Mish

The FDIC is struggling mightily to stay solvent. Given that there are bank failures every Friday, it’s no easy feat for the FDIC to stay ahead of the game.

Please consider Bank of America, Major Banks’ FDIC Premiums May Top $10 Billion.

The Federal Deposit Insurance Corp.’s plan to rebuild its reserves may cost Bank of America Corp. and three of the largest U.S. banks more than $10 billion.

Bank of America, the biggest U.S. lender by deposits, may owe $3.5 billion under an FDIC proposal that banks prepay three years of premiums, based on the lowest assessment rate multiplied by the bank’s $900 billion in June 30 U.S. deposits.

“This seems like a very hefty amount,” said Tim Yeager, a finance professor at the University of Arkansas and former economist at the Federal Reserve Bank of St. Louis. “The FDIC’s projections of future losses are pretty severe, and they are trying everything they can to avoid tapping the Treasury.”

U.S. bank premiums range from 12 cents per $100 in deposits for the safest lenders to 45 cents for banks the U.S. considers risky, said Chris Cole, senior regulatory counsel for the Independent Community Bankers of America. The FDIC yesterday proposed asking banks to pay premiums for the fourth quarter and next three years on Dec. 30. The fees will raise $45 billion.

Based on the current assessment and each bank’s deposits, Wells Fargo & Co.’s fee may be $3.2 billion based on its $814 billion in deposits, JPMorgan Chase & Co. may pay $2.4 billion and Citigroup Inc. $1.2 billion. The estimates exclude the FDIC’s plan to boost the assessment rate by 3 cents per $100 in deposits in 2011 or the agency’s assumption that bank deposits will increase by 5 percent annually.

FDIC Is Bankrupt

Last month I wrote As of Friday August 14, 2009, FDIC is Bankrupt.

Although that is a realistically correct headline (Please see You Know The Banking System Is Unsound When…. for a justification), I did overlook things FDIC did to temporarily stay in the game.

Prepaid fees is yet another attempt to keep the game going. How much longer this can last is anyone’s guess. Those prepaid fees are going to hurt bank earnings 100% guaranteed. The fees may even push some struggling banks into bankruptcy.

Emails from a Bank Owner regarding FDIC

In regards to my post on FDIC bankruptcy I received Emails from a Bank Owner regarding FDIC and Under-Capitalized Banks.

ABO, who as been in the business 30 years, writes:

This will certainly mark the end of the banking model using wholesale funding and aggressive deposits to fund commercial real estate projects. In other words this is going to come down hard on the FIRE economy.

I have been in banking for over 30 years and from my perspective this is much worse than anything I have seen. God help us if cap and trade passes!

Newfound Praise For Shelia Bair

At times, I have been extremely hard on Shelia Bair. She has said many things that I strongly disagree with. However, I have to commend her for two things.

1) Shelia Bair stood up to Geithner regarding the PPIP and banks being allowed to bid on their own assets. Clearly she recognized banks bidding on their own assets at taxpayer risk was outright fraud. Of course, I think the whole PPIP proposal was (and still is) fraud, but in retrospect I have to wonder if her stance caused this ridiculous program to go on the back burner. If so, Bair deserves a salute. Note that PPIP is still not up and running.

2) Shelia Bair is now refusing to borrow money from the treasury (taxpayers) to shore up FDIC. Instead, she has been raising fees and now is proposing pre-paid fees. In other words, she strives to make the riskiest banks pony up for their mistakes, as opposed to dumping the risk on taxpayers.

The easy way out for Shelia would have been to simply take money from the Treasury. However, she is taking a much tougher stance, at least for now. I reserve the right to change my opinion down the road based on future actions.

Perhaps, like many of the rest of us she simply cannot stand Geithner. However, regardless of motivation, she is now doing the right thing by making risky banks pay for the risk they undertook.

Is the system fair?

Is the system fair? Of course not. Citigroup and Bank of America received debt guarantees from the Treasury making their debt appear to be less risky, and their FDIC insurance payments less than they should be. Wells Fargo was the beneficiary of huge tax breaks.

However, those items are not Bair’s doing, so she should not take the blame.

The scorecard of Geithner and Paulson is a big fat zero. Yet, this is now the second thing major thing Bair has gotten correct. This is the best we can realistically expect.

Mike “Mish” Shedlock

Submitted by The Firecracked Report, a new up and coming financial blog H/T Zero Hedge


US Car Sales Collapse in September (2)

CalculatedRisk

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John Mack Proposes Single Global Regulator (Bloomberg)
“A better system would be one uber-regulator,” Mack said in an interview in New York with Bloomberg TV. “We do need an overall systemic-risk management that everyone buys into. It’s not a U.S. systemic boundary — it’s a global systemic risk manager.”

CIT Said To Weigh Financing From Citigroup, Barclays (Bloomberg)
Diamond and Pandit to Liz Peek’s rescue?

CIT In Last Ditch Rescue Bid (WSJ)
Dick Fuld always wins: “If CIT does file, it would be the fifth-largest bankruptcy filing, by assets, in U.S. history, trailing only Lehman Brothers Holdings Inc., Washington Mutual Inc., WorldCom Inc. and General Motors Corp.”

FDIC Fund To Be In The Red For Years (WSJ)
At least ‘til 2012.

Ex-Moody’s Employee Warned SEC About Muni Issues (AP)
Scott McCleskey, who was a senior vice president for compliance at Moody’s until he left a year ago, wrote a letter to an official at the SEC alleging a ”lack of meaningful surveillance of municipal securities, contrary to statements by Moody’s to the public and to Congress,” but no one thought much of it.

