Emails from a Bank Owner regarding FDIC and Under-Capitalized Banks

Here is an interesting Email from a Bank Owner and CEO regarding As of Friday August 14, 2009, FDIC is Bankrupt

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

A comment concerning the FDIC – As of June 30 the rates being charged banks have increased substantially. Risk 1 category went to 12 basis points from 5, risk 2, 17 basis points, risk 3, 35 basis points, and risk 5, 50 basis points. Additionally, a 5 basis point special assessment is being charged on September 30 on total assets less tier 1 capital. It is probable that a second assessment will also be charged in December.

The cost of FDIC insurance for a two hundred million dollar, 1 risk rated bank last year would have been around $8,300 per month or $100,000 per year. It would have been much less in previous years.

For a 5 risk rated bank, which many banks have been moved into, the cost will be $1,100,000 including the 5 basis point assessment being levied in September. While warranted, this will exacerbate the problems and ultimately hasten the death or forced sale of a lot of banks.

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.

It seems to me that the result could be positive with the elimination of worthless banks and the shaking out of a dead system. In other words, a true restructuring that could generate a true recovery.

However, rather than a return to the basics of lending I am concerned that this move will hasten our national race into the abyss of a depression and the further erosion of small business.

For whatever it is worth, I see years of hard work ahead and tough choices to be made if we are to turn the economy around. I am retired but still own some small community banks and can tell you first hand that the small town part of the economy is weakened but hanging on. The average Joe is hurting and scared. Most have never had to worry like this and just don’t know where to turn.

The core small business sector is also under pressure of varying degrees depending on the industry. 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!

Good Banks Pay For Stupidity Of Others

Here is an email from the COO of the same bank.
COO writes:

As of June 30 we went from being charged 5 – 7 basis points to 12. That is the lowest fee being charged. We are in the lowest risk rating category, 1. Risk category 2 is 17 basis points; Risk category 3 is 35 basis points and Risk category is 50 basis points.

On top of the 12 basis points, we are upcharged a little more. The definition of the upcharge fee is: "This FDIC board approved adjustment, applicable to all institutions, reflects the rate differential above or below the base rate schedule."

In other words, it’s another way to get money.

There is a special assessment that will be debited from our account on September 30 also. She could not give me an exact number but she said it is very likely our special assessment would be calculated as 5 basis points on assets minus Tier 1 capital as of June 30, there is no deduction for goodwill or intangibles.

I really hate it that the good banks have to pay for the stupidity of others!

Capital Is The Problem At Virtually All Banks

Here is an interesting followup email from ABO regarding bank capital.

ABO Writes:

I talked to a friend this morning who is retired from both the Federal Reserve of Kansas City and RSM McGladrey. He now does consulting work with the FDIC, due diligence and other regulatory work. He said the picture he is seeing is worse than at any time in his life and CAPITAL is the problem with virtually all banks.

The Next Bubble To Burst

Inquiring minds are reading Next Bubble to Burst Is Banks’ Big Loan Values, an excellent article by Bloomberg columnist Jonathan Weil.

Check out the footnotes to Regions Financial Corp.’s (RF) latest quarterly report, and you’ll see a remarkable disclosure. There, in an easy-to-read chart, the company divulged that the loans on its books as of June 30 were worth $22.8 billion less than what its balance sheet said. The Birmingham, Alabama-based bank’s shareholder equity, by comparison, was just $18.7 billion.

So, if it weren’t for the inflated loan values, Regions’ equity would be less than zero. Meanwhile, the government continues to classify Regions as “well capitalized.”

While Regions may be an extreme example of inflated loan values, it’s not unique. Bank of America Corp. (BAC) said its loans as of June 30 were worth $64.4 billion less than its balance sheet said. The difference represented 58 percent of the company’s Tier 1 common equity, a measure of capital used by regulators that excludes preferred stock and many intangible assets, such as goodwill accumulated through acquisitions of other companies.

Wells Fargo & Co. (WFC) said the fair value of its loans was $34.3 billion less than their book value as of June 30. The bank’s Tier 1 common equity, by comparison, was $47.1 billion.

The disparities in those banks’ loan values grew as the year progressed. Bank of America said the fair-value gap in its loans was $44.6 billion as of Dec. 31. Wells Fargo’s was just $14.2 billion at the end of 2008, less than half what it was six months later. At Regions, it had been $13.2 billion.

A State Of Mind

Weil goes on to say "difference between being well capitalized and woefully undercapitalized may come down to nothing more than some highly paid chief executive’s state of mind."

On the other hand I am sticking to what I said on July 23, 2008 in You Know The Banking System Is Unsound When….

1. Paulson appears on Face The Nation and says "Our banking system is a safe and a sound one." If the banking system was safe and sound, everyone would know it (or at least think it). There would be no need to say it.

2. Paulson says the list of troubled banks "is a very manageable situation". The reality is there are 90 banks on the list of problem banks. Indymac was not one of them until a month before it collapsed. How many other banks will magically appear on the list a month before they collapse?….

23. FDIC Chairman Sheila Bair said the FDIC is looking for ways to shore up its depleted deposit fund, including charging higher premiums on riskier brokered deposits.

24. There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.

25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.

What cannot be paid back will be defaulted on. If you did not know it before, you do now. The entire US banking system is insolvent.

Still like your chances of a V-Shaped Recovery?

Mike "Mish" Shedlock