FDIC Is Broke, Taxpayers at Risk, Bair Muses

FDIC Is Broke, Taxpayers at Risk, Bair Muses: Jonathan Weil

Sept. 24 (Bloomberg) -- The FDIC’s insurance fund is going broke, and Sheila Bair is wondering aloud about how to replenish it. This means one thing for taxpayers: Watch your wallets.
Bair, the Federal Deposit Insurance Corp.’s chairman since 2006, says the agency has many options. One way to boost its coffers, now running low after a surge in bank failures, would be to charge banks higher premiums. It could make them pay future assessments in advance. Alternatively, the FDIC could borrow money from the banks it regulates. Or it could borrow from the Treasury, where it has a $500 billion line of credit.

“There’s a philosophical question about the Treasury credit line, whether that is there for losses that we know we will have, or whether it’s there for unexpected emergencies,” Bair said Sept. 18 at a Georgetown University conference in Washington. “This is really a debate for Washington and for banks,” she added.

Far be it from me to intrude on this closed-circuit conversation. The question Bair posed should be a no-brainer. Borrowing taxpayer money to bail out the FDIC should be an option of last resort reserved for unforeseen emergencies. That the agency would consider this now underscores how dire its financial condition has become.

Whatever path it chooses, we shouldn’t lose sight of this: The FDIC has been mismanaged, and its credibility as a regulator is in tatters. Its insurance fund wouldn’t be in this position today if the agency had been run well.

Flipping Out
Bair’s comments last week reminded me of a year-old article by Bloomberg News reporter David Evans, who wrote that the FDIC soon could run out of money and might need a taxpayer bailout by the Treasury Department. Most revealing was the FDIC’s reaction. It flipped out.

The day the story ran, the agency released an open letter to Bloomberg from a spokesman, Andrew Gray. He said the piece “does a serious disservice to your organization and your readers by painting a skewed picture of the FDIC insurance fund.”

Gray said “the insurance fund is in a strong financial position to weather a significant upsurge in bank failures” and that he did not foresee “that taxpayers may have to foot the bill for a ‘bailout.’” He said the fund “is 100 percent industry backed,” and “our ability to raise premiums essentially means that the capital of the entire banking industry -- that’s $1.3 trillion -- is available for support.”

Tapping Capital
If needed, he said, the FDIC could borrow from the Treasury, noting that the funds by law would have to “be paid back from industry assessments.” He stressed the FDIC had done this only once. It happened in the early 1990s, and the money was repaid with interest in less than two years.

Gray told me this week that he stands by his earlier remarks. His notion that the FDIC could tap the capital of the entire banking industry still baffles me. While hypothetically this might be true, I doubt all $1.3 trillion would be available in any practical sense.

The FDIC said its insurance fund’s assets exceeded liabilities by $10.4 billion, a mere 0.22 percent of insured deposits, as of June 30. The liabilities included $32 billion of reserves the FDIC had set aside to cover bank failures that it believed were likely to occur during the next 12 months.

As recently as March 31, 2008, the FDIC had earmarked just $583 million of reserves for future failures. This was after the rest of the financial world already knew we were in a crisis. By the end of 2008, it had boosted these reserves to $24 billion.

Projected Losses
The balance-sheet reserves don’t capture all the insurance fund’s anticipated losses. In May, the FDIC said it was projecting $70 billion of losses during the next five years due to bank failures. The agency said it expects most of those collapses to occur in 2009 and 2010.

The FDIC’s problem is that it didn’t collect enough revenue over the years to cover today’s losses. The blame lies partly with Congress. Until the law was changed in 2006, the FDIC was barred from charging premiums to banks that it classified as well-capitalized and well-managed. Consequently, the vast majority of banks weren’t paying anything for deposit insurance.

Of course, we now know it means nothing when the FDIC or any other regulator labels a bank “well-capitalized.” Most banks that failed during this crisis were considered well- capitalized just before their failure. After the law changed, the FDIC still didn’t charge enough premiums.

