Wednesday, May 13, 2009

Prediction Power

I found this so amazing, I retyped it by hand (i couldn't cut and paste it). This is an email from the FOIA disclosure. How the judicial watch got this I have no idea. Anyway Bloomberg focuses on some of the big findings such as emails saying the government forced 9 banks to accept TARP money in October. (was really anyone surprised by outrage came and went along time ago concerning that issue) Anyway, the FOIA disclosure turned up an email from Camden Fine, the CEO of the Independent Community Bankers of America. Basically represents the interest of small regional and local banks. He was upset the organization didn't get to sit with the big boys at the meeting. The entire email can be found here but these two paragraphs are what is incredible.

"For example, Treasury should consider using a portion of its $700 billion authority to beef up the FDIC reserve fund so that significant insurance premium costs don't batter the bottom line of thousands of already weakened community banks. Since community banks fund their balance sheets almost entirely from core deposits, insurance premium increases (like those proposed by the FDIC to replenish the fund) hit community bank institutions disproportionately hard. It does no good to stabilize the problems on Wall Street and create a new crises on Main Street by having literally thousands of banks just stop extending credit because all of their capital resources are being used up to pay FDIC insurance premiums.

I just returned from 4 days of meetings with over 250 community bankers nationwide. In January, when the new proposed FDIC premium payment schedule kicks in, many community banks project that they will struggle to just break even next year. On top of everything else, if those banks receive just one additional shock it could drive them down - to nobody's benefit."

WOW!! If that doesn't make your jaw drop nothing will. Two major points from this. I have heard alot of chatter from local bankers about these FDIC premiums. Basically the good healthy banks capital is getting sucked out of the system to support the Zombie banks. CLASSIC JAPAN. This prevents lending and furthers deleverging and hence the depression cycle. Secondly, it puts these small banks in very precarious situation. I read about a small regional bank (11 branches) whose premiums (going from memory here) went from 45,000 to 450,000. The bank president said it will probably wipe out all profits this year. That is assuming his projections on loan losses are right which my guess is they underestimate. Even if there is no additional shock, you just wiped out the capital build through retained earnings. There will be no additional loans next years because of this as well.


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