Further, the current structure of many mortgage loans whereby no money down is acceptable and/or adjustable rate mortgages are popular, sets up the possibility that many may walk away from current mortgage commitments down the road as interest rates begin to climb. Indeed, as ARM's rates become more and more burdensome and as housing prices begin to decline, walk away situations are likely to become quite prevalent, thus adding even more downward pressure to the housing market.

It is our conclusion, then, that by defining nominal interest rates as a fundamental factor and not as the Fed induced causal factor of the real estate boom, and by completely ignoring the structual features of current mortgage loans, McCarthy and Peach have blinded themselves to the real estate bubble that does exist. They have set themselves up for perhaps making the worst economic prediction since Irving Fisher declared in 1929, just prior to the stock market crash, that "stocks prices have reached what looks to be a permanently high plateau."

Apparently, McCarthy and Peach thought my reply was funny and included this quote from me in their power point presentation, when they went around the country declaring there was no housing bubble. Under the headline Opposing View, they would flash this quote from me:

The faulty analysis by Federal Reserve economists McCarthy and Peach may go down in financial history as the greatest forecasting error since Irving Fisher declared in 1929, just prior to the stock market crash, that stocks prices looked to be at a permanently high plateau.

Last I heard, they aren't using that power point presentation anymore.

The point being that regulators do not have a magic wand that makes their beliefs 100% accurate. But, the problem is that regulators will direct regulation in the direction of what they believe and not, "Opposing Views". Thus, any crashes under heavy regulation become greater, because regulators have driven ALL market participants in that direction.

Regulators aren't gods. As we learn today in a WSJ report even the FDIC got caught up in te sub prime madness:

It turns out that the U.S. government itself was one of the lenders giving out high-interest, subprime mortgages, some of them predatory, according to government documents filed in federal court.

The unusual situation, which is still bedeviling bank regulators, stems from the 2001 seizure by federal officials of Superior Bank FSB, then a national subprime lender based in Hinsdale, Ill. Rather than immediately shuttering or selling Superior, as it normally does with failed banks, the Federal Deposit Insurance Corp. continued to run the bank's subprime-mortgage business for months as it looked for a buyer. With FDIC people supervising day-to-day operations, Superior funded more than 6,700 new subprime loans worth more than $550 million, according to federal mortgage data.

The FDIC then sold a big chunk of the loans to another bank. That loan pool was afflicted by the same problems for which regulators have faulted the industry: lending to unqualified borrowers, inflated appraisals and poor verification of borrowers' incomes, according to a written report from a government-hired expert. The report said that many of the loans never should have been made in the first place.

Hundreds of borrowers who took out Superior subprime loans on the FDIC's watch -- some with initial interest rates higher than 12% -- have lost their homes to foreclosure, data on the loans indicate...

The Superior situation could be costly for the FDIC. Texas-based Beal Bank SSB, which bought a portfolio of Superior loans, about half of them originated under the FDIC, is suing the agency in U.S. District Court in Washington. The suit claims many of the loans were made improperly and are plagued with problems.

An internal FDIC legal assessment, obtained by Beal Bank and filed in court last month, acknowledged "numerous appraisal deficiencies" in the portfolio and a "small number of loans that appear to be fraudulent from inception." Calling the FDIC's legal position poor, the undated 26-page assessment suggested that the agency's liability could be as much as $70 million. Another FDIC official, in a deposition, estimated that the cost of settling the case could be less than one-third that amount.

In a recent court filing, the FDIC estimated that about 1,500 of the 5,315 loans it sold to Beal either have defaulted or are nonperforming. The FDIC already has bought back another 247 of the mortgages, most of them for violations of federal anti-predatory-lending laws intended to protect borrowers from unreasonably high fees or deceptive practices. Beal Bank has said in court filings that 73 of the repurchased loans were originated while the FDIC was running Superior...

Meanwhile, a separate portfolio of Superior subprime loans that the FDIC sold to Bank of America Corp. -- which the bank in turn sold to investors -- also has been troubled. As of April, investors had suffered "realized losses" -- which generally occur after foreclosures -- on 511 of the 3,964 loans in that pool, according to data provided to investors...