So far this year, 94 banks have been shut, the fastest pace in almost two decades. Hundreds of others are in trouble. The FDIC said 416 banks were on its “problem” list, a 15-year high, as of June 30. That was up from 305 three months earlier.

Regardless of the law’s requirements, if the FDIC starts tapping its credit line at the Treasury, there can be no assurance it would be able to pay back all the money through future assessments on banks. That’s why it should be reluctant to borrow from taxpayers now, even though the banking industry whines that it can’t afford any short-term cost increases.

At the rate it’s going, though, the FDIC may not have a choice much longer. Perhaps Bair and the FDIC someday might see fit to deliver a full account of how the agency managed to mess itself up this badly. The country deserves an explanation.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net


Last Updated: September 23, 2009 21:00 EDT

Nick Vujicic is a giant of a man

Don't tell other you not lucky, no opportunity, no one help me...

Alan Grayson: Is Anyone Minding the Store at the Federal Reserve?

Alan Mark Grayson (born March 13, 1958 in Bronx, New York) is the Democratic Congressman in Florida's 8th congressional district. The district includes just over half of Orlando, as well as Celebration, Walt Disney World and part of Ocala. He defeated four-term incumbent Republican Ric Keller in the 2008 congressional election. I can see there is a lot talking but any action done...? I seriously hope there is...

Friday’s Food For Fear

Interesting article from my mentor... (pls click on title to re-direct) RESPECT him...

Gerald Celente : Revolution next for U.S.

Extract from wikipedia:- Gerald Celente (born November 29, 1946) is a United States trend forecaster,publisher of the Trends Journal, business consultant and author who makes predictions about the global financial markets and other events of historical importance. An article in the Washington Times has claimed "Celente's accurate forecasts include the 1987 stock market crash, the collapse of the Soviet Union in 1991, the 1997 Asian currency crash" and "the 2007 subprime mortgage scandal." His forecasts since 1993 have included predictions about terrorism, economic collapses and war. More recent forecasts involve fascism in the United States, food riots and tax revolts. Celente has long predicted global anti-Americanism, a failing economy and immigration woes in the US. In December 2007 Celente wrote, "Failing banks, busted brokerages, toppled corporate giants, bankrupt cities, states in default, foreign creditors cashing out of US securities ... whatever the spark, the stage is set for panic in the streets" and "Just as the Twin Towers collapsed from the top down, so too will the US economy ... when the giant firms fall, they’ll crush the man on the street." He has also predicted tax revolts. In November 2008 Celente appeared on Fox Business Network and predicted economic depression, tax rebellions and food riots in the United States by 2012. Celente also predicted an "economic 9/11" and a "panic of 2008." In 2009 Celente predicted turmoil which he described as "Obamageddon" and he was a popular guest on conservative cable-TV shows such as Fox News Sunday and Glenn Beck's news program. In April 2009 Celente wrote, "Wall Street controls our financial lives; the media manipulates our minds. These systems cannot be changed from within. There is no alternative. Without a revolution, these institutions will bankrupt the country, keep fighting failed wars, start new ones, and hold us in perpetual intellectual subjugation."He appeared on the Fox/Glenn Beck show and criticized the US stimulus plan, calling government controlled capitalism "fascism" and saying shopping malls in the US would become "ghost malls."Celente has said, "smaller communities, the smaller groups, the smaller states, the more self-sustaining communities, will 'weather the crisis in style' as big cities and hypertrophic suburbias descend into misery and conflict," and forecasts "a downsizing of America."

10 Small Caps With High “Insider Ownership”

By Marc Norton on September 16, 2009 More Posts By Marc Norton Author's Website

All 10 stocks mentioned below offer double digit rates of return on equity as well as assets. ROE is a corporations measurement of how profitable the company is with the money shareholders have invested. ROA shows how efficient management is at using its assets to generate earnings. All ten are trading at reasonable P/E ratios. All 10 mentioned have current ratios above 1.9, any thing above 1.5 shows that the company is capable at paying back short term debt. All 10 have a large inside ownership with modest to low debt and free cash flow, with each paying a dividend.

