Sheila Bair is proactively managing expectations for all concerned, those being politicians, regulators, bankers, and consumers. In fact, if she did not highlight the current state of the FDIC reserve fund and expectations for future declines, she would not be fulfilling her obligations.

The FDIC is funded by making assessments on all the banks throughout the country. With those assessments assuredly headed much higher, bank earnings will be dramatically impacted this year. In fact, analysts believe that many banks’ earnings will decline by anywhere from 50% to 100%!! The smaller community banks are enraged by the prospects of higher assessments given that many if not most of these banks managed their businesses with appropriate risk controls.

Read the rest ->

While taxpayers do not directly fund the FDIC, the fees incurred by member banks will be passed along to consumers in the form of increased charges on every transaction. If you feel like you are getting “nickeled and dimed” to death it is due to these increased FDIC assessments.

In light of this situation, what is one to do? First and foremost, make sure you do not have any deposits over the FDIC insured deposit limit of $250k at any one institution. The FDIC website has a wealth of information including an online estimator to assist you in calculating your FDIC insurance coverage. Additionally, proactively manage your finances so you can minimize your banking needs. I continue to encourage people to shop around for your banking needs, as well as for insurance and all other financial needs. Credit unions remain a great alternative to many traditional banks.

LD

It was only a matter of time before the losses embedded in our banking system caught up and surpassed the capital injected. As such, our politicians and bankers are now forced to be somewhat honest with the public at large.

At long last the “news” is out: there’s another expected $1 trillion in embedded losses in our banking system. I have tried to judiciously, but clearly, highlight that very fact here at NQ over the last three months. In today’s WSJ:

Goldman Sachs economists estimate that financial institutions and investors world-wide will ultimately realize $2 trillion in losses on U.S. loans, but have recognized only half those losses so far. That scares investors who might otherwise give banks needed capital, and makes banks reluctant to make new loans. Regulators say they worry that the only remaining source of capital for banks is the government.

While I know a few readers here at NQ, blogs are generally anonymous communities. Given the nature of my writings, a month or so ago I realized it would be more effective and compelling if I opened myself to public criticism if warranted. For that reason, I went from identifying myself as LD to Larry Doyle. For those who know me, I think they would say that I am a very competitive, honest, and humble individual. I’d like to think that I am. That said, I have plenty of shortcomings. As we look to grow our audience and community, I beg your indulgence as I retrace the posts since I started writing in mid-October in which we wrote about these massive unrealized but embedded losses. We’re all about sharing here, so please pass this along to your friends. We’ll try to stay ahead of the curve for you. ~LD

Without further adieu . . .

The Economy – What Lies Ahead (October 14, 2008)

This injection of capital will not necessarily fully flow through to the economy. The banking system here in the U.S. likely has $1 trillion in embedded losses. This plan is trying to buy time for the system to recognize those losses. The recognition of those losses will curtail future growth for the banking system and the economy as a whole.

Economic/Market Highlights 10/16 (October 16, 2008)

Remember the overall banking system has upwards of $1 trillion in losses that need to be recognized. Both Citi and Merrill know this and have pre-announced that they do not expect to show a profitable quarter in the near future.

McCain/Palin’s Economic Stimulus Plan (October 23, 2008)

. . . what these steps have done is buy time so that the banking system can generate revenues over the next few years to both write down and realize losses that are currently on their books, but which if were currently acknowledged would have rendered certain banks as already bankrupt.

Markets Selloff 10% Overnight (October 24, 2008)

In the midst of all this though, please remember that as I have tried to highlight, that there are likely $1 trillion in embedded losses in the banking system. That bill must be paid.

The Wall St. Model is Broken … and Won’t Soon be Fixed!! (November 12, 2008)

The losses in the banking system alone are upwards of $1 trillion. From there let’s move into insurance companies, hedge funds et al. Paulson, Sheila Baer, Bernanke and others know that any money that goes into the system is purely going to help the banks recapitalize themselves in the face of these losses.

When Barney Frank, Nancy Pelosi, and Barack Obama complain that they need to make sure that credit lines open and remain open, they are not addressing the fact that the banks have an overwhelming amount of non-performing assets already and that those assets are likely going to grow in the face of an unemployment rate headed up by 2% to 4%!!

Economic/Market Highlights 11/12 (November 13, 2008)

Transparency
I had an exchange with a reader as to why the government is not revealing which banks have been participating in certain specific programs launched over the last few months. I made the case that the government is trying to protect the participating banks and in turn the taxpayers by not revealing the names.

The reader responded as to why and how could he ever invest in a bank. That is a very good point, investing in banks now is a much higher risk proposition because one does not know just how deep losses are in individual banks. Who does know?? Hank Paulson knows and he does not want to reveal those figures because they would further spook the markets.

