Banks, Cash & Labor Day

Author: David Kotok, Post Date: September 1, 2008

Labor Day weekend started with another bank failure; this time in Georgia.  That is number 10 for the year.  Another few hundred million is lost by the Federal Deposit Insurance Corporation (FDIC) fund as a billion-dollar, five-branch bank disappears. 

The weekend also saw a few of us back at Leen’s Lodge in Maine, talking informally about how far this credit market crisis has to go before it hits bottom.  None of us are misled by the 2nd quarter GDP number, which had a “puff” because of inventories and which also reflected the federal stimulus package. 

We expect the rest of the year to be bleak.  The list of problem areas is well known.  We won’t dwell on housing or autos or the related consumer areas or energy costs (Gustav added).  Let’s get right to the banks.

Despite some earlier media reports that IndyMac was on the first-quarter FDIC problem bank list, we disagree with that conclusion.  The first-quarter list had 90 banks, according to the FDIC.  The asset size of the total 90 banks was $26.3 billion.  IndyMac was a $32 billion failure.  Therefore we conclude that it wasn’t on the list.

That means a $32 billion failure went from not making the list to an FDIC loss of billions in about 100 days.  Remember that the FDIC keeps the list confidential.  They fear giving out the names on the list would trigger runs on those banks.  They are probably correct.

At the end of the 2nd quarter the list was enlarged to 117 banks.  IndyMac’s actual failure happened in July, so it will end up reported as a 3rd-quarter event.  It was one of the 117 banks listed on June 30th.  The Office of Thrift Supervision (OTS) has disclosed that.

Some analysts speculate that the OTS didn’t put a $32 billion bank on the list because it would have triggered a market search for potential large bank failures.  OTS denies that.  They only say that they were not finished examining IndyMac, so they didn’t list it.  We believe the OTS but many do not.  Conspiracy theories are impossible to prove.  Even if they do alter timing of list placement, the OTS cannot admit they manipulate the timing of the list to avoid market-based runs on banks. 

Our conclusion is that the FDIC list is an indicator of trend but gives us little guidance about how big the bank failure problem will become.  Our second conclusion is that we are still in the early stages of bank failures.  We agree with our friend Chris Whalen, a skilled bank analyst who projects the trouble bank list will be in the hundreds and the asset size in the many hundred billions. 

To quote the great economist Yogi Berra: “It ain’t over till it’s over.”  Stock market complacency about the financials hitting a bottom in mid-July is about to be sorely tested as we enter autumn. 

September can be a particularly treacherous month.  History suggests a cash reserve is wise when Labor Day weekend concludes. At Cumberland we leave the Labor Day weekend behind with one in place in our ETF accounts.

Special thanks to David Ellis of CNN for FDIC data.

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