* Deep Value Investor Seth Klarman of The Baupost Group holds 8.49 million shares of BreitBurn Energy which accounts for over 16% of the stock.

Alice Schroeder, author of "The Snowball: Warren Buffett"

Sooner Rather Than Later

Posted by Conrad June 12, 2009 http://www.conradalvinlim.com/?p=1103 You enter a trade. It goes well for the first few moments. Then without warning, it turns and goes the wrong way! Horror of horrors! Now in the heat of the moment, you battle your wits for the best decision to make as the trade gets worse … cut now? … or wait a while more? The same thing happened last month. You decided to cut your losses fast. And as soon as you did, the trade turned around and went on to be a big winner had you not cut and run.

• “Why didn’t you wait?”
• “Why were you so hasty?”

Then last week, the same thing happened again and being smarter, you decided to hold out. The trade continued losing. The longer you held it, the more you lost. But you knew then that as soon as you cut your loss, it would have turned around. So you held on and the losses kept mounting.

• “Why didn’t I cut sooner?”
• “Why did I hold on for so long?”

By the time you made that cut, the loss was insurmountable. And the trade turned around right after the cut. Let’s resign ourselves to one fact; Whatever the decision, it will always be the wrong one. So a simple lesson in this is that if we are going to make a decision, it WILL always be the wrong one. Cutting losses fast will return the trade. Cutting too late will continue the trend. What ever you decide, the market is going to take the mickey out of you. So to overcome this dilemma, ask yourself a simple question: “Is it better to make the wrong decision sooner or later?” The answer is obvious, isn’t it? I don’t know why anyone, in their right mind, would want to prolong an agony. If any decision you make is going to be the wrong one, then get it over and done with it quickly. Here’s another line of logic … You know that the moment you cut, the trade will return. So why don’t you cut it quickly and be ready for another entry as soon as the trade returns? (okay, that is speculative … but it works for the psychology!) At least it is obviously better than running the losses deeper. Likewise, you know that you are always going to take profit too early. So what can you do? Answer: Make the wrong decision early because making it too late will surely eat away your profits or could even end up with profits becoming losses. But in profit taking, you do have the advantage of taking some profit and leaving some to be greedy. It is always a good way to manage your profits. Take it when you have it but do it in stages. For example, if you have 10 lots long and they’re making some money, take half off the table when you reach your time/profit target. Let the remaining five lots run. The worst that can happen now is you can still get out at break-even if the trade turns against you. If the 5 remaining lots continue the profitable trend, when the trade hits a resistance, or if it stalls, take three more lots of the table and see what happens to the last two. At this point in time, you’ll have no fear and nothing but greed to manage. Should the remaining two lots reverse, your worst case scenario is that you can still get out at breakeven on those two lots and still get to keep the profits of the first eight lots. In a best case scenario, you are now in a position to put on a trailing stop and let the profits of the last two run to the sky. So avoid procrastinating on your trading decision. Make it quick, make it sensible and make it happen … make it sooner and never later. Moral of the story is that in Trading, it is NOT “better late than never” because in Trading, late is as good as never.

A Stock Market Crash Is Coming...?