“The Greatest Generation”…… (November 14, 2008)

The TARP bailout/rescue plan proposed to date has not inspired confidence nor generated any real impact for three reasons:

1. the banks have such sizable embedded losses that the funds already injected are being and will be used to recapitalize the balance sheets …

Economic/Market Highlights 11/17 (November 17, 2008)

Markets read this as a further indication that losses are so deeply embedded in the system that only time and “private money” can truly bring needed change. But how does “private money” receive incentive to enter the market?

Economic/Market Highlights 11/19…The Pain Increases!! (November 20, 2008)

Neither Paulson nor Congress nor anybody in Washington or Wall St. will tell you that the system has trillions in embedded losses but they do and our markets know it and are showing it by their prices.

“IT’S EASY TO FIND FAULT…especially if you’re clueless!! (December 11, 2008)

It keeps getting back, though, to the fact that the current situation as well as our future situation under any reasonable economic scenarios highlight the fact that the Wall St. banks are sitting on enormous embedded losses and expected future losses (continued increasing defaults on residential mortgages, credit cards, commercial loans, corporate loans). The money is not flowing through because:
banks need to replenish capital against these losses.

“Where’s The Money??….!!” (December 29, 2008)

In large measure, our mainstream media has done an exceedingly poor job as to highlighting the dynamics at work in the banking system. I will utilize a tape from a high profile financial show to reveal how the media is largely pandering to the public on this topic. Prior to doing that, though, let me get very detailed in answering the question as to “where’s the money?”

The business of banks is to lend money and in so doing they provide the liquidity to keep our economy moving. The banks lend money in a number of sectors but they can be summarized as follows: credit cards, residential mortgages, commercial mortgages, corporate loans. In addition to their lending role, most banks maintain a separate investment portfolio to further augment their revenue.

We have maintained that as a result of these investment activities, banks retained a wide array of what are now qualified as “toxic mortgage assets”. Globally, while banks and investment banks have taken $1 trillion in write-downs on these assets, by my estimation, confirmed by independent research and analytics, there are likely at least another $750 billion in write-downs yet to take on these assets.

Larry Doyle’s (LD’s) Dollars and Sense “Central Station” (January 10, 2009)

Comment by LD | 2009-01-10 10:45:43

Citi will inevitably sell other units at discounted prices.

In summary, it is not outside the realm of possibilities that this institution ends up being nationalized much like has occurred with some banks in the UK.

Against this backdrop, do not expect access to credit to improve anytime soon.

“Market Musings on a Monday . . . “ (January 12, 2009)

We have highlighted extensively why the embedded losses in the banking system would inhibit credit from flowing.

“Where’s The Money?” on December 29th specifically addressed the extent of losses and expected chargeoffs in our banking system. Why do the mainstream media and politicians continue to pander to the public on this topic?

“When Big Ben Speaks . . .” (January 14, 2009)

What does this mean? The banks need more money along with government guarantees against further losses from their deteriorating portfolios. To wit, Citigroup is selling divisions to raise capital. How will those government guarantees be structured? Potentially the nationalization of a banking institution, like Citi, or the splitting of Citi and perhaps other banks into “good banks” and “bad banks”. The “good banks” will house the day to day operations, while the “bad banks” will house the toxic and deteriorating assets and will be capitalized by, you guessed it, “Uncle Sam!”

The markets and economy remain turbulent. Economies overseas are also in the midst of stormy weather.

Banks are flooded with bad loans. The auto industry is praying for an Obama lifeline!

Residential housing and commercial real estate continue to take on water.

Where can you go to get away and make some “sense” of this madness? Central Station has a train departing at 9am that will take your questions and comments on the markets, economy, and world of finance at large.

Your conductor, LD, is not a professional financial planner but is a Wall Street veteran.

Bring your coffee, invite a friend, settle down as you’re amongst friends here. Selling nothing other than honest opinions and advice. We’ll be departing momentarily…….so….

Aaaaaaaaaal Aboard!!

The markets are down 5-6% on the month. Given the stream of negative news, one might think that the market could be even lower. The fact that markets aren’t even lower is testament to the trillions of dollars that have been put to work by governments around the world.

Let’s review the major stories of November 10, 2008:

1. China implemented a $563bln economic stimulus plan primarily to further develop infrastructure in the country. That figure represents 1/5th of their total GDP. I was surprised to hear that, but it also indicates to me how much growth potential that country possesses. This package had an immediate impact on our equity markets this morning when our markets were up 3%. This package also supported commodities, especially copper which bounced about 5% on the day. Aside from infrastructure, China directed this stimulus package to an area that was badly damaged in a recent earthquake. Last but not least, China offered “tax deductions” on the purchase of certain hard assets. (Are you listening, Barack??)

This stimulus package though indicates to me that it is not likely that many of our domestic companies will likely be receiving capital injections from sovereign wealth funds. With oil at $60, oil producing countries (such as Dubai) may need to support the real estate developers and exporters in their own countries.

