More on the FDIC as a Catalyst

In continuing the  train of thought initiated in “The FDIC as a catalyst, or the new Doo Doo 32!”, I am going to release some interesting data points for subscribers and non-paying readers alike. 

The FDIC imposed a special assessment charge on all FDIC insured depository institutions in 2Q09- which amounted to 5 basis points of bank’s total assets less tier 1 capital. However, the charge was capped at 10 basis points of the bank’s domestic deposits. FDIC has indicated they will levy a similar charge (in terms of formula) in third or fourth quarter of 2009. This helps serve as a catalyst for those who have been short failing banks, just to see their share price double or more. You see, it seems that the FDIC is one of the few government arms that is actually working solely for the benefit of the individual tax payer and not exhibiting unnecessary favoritism towards the banking industry. Examples of such are rampant:

The Treasury with their stress tests, lacking any form of realistic stress:

 The FASB allowing politicians and special interest groups tell them how to perform accounting, to the beneficial interest of the banking lobby, of course: see: The Folly of US Financial Poitical Games.

 The Fed and thier “shroud of secrecy to prevent unfounded rumors from being created from founded facts”, see The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets.

 For more on this in the MSM, see Bloomberg: FDIC May Add to Special Fees as Mounting Failures Drain Reserve:

Aug. 20 (Bloomberg) — Colonial BancGroup Inc.’s collapse and the prospect of mounting failures among regional lenders may prompt the Federal Deposit Insurance Corp. to impose a special fee as soon as next month to boost reserves by $5.6 billion.

The FDIC board might act sooner than expected after the Aug. 14 failure of Alabama-based Colonial cost the agency’s insurance fund $2.8 billion, and as banks such as Chicago-based Corus Bankshares Inc. report dwindling capital and Guaranty Financial Group Inc. of Austin, Texas, says it may fail. The fund fell to the lowest level since 1992 in the first quarter.

“With the failure of Colonial Bank and the possible near- term failures of one or two more large banks, the FDIC may be forced to levy a special assessment on the industry sooner than it had planned,” said Camden Fine, president of the Independent Community Bankers of America, an industry group.

The failure of 77 banks this year is draining the fund, prompting the agency in May to set an emergency fee of 5 cents for every $100 of assets, excluding Tier 1 capital, to raise $5.6 billion in the second quarter. The agency has authority to set fees in the third and fourth quarters, if needed, to prevent a decline in the fund from undermining public confidence.

The FDIC board has until Sept. 30 to adopt a fee that banks would set aside in the third quarter. The agency has already signaled another special fee this year.

“We will likely have to have another special assessment in the fourth quarter,” FDIC Chairman Sheila Bair said in an Aug. 5 Bloomberg Television interview.

Two additional assessments this year are “very possible” amid the rising cost of failures, Chip MacDonald, a partner specializing in financial services at law firm Jones Day, said in a telephone interview.

‘Painful For Industry’

…The fund had $13 billion on March 31, the lowest since 1992 when it was $178.4 million, the FDIC said. The 56 bank collapses since March 31 cost an estimated $16 billion. First-quarter failures cost the fund $2.2 billion, the agency said.

The agency is required by law to shore up the fund when the reserve ratio, or balance divided by insured deposits, falls below 1.15 percent. It was at 0.27 percent as of March 31.

The industry will pay $17 billion in premiums this year, including $11.6 billion from the annual fee, said Robert Strand, a senior economist at the American Bankers Association, said in a telephone interview.

‘Great Expense’

“This is not a good time for the industry to pay an additional special assessment,” Strand said. “This is a great expense while banks are trying to recapitalize and make loans.”

If the fund is drained, the FDIC also has the option of tapping a line of credit at the Treasury Department that Congress extended in May to $100 billion, with temporary borrowing authority of $500 billion through 2010.

Separately, a proposal Bair made last month to charge banks additional fees tied to risks when their business expands beyond traditional lending, such as proprietary trading, hasn’t advanced during Congress’s recess. A fund created with the fees would cover losses when a large firm collapses, avoiding government bailouts of companies deemed too big to fail.

“Those institutions that have been the riskiest and have engaged in the riskiest behavior should be assessed,” House Financial Services Committee Chairman Barney Frank said in a July 23 interview with Bloomberg Television.More on this and how it will affect stalwarts JPM and GS later.

How can I monetize this? Well, there are members of the new Doo Doo list that will be getting hit hare, and rightfully so. See below…

Subscriber short candidate 1 – this company is trading at what we feel to be an unsustainable and unrealistic valuation from what we have uncovered thus far and has a share price of $15 which makes it a potential actionable short for my portfolio. It also has options available, and we have initiated coverage on it:  – In 2Q09, it recorded a FDIC special assessment charge of $5.5 million (0.5% of the tangible equity as of June 30, 2009).The amount is about 13.1% of total revenues (net interest income after provisions) in 2Q09 and 32% of pretax income before special assessment charge. Based on the total assets and tier 1 capital as of June 30, 2009, we arrive at the same figure. If FDIC imposes another special assessment charge for 3Q09, the bank is likely to record an approx. equal charge in 3Q09. Look for a summary preview to be released to subscribers within 24 hours. 

SunTrust banks – This original Doo Doo 32 list member from early last year (pdf.png Sun Trust Bank Report 2008-08-30 06:39:22 391.89 Kbpdf.png Sun Trust Bank Stress Test Scenario Analysis – Government Simulation 2009-04-30 03:43:18 665.82 Kbpdf.png Sun Trust Banks Simulated Government Stress Test 2009-05-05 11:37:13 1016.17 Kb) states that although the banks are clearly not out of the woods yet, they are clearly positioned to do well in comparison to their peers (see Most US Stocks Drop as SunTrust CEO Predicts More Bank Losses). I disagree. In 2Q09, STI recorded a FDIC special assessment charge of $78.2 million (0.7% of the tangible equity as of June 30, 2009) and the same shall be paid on September 30, 2009. The amount is about 6.5% of total revenues (net interest income after provisions and non interest income) in 2Q09. Based on the total assets and tier 1 capital as of June 30, 2009, we arrive at special assessment charge of about $79 million. If FDIC imposes another special assessment charge for 3Q09, the bank is likely to record an approx. equal charge in 3Q09.

I will post an update on the SunTrust metrics for subscribers by tomorrow morning.


Originally published at Boom Bust Blog and reproduced here with the author’s permission.