Take Downs and Drawing the Wrong Straw

July 12, 2008

The FDIC take down of IndyMac has occurred. This bank had $19.06 billion in deposits, and from the FDIC site it looks like the insurance pool will eat $4-8 billion on this one. With about $52 billion in FDIC reserves on hand, we can get some idea of the possible burn rate as this process unfolds with other banks.

From Aaron Krowne’s Bank Implode-Meter comes a comment about IndyMac defaulted homebuilder loans, and the problems and costs associated with half constructed housing projects. Aaron also offers some comments on Wachovia who appears to have brought in a Paulsen crony from Goldman Sachs. This is probably significant to my general theory that the last six months of the Bush administration will mark one of the greatest periods of systematic looting in American history. Never again will so many assets be handed off to regulators and corrupt apparatcheks for “distribution” to the privileged. This may make the “privatization” of the Soviet Union to Russian oligarchs look like a cake walk. Aaron also mentions that fact that JP Morgan will likely make a move in the Southeast. Wachovia? Maybe, but there are also a slew of smaller regional banks in that region too.

In asking the question of who gets looted and who gets the distressed pickings, I think it is important to consider who is most exposed. The answer is the investment banks who have thin capital bases relative to their fictitious capital holdings and obligations. The biggest plum of all are the assets of GSE’s Fannie Mae and Freddie Mac. Therefore I think we are going to see them dropping one by one like flies. And it really does look like the next crisis is Lehman Brothers. It is not that LEH is terribly more exposed than the others, it’s just that they apparently drew the wrong straw. I will also mention that with enormous amounts of wealth already transferred to oil sheiks and Asians that you can look for them to be the new owners of many marked down American assets. They have the purse, and the only nationality or race that is important is the green. You can count on that as much as you can count on the sun going down at night. Follow that ball.

Source: Reggie Middleton


I believe the pile on and stealing of American banks will happen at a very rapid pace, maybe even within just a few weeks. It really has to be a done deal by the end of this year. The events that tipped me off were wholesale downgrades of virtually all regional banks by Goldman Sachs, Citicorp and a chorus of lacky lapdogs in June. In addition the old Risklove rabble is running stock prices of banks into the ground with extremely aggressive short selling. For example short positions as % of float on June 15, (probably even higher now) : FHN 25.8%, CNB 36.3%, NCC 20.4%, SNV 19%, RF 12.3%, And now as if problems didn’t exist before, there is suddenly a panic recognition phase about Fannie Mae and Freddie Mac. What a coincidence! And what a coincidence that the overdue closure of IndyMac occurred this week. And next week we get a slew of 2nd quarter bank reports.

Allow me to give you a quick simplified primer (we can get more anal in the comments if you wish) on banks. Banking is a great business in almost all times. That is why I am convinced the great monied interests are lathered up for a crisis about now and before Paulsen and his lapdog Bush leaves office. A generic bank takes cheap deposits, lends to credit worthy businesses and Gente, and collects a spread of say 3-3.5%, minus operating expenses, netting out around 2.8%. Just using rounded numbers, for each dollar of capital skin in the game, they can take in deposits of $10, and make loans, and net out 28 cents against the Skin. Losses are then subtracted off, and the remaining profit is added to the Skin. If losses are running higher than previously anticipated (universal now) than it is reserved for and taken off of Skin.

In a banking crisis it is important to look at potential losses. One way to ball park whether the Skin shareholders are going down or to what degree they will be diluted is called the Texas ratio. This takes non-performing loans divided into tangible equity capital plus loan loss reserves. It is important to recognize that a non-performing loan is not a complete loss. Recoveries are a complete topic in and of itself, that I will attempt to shed light on as this phase unfolds. There are recoveries especially on mortgages. Figure that a Texas ratio of 50% jeopardizes not only all the profit of banking, but also damages the leverage capital that is needed to exist as a bank. That bank will need to quickly raise capital (preferred or common equity) to make that up, and right now the ability to do so is severe constrained even for more solid lower Texas ratio banks. The other method is as ominous, reduce or liquidate loans to bring in line with depleted capital.


We are about to get quite a snap shot of American banking conditions at mid-year, buckle your seat belts. If there is interest, I am available to respond to and develop more discussion on this specific topic all weekend. I am going to ask that all comments on today’s post be directly related to this topic.

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