Hedge Funds Find Sweet Spot (NYP)
Sugar. They’re lovin’ it.

Microsoft CEO Takes Paycut After Rough Year (Reuters)
Steve Ballmer, CEO since 2000 earned a total of $1,276,627 for fiscal year 2009, which ended June 30, according to a filing with securities regulators on Tuesday, down 5.5 percent from the previous fiscal year’s total of $1,350,834. Say what you want about executive pay anything that puts less of this in our lives is not a good thing.

Crude oil rose above $67 a barrel in New York as manufacturing expanded in China and Japan, buoying hopes for a rebound in fuel demand.

Oil is nonetheless heading for its first quarterly decline this year amid swelling fuel inventories in the U.S. The Energy Department will probably report that supplies of crude and fuel increased last week, according to a Bloomberg survey. Chinese manufacturing rose for a sixth month in September and Japanese industrial output climbed for a sixth time in August.

“Emerging markets have definitely been driving the demand recovery,” said Thina Saltvedt, an analyst at Nordea Bank AB in Oslo. “Industrial production has increased. We will see a gradual improvement in the economy, but prices have got ahead of the physical fundamentals”…..Read the entire article

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Zero Hedge

One of the most recent statistical aberrations to be noted by Investment Research firm Oscar Gruss and subsequently referenced by Bloomberg highlights the dramatic disconnect between raw and seasonally adjusted continuing claims numbers. The divergence has manifested itself in a discrepancy of nearly 900,000 people. It is represented below:

From Bloomberg:

The pre-adjustment total dropped for the last nine weeks, the longest streak since May 2008. The number of claims fell by 1.05 million, or 17 percent, during the period. Adjusted claims changed direction on a week-to-week basis throughout the period and declined by only 113,000, or 1.8 percent.

Another way of visualizing the discrepancy is presented by Oscar-Gruss:

Furthermore, the key issue according to Oscar-Gruss’ economists is the odd behavior of the 2009 data series which is a visible outlier compared to prior historical periods: the delta between unadjusted and adjusted hit a recent record, and to the downside at that.

And here is the proposed explanation:

“Our assumption is that the sheer brutality of the current cycle has caused the statisticians to cease to trust the ‘raw’ data and therefore fall into the trap of abusing the process of seasonal adjustment.”

Is the discrepancy merely a function of improving fundamentals catching up with the labor pool:

We would expect to see another “catch up” reduction in the “headline” seasonally adjusted continuing claim data in the coming weeks which will take claims down by somewhere between 400 to 500K based on the current data. We would also conclude that the pace of employment repair is running significantly faster than anyone relying on the “headline” seasonally adjusted data would be led to believe.

Yet keep in mind, in late 2008 and early 2009, the opposite was true, when unadjusted data was over a million higher than adjusted. Is the raw-to-adjusted ratio skew merely a function of the two data-series catching up on average with each other?

It would be odd for the government to present a cautiously bearish representation of economic reality here, while in all other economic data series it has not hidden its bias to promoting an upside case. Compare historical data revisions: what better way to indicate sequential improvement than by making just prior data look worse upon further “information” – this has occurred on far too many occasions over the past year.

Or is this merely a way for the government to provide “improving” numbers and thus stoke the market higher as the adjusted continuing claims number catches up with the raw number?

Alas, the simplest explanation is that while the rate of attrition could be slowing, it is not manifesting itself into any real economic improvement. Recall our recent presentation of the exhaustion rate, which hit an unprecedented 52% in the most recent data. This means that a whopping 52% of those collecting claims exhaust their benefits before they can find a job.

Combining the raw continuing claims data with the exhaustion rate presents a much more troubling picture: the raw data is “improving” due to the lack of material new “entrants”, yet the lagging end of the curve keeps getting worse and worse.

This is yet another matter on which the BLS would be best suited to present their reasons for this divergence.

Lastly, it would be prudent to recall the interview with Charles Biderman of TrimTabs, who has for years been promoting the idea that the BLS continues to misrepresent the reality of the labor picture: be it raw or adjusted. One thing is for certain: with the U-6 unemployment rate breathing on 17% and soon likely to hit 20%, much of this speculation is merely semantics. The economy is still a long way away from not only stopping the labor bleeding but from actually reporting an uptick in employment. Until that happens, we expect that all bets are off when it comes to the government presenting the most optimistic possible case, even as more aberrations such as this become apparent.

From the FDIC:

The Board of Directors of the Federal Deposit Insurance Corporation today adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC estimates that the total prepaid assessments collected would be approximately $45 billion.

MarketWatch has more details: Fund to protect deposits has shrunk to low levels

Absent the prepaid premiums, the FDIC said that the agency’s Deposit Insurance Fund … would face a liquidity crunch early next year, and that it will be operating in the red by the end of this month.

The FDIC said that the prepayments would raise $45 billion for the fund. The board said it estimates that total bank failure losses could reach $100 billion by 2013.

Zero Hedge writes: Irrational exuberance in High Yield shows no sign of abating: the loan-HY bond spread is down to 2009 tights: a mere 326 bps for the represented universe of credits. Last week HY bonds averaged 710 bps, while loans were are 383 bps. For rational types, now is the time to consider some long loan-short bond basis packages, at a 1.0x:1.85x ratio. Also the negative loan-HY basis in Sealy continues, now at about 500 bps: either the data there is really faulty or somehow that relationship makes sense… in some parallel universe.

Big movers in the prior week were Mediacom loans moving wider by 150 bps and Neiman Marcus bonds caught in another squeeze, pushing them tighter by 130 bps. Overall loans widened by 6 bps while bond tightened by 34 bps.