Risk Rap

Rapping About a World at Risk

The Cost of Banking Goes Up

screamThe severity of the banking crisis is evident in the 95 banks the FDIC has closed during 2009. The inordinate amount of bank failures has placed a significant strain on the FDIC insurance fund. The FDIC insurance fund protects bank customers from losing their deposits when the FDIC closes an insolvent bank.

The depletion of the FDIC Insurance fund is accelerating at an alarming rate. At the close of the first quarter, the FDIC bank rescue fund had a balance of $13 billion. Since that time three major bank failures, BankUnited Financial Corp, Colonial BancGroup and Guaranty Financial Group depleted the fund by almost $11 billion. In addition to these three large failures over 50 banks have been closed during the past six months. Total assets in the fund are at its lowest level since the close of the S&L Crisis in 1992. Bank analysts research suggests that FDIC may require $100 billion from the insurance fund to cover the expense of an additional 150 to 200 bank failures they estimate will occur through 2013. This will require massive capital infusions into the FDIC insurance fund. The FDIC’s goal of maintaining confidence in functioning credit markets and a sound banking system may yet face its sternest test.

FDIC Chairwoman Sheila Bair is considering a number of options to recapitalize the fund. The US Treasury has a $100 billion line of credit available to the fund. Ms. Bair is also considering a special assessment on bank capital and may ask banks to prepay FDIC premiums through 2012. The prepay option would raise about $45 billion. The FDIC is also exploring capital infusions from foreign banking institutions, Sovereign Wealth Funds and traditional private equity channels.

Requiring banks to prepay its FDIC insurance premiums will drain economic capital from the industry. The removal of $45 billion dollars may not seem like a large amount but it is a considerable amount of capital that banks will need to withdraw from the credit markets with the prepay option. Think of the impact a targeted lending program of $45 billion to SME’s could achieve to incubate and restore economic growth. Sum2 advocates the establishment of an SME Development Bank to encourage capital formation for SMEs to achieve economic growth.

Adding stress to the industry, banks remain obligated to repay TARP funds they received when the program was enacted last year. To date only a fraction of TARP funds have been repaid. Banks also remain under enormous pressure to curtail overdraft, late payment fees and reduce usurious credit card interest rates. All these factors will place added pressures on banks financial performance. Though historic low interest rates and cost of capital will help to buttress bank profitability, high write offs for bad debt, lower fee income and decreased loan origination will test the patience of bank shareholders. Management will surely respond with a new pallet of transaction and penalty fees to maintain a positive P&L statement. Its like a double taxation for citizens. Consumers saddled with additional tax liabilities to maintain a solvent banking system will also face higher fees  charged y their banks so they can repay the loans extended by the US Treasury to assure a well functioning financial system for the benefit of the republic’s citizenry.

You Tube Music Video: The 5th Dimension, Up Up and Away

Risk: bank failures, regulatory, profitability, political, recession, economic recovery, SME

September 30, 2009 Posted by | banking, business, commerce, economics, government, Hamilton Plan, private equity, regulatory, SME, sovereign wealth funds, TARP, Treasury | , , , , , , , , , , , , , , , , , , , | 2 Comments

Ghost in the McCain Machine

McCain must think he is suffering from déjà vu. Or maybe he thinks he is caught in a 1980’s time warp. Or maybe divine justice is righting the cosmic scales for transgressions from a time long past. The reappearance of a Resolution Trust Corp. (RTC) type agency to deal with the current banking crisis must have McCain cursing the God’s of Commerce for resurrecting this ghostly specter to haunt his presidential electoral campaign.

Flashback to Its Morning in America during the Reagan Administration. The Savings and Loan industry was riding the high economic tide brought on by favorable interest rates and an accommodating regulatory regime. Such ideal conditions incubated a culture of excess, corruption and fraudulent lending. Lincoln Savings and its Chairman Charles Keating conducted illegal business practices. Keating actively courted politicians to run cover and deflect regulatory examinations into its business practices. John McCain was one of five US Senators who received substantial campaign contributions from Keating. The Keating 5 as they became known, tried to deflect regulatory examinations of Lincoln Savings. Keating did the perp walk and became the villainous poster child of the S&L Crisis. The RTC was an agency created by the Federal Government to seize assets of insolvent S&Ls; package and sell those assets to avoid catastrophic economic consequences.

The S&L crisis and the RTC cost the US taxpayer $100B. John McCain will forever be linked to this black stain on the history of capitalism. Its also a strange and ironic Karma as the ghostly apparition of a resurrected RTC rises from the grave to slowly stalk McCain as he reaches for his long sought presidential prize.

Music: The Police, Spirits in a Material World

Risk: Karma, electoral

September 19, 2008 Posted by | banking, credit crisis, McCain, politics, pop | , , , , | Leave a comment