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Upon Further Review

Posted by Larry Doyle on February 26, 2009 3:02 PM |

The FDIC just released its 4th quarter 2008 report. Read it and weep . . .

1. FDIC had a $26bln loss in the 4th quarter and now has only $18bln in reserves. (Little doubt that FDIC premiums — insurance premiums that banks must pay — will be increasing to rebuild reserves. All costs ultimately flow through to customers). In fact in today’s WSJ, FDIC Poised to Double Fees Charged to Lenders

2. banking industry had first loss in 4th quarter 2008 since 1990

3. troubled institutions rose to 252 from 171 in 3rd quarter

4. banks have taken a total of $750 billion in writedowns on problem assets!!

5. banks have increased loan loss reserves to $69 billion from $32 billion

These numbers in conjunction with the Bank Stress Test lead me to make the relatively easy projections that:

 — Government will have significant stakes in certain major institutions while continuing to take over and shut down many smaller institutions.

 — Banks will continue to look to build reserves against future losses. This development along with a limited if not nearly non-existent “shadow banking system” (securitized consumer loan market) will mean that credit will be tight.

 — As banks need to preserve capital, their ability to recruit and pay people will be severely restricted. I know employees are looking to leave these organizations to work at smaller shops without these problems.

 — Although bank stocks are currently getting a bounce given government indications of support, these are not companies that have attractive growth prospects under these conditions.


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