2. Fannie Mae reported a loss of $29bln (I’m not going to say earnings when companies lose money) which equates to $12.96 a share vs an expected loss of $1.40 a share. (How can Wall St. analysts maintain credibility when they miss a call by almost 1000%?).

It is amazing how Fannie can rack up losses like this when their own incentive bonuses are not on the line and when collectively Uncle Sam owns them. Aside from this loss, Fannie did announce that they expect losses to continue and to increase into 2009. This to me means they see foreclosures increasing over the next 6 months. More than likely Fannie will have a negative net worth by the end of 2008 requiring an increased capital injection by the U.S. taxpayer. Where does it end!!

Again, this model is broken. The American consumer who is able to get a mortgage is being subsidized at the expense of the taxpayers. Let the private market set the mortgage rates and if the housing market re-prices, so be it. Enough socialized housing finance.

3. AIG has already been covered on a separate thread so we do not need to repeat that pain here. Suffice it to say, though, that if they effectively burned through $100bln dollars, give or take, in the course of 6 months, the price tag for this entity could possibly be upwards of $300-500 bln dollars with pressure on a wide array of assets owned by other entities in the process.

4. How about the auto analyst at Deutsche Bank coming out with a sell rating on GM? The stock is down 90% on the year and now he tells us to sell … in any event, the stock was down 23% on the day to close at 3.25. The Deutsche analyst is bold enough to say the stock is going to “0″ !! Look for heavy political posturing between BO/Dems vs the Bush administration as to added bailout funds, terms, timing for the auto industry.

In today’s WSJ editorial section, they write, “[I]f our politicians can’t avoid throwing taxpayer cash at Detroit, then they should at least do so in a way that really protects taxpayers. That means handing a receiver the power to replace current management, zero out current shareholders, and especially to rewrite labor and other contracts. Anything less is merely a payoff to Michigan politicians and their union allies. ”

High time somebody stands up for capitalism!! … Gentlemen … (one of the great movies ever made…)

5. Recession plays in the form of General Mills, Campbell’s Soup, McDonalds, and Wal-Mart continue to out-perform.

6. Google trades down sharply today on anticipation of slowing in internet advertising.

7. Goldman Sachs (the boy wonders of Wall St.) also trade down sharply (down 8% on the day, 70% on the year and down a full 40% from just 6 weeks ago when Warren Buffett made a 5bln equity investment … a cool $2bln loss for Warren). Concerns about Goldman center on their private equity investments with their own capital.

8. Speaking of Warren Buffett, Berkshire Hathaway announced earnings after Friday’s close and they were down 77%. Berkshire Hathaway is still only down app 23% on the year so as a stock it has handily outperformed the market.

9. The top-rated bank analyst on Wall St. is Meredith Whitney at Oppenheimer. She is beholden to nobody and truly tells it like it is. She was quoted recently as saying that she is particularly pessimistic about the U.S. government’s historic actions to bail out banks with massive capital injections. Such plans have little hope of improving core fundamentals.

Again, in the face of this massive flow of bad news, the market was only down 1-2% on the day. That said, the real economy is going to get worse before it gets better so be cautious about putting money to work in situations that are dependent on borrowed financing.

Heck, even my neighbor who runs a family business (guessing 3-5mm in annual earnings with significant real estate holdings) that has existed for 75 years and is an institution in our town, was turned down for a modest-sized loan by a money center bank to settle an estate.

That, to me, is the definition of a “credit crunch.”

Last but not least, I want to comment on a story that has been making the rounds about the “lack of transparency” in some of the government programs that have been put to work in the markets.

Specifically, the program in question focuses on the Fed backstopping the short-term lending markets. The Fed has provided $2 trillion in money/loans to a wide array of banks and has not provided info on just which banks have participated.

I can understand that the taxpayers want to know, but you have to understand that in the market if other players (dealers, hedge funds, et al) find out which entities are borrowing, then it is very likely that that info will be used against those borrowers. Their stocks and bonds trading in the market will likely get punished.

By not sharing this info, the Fed is actually protecting the banks and the taxpayers at the same time. Think of it from the standpoint of a card game. if you know what somebody else is holding, you can obviously change the way you play your own hand.

10. I almost forgot to post that Circuit City folded for Chapter 11 on Monday. Retail, especially any form of higher end retail, is going to be in for a very tough time. Shopping malls will lose some key tenants as well.

11. I also almost forgot to post that American Express filed to become a bank holding company (just like Morgan Stanley and Goldman Sachs) in order to receive a cheaper source of funding. This indicates that they know their credit card delinquencies and defaults are getting ready to move higher very quickly!! Pay off your credit cards !!

In summary, it is truly amazing when I review these 11 highlighted stories. (Of those, each of the 10 would provide enough ammo for a full-blown front-page article all by itself.)

I hope that people can fully appreciate the gravity of the current situation. This turmoil will not turn around soon. Nothing is served by being alarmist but nothing is served by not treating this fiasco with the respect it deserves.

I wish you all the best.

LD