By KhronoStock on August 7, 2009 More Posts By KhronoStock Author's Website A lot of commentators have begun heralding a new bull market in stocks. Day after day, I hear that March was THE bottom, that the next bull market has begun, and that anyone betting on another collapse is a moron. These claims are not only wrong, they are completely misleading and should be depicted for what they are: nonsensical hype from sources with conflicted interests - folks whose jobs and income stem largely from people remaining bullish. More often than not, these are the same guys who claimed that Bear Stearns marked the end of the Financial Crisis (how’d that work out?) and that the Federal Reserve can pump our way back into a bull market (how’s that working out?). The reason this is entirely wrong is because this recession is not your average run of the mill excess inventory recession: the kind of economic contraction we’ve experienced post-WWII. No, this is a DE-flationary debt collapse, a bursting of a 30-year credit bubble that papered over enormous drops in real incomes, standards of living, and financial stability. The private sector hit a point of total debt saturation in 2007 This recession so far has been the first taste of DE-flation the US has experienced since the ‘30s. Comparing it to every other post-WWII recession is like comparing apples and oranges. A debt bubble cannot be re-flated by issuing more debt. A second-grader can understand this. I don’t know why guys with PhDs, alleged experts, and the like don’t get it. For 30 years, our economy grew by borrowing from the future. I mean that the US’s economic growth was funded largely by the use of credit: borrowings that would be paid back down the road. In simple terms, the economy grew based on imaginary, not REAL demand. We pulled forward future sales of cars, TVs, homes, and the like. By using credit, we bought things NOW, that we would have normally bought LATER. This pulled future sales, future corporate earnings, future incomes, and future economic growth to the NOW through the ‘70s, ‘80s, and ‘90s. So instead of having a safe, annual rate of consumer spending growth (say 4-5%), we saw double digit rates of growth: for example, between 1980 and 1990, credit card spending increased more than five-fold while average household credit card balances quadrupled. That’s NOT normal. This led to the single largest debt bubble in history ($49 trillion in private sector debt and $50+ trillion in public sector debt). And a debt bubble can continue until you can no longer meet debt payments. The private sector hit its “debt wall” in 2007. The public sector continues to grow its debts, creating an even larger bubble that will have even worse consequences. Now, as you know, there are only two ways of dealing with a debt problem: 1) Paying it off 2) Defaulting. The US consumer has begun both. From February to May of this year we paid off $45 billion in credit card debt. Consumer credit contracted $3.3 billion in May, the fourth consecutive monthly decline (this makes our current credit contraction the longest running since 1991). And we’re just getting started… Total consumer debt at the bubble’s peak was $2.57 trillion (the other $46 trillion was corporate). So the fact we’ve paid off about $50 billion of this means Joe America has a LOT more (98%) debt to pay back and default on before he’s finished de-leveraging his balance sheet. Folks, we’ve got a long, LONG ways to go before this crisis and Crash are over. Anyone who’s telling you the bear market is over either isn’t looking at the data or is basing their analysis on “a gut feeling” or some other nonsense. They’re all going to get destroyed this fall. Above, we detailed the difference between this current economic contraction, and your usual run of the mill plain vanilla recessions. We also went over the MASSIVE consumer credit contraction that needs to occur before American households have finished de-leveraging. Now, we’re detailing why stocks will crash this coming fall. As you know, the media is rife with folks calling the end of the recession and the beginning of a new bull market. It’s clear to me that this is a load of nonsense. I’ll show you why. Because a lot of the alleged “analysis” that is backing up the bulls’ claims of a new bull market comes from technical analysis and charts, I’m presenting the below chart from David Rosenberg of Gluskin Shef. It charts today’s bear market over that of 1929-1932. As you can see, today’s bear market is mirroring that of the ‘30s almost to perfection. Indeed, the correlation between the two charts is an incredible 0.8, meaning it’s 4/5ths perfect. In finance, you’re lucky if you get a correlation above 0.6. (gold and the dollar are only 0.28 inversely correlated). A 0.8 correlation is virtually unheard of. But that’s exactly how closely today’s market is mirroring that of the ‘30s. I can’t take full credit for this insight. Ron Coby, an investment manager at Coby Lamson in Oregon, first started pointing out the similarities between this market and that of 1929 back in February ‘09. No one wanted to listen to him then. They’re listening now. Coby notes that from October 29, 1929 until November 13, 1929, the stock market collapsed 49% (2008’s was 52%). Ron points out that the market then staged a 155-day rally of 50%. Today’s rally (starting in March ‘09) has lasted 150 days and the market is up an average of 50% (average of Nasdaq, DJIA, and S&P 500). Unfortunately for the bulls today, the 1929 market then rolled over and collapsed another 70%. “Bottom callers” INCLUDING legends like Jesse Livermore, Benjamin Graham and others bought ALL THE WAY DOWN, losing entire fortunes. Ok, so the charts for today and 1929 are identical, what about the earnings? After all, profits are ultimately what drive the stock market: you buy based on expected future earnings of the companies. Earnings today are even lower than they were in the ‘30s during the Great Depression. They’ve fallen 98% from their peak in 2007. Adjusted for inflation, stocks have NEVER been this unprofitable in the last 80 years. The US was already in a recession in 2008. And 2Q09 profits are actually down 31% even from THAT. Indeed, based on ACTUAL posted earnings, the S&P 500 is trading at a P/E of 700 today. Even if you go by operating earnings the multiple is still 24: hardly cheap. Looking over this, I can’t see where any claims of a “bull market” are coming from. The people who are saying today is a new bull market probably went long Tech Stocks in 2001, Housing in 2006, and Financials in 2008. In light of the rampant bullishness, the parabolic rally in the S&P 500, the horrific earnings, and the similarity between today’s rally and that of 1929, I believe the likelihood of another Crash (like 2008) is quite high. In fact, I would not be surprised to see stocks collapse within the next eight weeks.

