FDIC Swan Song: 8 Banks a Week

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The FDIC closed down eight banks last week bringing this year's total to 118 so far. Included in this week's closures was the notorious ShoreBank in Chicago. In a separate report, the U.S. Treasury has disclosed that the Obama administration's HAMP (Home Affordable Mortgage Program) seems to be rapidly falling apart. This could further weaken the U.S. banking system.

The FDIC is operating on both borrowed time and borrowed money. This agency is the bulwark protecting American's savings in the case of failed banks, but the FDIC itself is close to going broke. The eight closures this week alone cost the FDIC’s deposit-insurance fund $473.5 million. The deposit insurance fund was already $20.9 billion in the hole at the end of the fourth quarter in 2009. In order to plug the hole and keep going, the FDIC in December forced banks to prepay three years of insurance premiums and raised about $45 billion by doing so. That money had to pay off the deficit already accumulated and then last for the next 156 months of bailouts. There have been weeks this year when the FDIC has had to shell out close to $1 billion for bank rescues. That $45 billion isn't going to last much longer.

ShoreBank was the most significant bailout this week. The bank was founded in the South Side of Chicago in 1973 and was the nation's first community development and environmental bank. Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS), Citigroup (C), Bank of America (BAC), American Express (AXP), GE Capital (GE), and Wells Fargo (WFC) were investors. The bank has indirect ties to a number of members of the Obama administration. The bank was under a cease-and-desist order from the FDIC for more than a year before it was finally closed down. Its remaining assets will be transferred to a newly created corporation, Urban Partnership Bank. Some of the same executives from ShoreBank will be running this newly chartered bank (once they drive Urban Partnership Bank into the ground, it too will be bailed out). It looks like the investments of the too-big-to-fail, or even lose any money, big bank funders will also be protected under this arrangement by transferring them to Urban Partnership Bank.

Meanwhile, the poorly thought out and even more poorly run HAMP program is not making a big dent in slowing foreclosures. Nearly half of the 1.3 million homeowners who enrolled in the Obama administration's flagship mortgage-relief program have already fallen or more likely been pushed out. Mortgage holders blame the banks for not cooperating and banks blame the mortgage holders. According to RealtyTrac, the nation is headed toward more than one million foreclosures this year - a higher amount than the 900,000 homes repossessed in 2009. Boy, HAMP is certainly doing a great job in significantly reducing the number of foreclosures. Well, I guess it's just too much too expect that something will be accomplished for only $75 billion in taxpayer money.

Based on this week's events, I have written the following theme song for the FDIC (maybe Sheila Blair will sing it at the next board meeting) to be sung to the tune of the Beatles 'Eight Days a Week':

Oh I'll bail out your bank babe,
Guess you know it's through,
Hope you like the money banker,
When I'm funding you,
Spent it, Lost it, Pay Me, Save Me
Don't do nothing but bailouts,
Eight banks a week


Disclosure: No positions

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Meltdown Microcosm - U.S Future Can be Seen in Iceland Today

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

What happens when you create an economy based on the shaky foundation of foreign debt? While this sounds like a question about the U.S. economy, it is actually something that has been asked recently about Iceland. While the U.S economy has been built on foreign borrowing for about 25 years, Iceland only pursued this course of action after the mid-1990s and it is already experiencing a financial meltdown. Things are so bad that the country itself risks bankruptcy. In response to the crisis, draconian emergency powers, which would be the envy of any totalitarian state, have been granted to the authorities. The currency no longer floats, some stock trading has been suspended and banks are closed. Want to get access to your money or get it out of the country? Lot's of luck.

The rot in Iceland's financial system that has built up over the years was hardly a secret. The top four banks in Iceland have liabilities greater than $100 billion, while the entire GDP is only $14 billion. However, unlike much of the rest of Europe and the United States, Iceland banks do not own toxic mortgage securities. The problem instead is simply one of too much leverage (the U.S. also has this problem). Heavily exposed banks are collapsing under the weight of debts incurred during the 2000's lending boom, which artificially increased the average citizens wealth 45% in only five years. While all highly leveraged enterprises will inevitably fail, the Icelandic government still refuses to admit this is the cause of the country's problems. The prime minister has claimed that the "banks were victims of external circumstances". Governments throughout history have of course always blamed external (and frequently internal) forces for economic calamities and never their own policy failures and mistakes. Iceland is no different, nor is the U.S.

While the financial bubble developed over many years in Iceland, the final decline has been sudden. The surprise nationalization of Glitnir, the nation's third largest bank, a week ago precipitated a large drop in stocks prices and a plummeting currency. It order to stabilize the krona, the government stopped its convertibility and fixed the exchange rate to 175 per dollar. Stock trading was also suspended. To avoid capital flight, banks were closed down. Emergency powers were given to the government that allows it to take over any company, limit the authority of boards of directors, and to call shareholder meetings at will. If this sounds like communism, that's because it is. And all this is happening in a country with a democratic history going back to 930 when the national parliament, the Althing, was established.

Any American that thinks that similar things can't happen in the United States is being naive. In desperate times, governments take desperate actions. The U.S. government after all confiscated gold and closed down all the banks in the 1930s to help stabilize the economy. This time around, AIG Fannie Mae, and Freddie Mac have already been nationalized by the formerly capitalist U.S. government. Treasury Secretary Paulson stated only yesterday that partial nationalization of banks was an option under the Wall Street bailout bill. Just like in Iceland, governments shut banks, stock trading is suspended, and currency is frozen during a financial crisis. Democratic states can become totalitarian and capitalism can transform overnight to socialism. If you haven't prepared for these developments beforehand, it will be too late to do so once they actually occur.

NEXT: Will Double Digit Crashes Follow Triple Digit Losses?

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.