The FDIC, which insures bank deposits under $100,000, lacks the funds to do its job, Bloomberg News reported. Specifically, it has $45 billion and needs $200 billion. The additional $155 billion it needs may come from the Treasury (or an increase in insurance rates). This means that you need to figure out whether your money is in one of the 100 banks likely to fail (those failed banks should be protected by the FDIC but who needs the aggravation) and get it into a profitable one now.
While big banks have taken $500 billion in write-downs related to financial toxic waste -- the $13 trillion worth of mortgage-backed securities (MBS) and collateralized debt obligations (CDOs), the regional banks covered by the FDIC have been holding back. Unfortunately, they were big players in subprime -- from 2002 to 2007, U.S. lenders originated $2.5 trillion in subprime mortgages -- and it quotes financial analyst Christopher Whalen as estimating that writing these down would end up costing the FDIC at least "$200 billion."
The FDIC seems to be expecting a big increase in bank failures -- it may agree with Whalen who estimates that 100 U.S. banks with $800 billion in assets will fail by the end of 2009 -- since it is staffing up rapidly. The FDIC's Division of Resolutions and Receiverships -- which was formerly the Division of Liquidation when I worked with the FDIC -- has increased its headcount 48% to 331 this year, hiring 178 new financial specialists and recalling 65 retirees for temporary service. What should you do?
Make sure that your bank is profitable and it doesn't accept brokered deposits -- deposits the bank buys from brokers. If your bank is among the profitable ones and is likely to remain so, then you won't need to worry about how the FDIC is going to fund the cleanup efforts for the 100 banks that fail.
And one predictor of failure, besides big net losses and growing provisions for bad loans, is the rate at which a bank is taking on brokered deposits. There are $644 billion worth of such deposits around which enable customers to get around FDIC insurance limits of $100,000 per account. The loophole exists because Washington chose not to limit the number of different banks where a depositor can hold accounts. Banks take on these brokered deposits when they can't get more money from regular customers because those customers are concerned about the bank's finances.
A high level of brokered deposits -- one above 7.5% of total deposits -- is a good predictor of trouble. For example, half of the 12 U.S. banks that have failed so far this year had at least 15% of their customer holdings in brokered deposits, according to Bloomberg. Examples of such failed banks -- with their level of brokered deposits include -- ANB Financial NA of Bentonville, AK (87%), Columbian Bank & Trust Co. of Topeka, KS (44%), and Silver State Bank of Henderson, NV (41%).
So if your bank is losing money, if its provision for loan losses is rising fast, or its rate of brokered deposits tops 7.5%, find a profitable bank and deposit your money there. If 100 banks fail in the next year, that leaves some 8,300 that won't.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
Reader Comments (Page 1 of 1)
9-25-2008 @ 11:00AM
w tim said...
Just pass the bill, tax payers are already in pain. Every business that goes down a tax payers lose a job and there goes another home with new issue. The fight about who's wrong is in the way. The fight to be rite is in the way. Come together pass the bill cut putting America on hold. 700000000000 is a number a repairing number, a number to say we can fix this or get close to fixing it. The money can be allocated once it's out there , however the time is now. Tomorrow is another day and as an Americans, we learn how to fight for life; but the fight for life can come to a end then we are lost of the time we had. No one specific person will gain but the world will be one step forward in where we are going.
The key is looking ahead and not forgetting yesterday.
9-25-2008 @ 11:02AM
Steven said...
And my question all along has been which banks look like they are safe? I bank with Wellsfargo and haven't heard anything bad so I assume I'm safe, but am not certain. Is there a site or article that has information on the banks that are looking good?
9-25-2008 @ 3:56PM
David Maddox said...
A Silver Bullet for the U.S. Housing Crisis (by David Maddox)
The answer? Make new and existing FNMA and FHLMC loans freely assumable.
It's that simple. Making conventional loans assumable would immediately revive our real estate market nationwide.
The problem with our market isn't an excess of sellers, or even a shortage of buyers--it's tight money. When buyer and seller don't need a lender, the transaction can happen quite easily...and it can happen fast.