Jesse Livermore, The Great Legendary Stock Operator

http://www.retirerichblog.com/2009/08/jesse-livermore-great-legendary-stock.html During his lifetime, Livermore gained and lost several multi-million dollar fortunes. Most notably, he was worth $3 million and $100 million after the 1907 and 1929 market crashes, respectively. He subsequently lost both fortunes. Apart from his success as a securities speculator, Livermore left traders a working philosophy for trading securities that emphasizes increasing the size of one's position as it goes in the right direction and cutting losses quickly. Livermore sometimes did not follow his own rules strictly. He claimed that his lack of adherence to his own rules was the main reason for his losses after making his 1907 and 1929 fortunes. The popular book Reminiscences of a Stock Operator, by Edwin Lefevre, reflects many of those lessons. Livermore himself wrote a less widely read book, "How to trade in stocks; the Livermore formula for combining time element and price". It was published in 1940, the same year he committed suicide. "Cash was, is, and always will be - king. Always have cash in reserve. Cash is the ammunition in your gun. My biggest mistake was not in following this rule more often. Time is not money because there may be times when your money should be inactive... Often money that is just sitting can be later moved into the right situation and make a fortune. Patience-Patience-Patience. Patience was the key to success - Don't be in a hurry." - Jesse Livermore. How To Trade In Stocks, 1940."I have suggested to people who are interested in the stock market that they carry around a small notebook, keep notes on interesting general market information, and perhaps develop their own stock market trading strategy. I always suggest that the first thing they write down in their little notebooks should be: 'Beware of inside information- all inside information!' " "The stock market must be studied, not casually, but deeply, and thoroughly. It's my conclusion that most people pay more attention to the purchase of an appliance for their house, or when buying a car, than they do to the purchase of stocks. The stock market , with its allure of easy money and fast action, induces people into foolishness and the careless handling of their hard earned money, like no other entity."

United States GDP Growth Rate

From http://www.retirerichblog.com/2009/08/united-states-gdp-growth-rate.html http://www.retirerichblog.com/2009/04/unemployment-chart-monthly-statistics.html United States GDP Growth rate 2008 Mar +2% 2008 Jun +1.6% 2008 Sept 0% 2008 Dec -1.9% 2009 Mar -3.3% 2009 Jun -3.9% Unemployment Chart Monthly Statistics 2007-07 4.60 2007-08 4.60 2007-09 4.70 2007-10 4.70 2007-11 4.70 2007-12 5.00 2008-01 4.90 2008-02 4.80 2008-03 5.10 2008-04 5.00 2008-05 5.50 2008-06 5.50 2008-07 5.70 2008-08 6.10 2008-09 6.10 2008-10 6.50 2008-11 6.70 2008-12 7.20 2009-01 7.60 Obama 2009-02 8.10 2009-03 8.50 13M now jobless 2009-04 8.90 2009-05 9.40 2009-06 9.50