FDIC Chairman Sheila Bair has been unusually forthright in putting part of the blame for the mortgage mess on regulators, who she has said should have acted earlier

.

And Paulson wants to put Fannie Mae and Freddie Mac under the control of the Federal Reserve, and the likes of McCarthy and Peach? I'd rather see Randal Quarles and Carlyle Group in there right now competing against other private equity firms--as long as others are also allowed to compete for the banks and their assets.

What's going to happen, though, is that, at a minimum, new regulation will be instituted so that no one but Quarles will understand what the hell is really going on. At worst, Paulson will takeover Freddie Mac and Fannie Mae and carve it up in some way that Quarles and other private equity firms will be able to pick off the juicy meat. And at the same time new regs will be saddled on the banking industry overall, making it more difficult to operate, especially for those survivors who were smart enough to stay away from the subprime wacky loan business in the first place.

That's government at work, not God.

About Those Bank Lines

The bank line stories are coming out of California, as a result of the failure of IndyMac and its takeover by FDIC. Nervous bank account holders lined up outside IndyMac branches. Whether standing in line makes the most sense or not is a question all itself, but first I am going to the discuss the lines themselves.

Many years ago, I investigated a bank run in New York City's Chinatown. At some point, I spoke to a very talkative branch manager at the bank. The bank run had the same long lines, which always confused me. I asked, "Why are the lines so long. It usually only takes a few minutes to make a withdrawal?"

This is what she told me.

She said, after the bank failed, Federal regulators came in and held a meeting, before the bank opened, with all employees. The regulators told the employees, this was not the time to take short cuts, in fact, they were to go very slow servicing the customers and make the customers fill out every form necessary to make a withdrawal. The Feds apparently supplied additional forms. Further, they were to have the customer fill out the paperwork right at the tellers station and the teller was not to take the next person in line until the first person had finished the paperwork and the withdrawal. The message from the Fed was s-l-o-w, v-e-r-y s-l-o-w to bank employees.

The manager told me that there were two reasons for the Fed's slowdown. The first was that the Fed needed a stall to actually get enough physical currency to the bank (And that was a small bank, not the $32 billion IndyMac bank). The second reason is to discourage more people from getting on to the line.

Thus, this should explain this report from The Orange County Regster:

IndyMac customers across Orange County finally were getting help with their accounts today after the bank reopened for the first time since it was taken over by federal regulators Friday.

It was slow-going, however, as the branches limited access to 10 or 12 customers at a time, with as many as 200 people in line. At some branches it was taking an hour or more for those admitted to complete their business...A few minutes before the Laguna Woods branch opened...An Orange County Sheriff's deputy announced from his patrol car that the bank would be letting in 10 people at a time....

It took more than an hour for the first customers who got in to complete their business, suggesting it was going to be a very long day for those waiting outside in the blazing sun.

As for those who have money in a failed bank, your funds are protected by the FDIC up to $100,000. There is no need to pull it out in a panic, it will be there tomorrow and the day after.If you want it out and have checks associated with the account, right a check and depost in a different bank. If you have more than $100,000at such a bank, good luck.

FDIC Failed Bank List

Here is the FDIC's list of failed banks, since October 2006. Notice how many of the bank closures occur on Friday's. The announcements are usually made very late in the day on Friday. Thus, trying to sneak it past the general public, as they head home for the weekend.

$32 Billion in Assets California Bank Closed By FDIC

When you want to bury news that you have to make public, but that you really don't want a lot of people to see, you release it on Friday night.

The FDIC has just issued such a Friday night release. Thay have closed Pasadena, California-based IndyMac bank.

IndyMac Bank, F.S.B. had total assets of $32.01 billion and total deposits of $19.06 billion as of March 31, 2008. As conservator, the FDIC will operate IndyMac.

IndyMac's failure is the first bank failure in California since 2003 and is expected to cost the FDIC between $4 billion and $8 billion.

At the time of closing, IndyMac Bank, F.S.B. had about $1 billion of potentially uninsured deposits held by approximately 10,000 depositors.

Loan customers should continue making loan payments as usual, said the FDIC.