A real estate market filled with freely assumable mortgages isn't a new experience in the U.S. We enjoyed it through most of the 20th century. VA and FHA loans were freely assumable until 1988 and 1989, a moment in history which happened to coincide with the last great national housing crisis we suffered. Until the late 1960s, even conventional loans could be passed freely from seller to buyer.
Banks had long argued they should be permitted to deny assumability, and reasonably so, because even though the initial borrower remains liable unless released by the lender, a new owner can be an undue burden upon a lender. If he isn't credit-worthy, and abuses consumer protection laws, he can cost a lender substantially by forcing a long foreclosure process. He can also abuse the property. Despite these potential problems, however, foreclosure rates were generally low and both lenders and sellers generally protected themselves by requiring some down payment from purchasers. Courts and legislatures tended to side in favor the public policy advantage of assumability.
As inflation came along in the 1960s and 1970s, however, two things happened. Prices rose, and so did interest rates. Higher prices meant purchasers needed new loans; the balance remaining on the old loans were typically too small to cover their financing needs. This made assumability less important to buyers. Banks, on the other hand, were losing money on low-interest rate loans and wanted them paid off as early as possible. Higher rates induced them to fight much more fervently against assumability, and they finally prevailed.
Since the late 1960s, standard conventional mortgage loans include a "due-on-sale" clause (requiring that the loan be repaid in full upon sale of the property). Lenders have enjoyed the new status quo quite well over the years, as it requires many more frequent mortgage transactions--each of which mean additional fees and more control in the hands of the lender.
Enter a liquidity crisis which drives down home values and triggers run-away foreclosures. Circumstances have reversed. Lenders are now accepting huge losses through negotiated short-sales every day. Far from the happy-go-lucky times of rising markets with refinances every few years (or months), most present-day lenders and investors gladly trade a due-on-sale clause for a re-liquified housing market and all the stability and loss-avoidance that would bring.
This moment provides us all a great opportunity to recoup the simplicity of an earlier era--a time when lengthy mortgage applications weren't even necessary. But it's more than that. Mortgage assumability substantially frees homeowners from lenders, adding permanent liquidity and therefore significant intrinsic value of our entire stock of housing.
Any market which is liquid will trade at higher prices than the same market without liquidity. You'll likely pay more for something you want if you can get it in five days rather than 60. Similarly, you'll likely accept less if someone offers you cash for something you know most people would have a hard time financing. Time and certainty are enormously valuable, and that's what liquidity offers the owner of an asset. We accept a much lower return on a checking account, perhaps nothing at all, because of the almost infinite liquidity it offers. We can get our money out on demand. The harder it is to get our money back out of any investment, the higher return we demand (and/or the lower price we're willing to pay for it).
These aren't odd behaviors. Liquidity adds value because ease of transfer is a powerful attribute for any asset. Warren Buffett won't purchase shares in private companies because they don't carry the benefit of easy sale on the public market. When a private company goes public, shareholders often make dramatic sums because what was formerly illiquid suddenly becomes easily saleable.
The conservatorship which now controls Fannie and Freddie can waive due-on-sale clauses, thereby making most loans in the United States immediately assumable, with little more than a stroke of a pen. In concert with lenders, they can do it without violating anyone's rights or liberties because nothing will be taken away from the borrower. No requirements will be imposed upon sellers; they will simply have an option returned to them which they'd previously lost. Some sellers won't care, insisting for prudence' sake that buyers get new loans, but many will be pleased to sell a house they don't want to a capable buyer who does want and need it but can't, or doesn't want to, for any one of a variety of reasons go through the hoops of procuring a new mortgage loan. The buyer wins, the seller wins, and the public wins. Even the lenders win.
(David Maddox, founder of Cornerstone Mortgage and Foundation Realty, has been an active broker and investor in the mortgage and real estate markets of Northern Virginia for the past thirty years.)
9-25-2008 @ 3:27PM
Brandon said...
http://www.truthout.org/article/mccain-and-pow-cover-up
9-25-2008 @ 3:31PM
DivaEl said...
Steven:
The Weiss Research website www.moneyandmarkets.com offers a free X-List report via e-mail that lists all banks with at least $500 million in deposits in 2 groups based on FDIC reports: those rated B+ or better (they recommend moving your money into them if your bank is rated D+ or worse) and those rated D+ or worse (they recommend moving your money out of them).