Banks In Trouble and the FDIC

Looks like the FDIC is working on a new business plan. Apparently, closing small banks one at a time is inefficient, slow, and probably not adequate given this unofficial list of problem banks. In truth, it is probable that a big bank or two (or three) is being lined up for failure, and Sheila Bair realizes that they don't have the money.

So what will the enterprising FDIC do? Why, borrow money from the treasury, if it gets its way:

WSJ.com: "Federal Deposit Insurance Corp. Chairman Sheila Bair said Tuesday her agency might have to borrow money from the Treasury Department to see it through an expected wave of bank failures.

Ms. Bair said the borrowing could be needed to cover short-term cash-flow pressures caused by reimbursing depositors immediately after the failure of a bank. The borrowed money would be repaid once the assets of that failed bank are sold.

The last time the FDIC borrowed funds from Treasury came at the tail end of the savings-and-loan crisis in the early 1990s after thousands of banks were shuttered."

The NYT tells us that she is certainly expecting the banking crisis to get worse. They mention that 117 banks are on the troubled list, with assets just under $78 billion.

Do you know that $78B / 117 = $666 million per bank on average? If that isn't an obvious sign of what's to come, I don't know what is.

LEH Rearranges The Furniture

I would love to see LEH sell off their mortgage assets to a new company. It would cause a giant mark-to-market, if the investors were truly arms-length:

Bloomberg.com: Worldwide: "Lehman Brothers Holdings Inc. may set up a company funded by outside investors to buy some of its mortgage assets, aiming to dispel concern the firm faces crippling losses, people familiar with the discussions said.

Investors in the new venture would also manage the holdings, which are linked to commercial real estate, the people said, declining to be identified because the proposal hasn't been made public and no decision has been made about how to proceed. The New York-based firm had about $40 billion in commercial-mortgage assets as of May."

My read is that LEH is just about out of options and time. This smells of desperation to me.

Two of my favorite blogs

If you are looking for folks who nailed the housing meltdown well before it was making headlines, then you need to follow thehousingbubbleblog and calculatedrisk. Although there are many good blogs who contributed, these were the two that made it clearest to me that something was amiss.

CalculatedRisk is especially good at spin-free data, like today's Case-Shiller numbers. While a bunch of headlines were trumpeting expectations-beating performance, CR shows the raw data (and the data are not pretty). Even though the number beat expectations by 1.9%, the market seemed to have taken this as a positive.

Frankly, I think that the worst drop in the history of Case-Shiller is terrible news for the solvency of many banks, and beating the expectation by less than the error in the measurement is not cause to run out and buy madly. But that's just me.

As for The Housing Bubble Blog: Ben Jones has a knack for finding regional anecdotes. After reading for a while, you will get a sense of where most of the country is in the meltdown. Ttoday for example:

“Take Holiday. Energized by furious flipping, the median home sales price peaked at $130,000 in early 2006. By the first half of this year, the median price had hunkered down at $75,000. That’s a drop of 42 percent, one of the county’s worst.”

‘It became investor heaven. Now it’s turned into investor hell,’ said Greg Armstrong, president of the West Pasco Board of Realtors. ‘People didn’t want to be left out, but they got burned instead.’

Areas that are not as far along in the meltdown will not have local stories like the above, so it is good information to see what might be coming down the pike.

Dismissing a Rumor

A Korean regulator dismissed dismissed Friday's rumor about he Korean Development Bank buying Lehman.

Korean regulator reportedly warns against buying Lehman: "South Korea's financial regulator on Monday warned the Korean Development Bank should take a cautious approach to buying an overseas bank, following KDB's expression of interest in Lehman Brothers 'In principle, taking over a global investment bank can become an opportunity to raise the capability of the [Korean] investment banking business,' Jun Kwang-woo was quoting as saying by the Financial Times. 'But at the same time, as the risks are also big, KDB should take a cautious approach.'"

Translation: It ain't gonna happen. No how, no way.
So who unwound their position during the rumor pop?

The Law of Unintended Consequences

Freddie and Fannie are now learning the law of unintended consequences. The recent legislation by Congress to backstop these government sponsored enterprises is now interfering with their ability to raise money in the private markets. After all, who would be foolish enough to provide them with more capital when the government now has the right to step in and wipe out stockholders?

Freddie Hunts for Cash - WSJ.com:
"But that effort is running up against what may be an insurmountable hurdle: Many investors fear any money they invest now in Freddie or its main rival, Fannie Mae, will be lost later if the U.S. Treasury bails out the companies through a purchase of equity in them. Investors believe such a purchase would likely involve terms that would wipe out the value of previously issued shares."

Moody's saw fit to pile on this morning too:

Moody's cut the firms' preferred stock ratings to Baa3 from A1 and their bank financial strength ratings to D+ from B-.

Auction Rate Securities Penalties

Strange days in New York state: Their AG has reached a deal with three investment banks for malfeasance in the way ARS were sold:

Merrill, Goldman, Deutsche in deal with regulators: : "New York Attorney General Andrew Cuomo said regulators have reached settlements with Merrill Lynch & Co., Goldman Sachs Group Inc. and Deutsche Bank over their roles in selling risky auction-rate securities to investors.

Under the agreement, Cuomo said, Merrill Lynch will buy back roughly $10 billion to $12 billion of the investments from investors by Jan. 2 and pay a fine of $125 million.

Deutsche Bank, which must buy back about $1 billion of auction-rate securities, has been fined $15 million. Goldman Sachs has $22.5 billion of the securities to buy back, and was fined $1.5 billion.

'This has been a great day of progress,' Cuomo said during a conference call.

Cuomo and other regulators previously reached $42 billion worth of settlements with five major Wall Street banks, including Citigroup Inc. and Switzerland's UBS AG. The attorney general threatened earlier Thursday to sue Merrill Lynch if an agreement was not reached by the end of the day."

DB only pays a penalty of $14M (= wrist slap) for selling $1B of securites, but Goldman pays $1.5B for selling $22.5B of ARS? Remind me: Why does Goldman have a good reputation for negotiation?

Credit Cards Manufacturer Slowdown

In a concrete sign of slower issuance of credit cards: JDSU, who manufacturers the optical films for credit cards blamed its bad quarter in part on reduced orders for coatings.

Tech Trader Daily - Barron’s Online : An Indicator Of Consumer Credit Slump:

"It’s not often a fiber optic company tells you a lot in a direct way about the health of consumer spending. However, I had a fascinating discussion last night with Kevin Kennedy, the CEO of JDSU (JDSU), the $2.4 billion (market cap) maker of lasers and other components used in communications equipment. Part of the company’s business, the “Advanced Optical Division,” consists of coatings used on credit cards. That business, which is 13% of sales, was down about 6% in its fiscal Q4, the company last night reported, contributing to the company missing sales and profit estimates.

Kennedy noted that one of the three largest credit card issuers, a customer of JDSU’s, substantially reduced its issuance of new cards in the June quarter. JDSU has material share in the market for card coatings, so with card delinquencies and charge-offs on the rise, this is yet another meaningful indicator that credit card companies are pulling in their horns, lending less. Just one of the surprising economic tidbits you find from a tech company."