Monday, January 11, 2010

The FDIC Christmas Break

Christmas was an easy time for FDIC regulators; there were six bank closings for December 18th and none for the following two weeks. Believe it or not, there was only ONE for January 8th of 2010. The year 2009 had 140 bank closures. This year could have 10 times that amount, which comes out to about 1,400 or about 30 a week (Just an educated guess on my part).

Here is a quote from “The Thirties America and the Great Depression” c1967,by Fon W. Boardman, Jr. page 26
Perhaps most ominous of all was the increase in bank failures. In 1929, 659 American banks had failed: in 1930 the number rose to 1,352, and in 1931 to 2,294. Just before Christmas, 1930, the Bank of the United States in New York City collapsed. It had 400,000 depositors, many of them recent immigrants, and its failure, the worst in the country’s history, affected a third of all the people of the city. A bank panic in the Middle South closed 129 banks. As usual, people began to withdraw their money and it is estimated that by 1931 they had taken $1,000,000,000 from the care of the bankers and had hidden it away in everything from safe deposit boxes to old mattresses. And just at the time when the people were losing jobs and money, states and other governmental units imposed new taxes to make up for declining revenues from other sources. Thus the depression was chiefly responsible for the introduction of the sales tax, Kentucky being the first state to have one, in 1930. Other states and cities followed suit.
FDR took office in 1933 and there were 4,000 bank failures and 1,500 saving and loan failures. Here is a graph I "borrowed" from Calculated Risk. (Double click for a larger view)

Our last banking fiasco in the late 1980's had over 531 banks going bust in 1989 alone. The question arises is there more to this mess than meets the eye? Common sense suggests that the current banking crisis should be a lot worse.

The following is from an article, that appeared in the Saturday Evening Post, CCV (November 5, 1932), pp. 3-4 titled" What about the Banks." It was written by Frank A. Vanderlip, former president of the National City Bank of New York. Bear in mind that 1932 was three years into the Great Depression.
The present economic disturbance has been so severe that it as make even some changes in our language. No longer is it an apt metaphor to say that anything is “as safe as a bank.” The word “securities” has almost become obsolete. An investment that drops in price to a tenth or, perhaps, even to a twentieth of its former range is not a security; it is a jeopardy. The page of stock-and-bond quotations might well be headed Quotations of Risks and Hazards. To call them securities in the light of their fluctuations is ironical.

In 1720, a financial debacle added to the English language a phrase which has persisted in common world-wide use for two centuries. A hopelessly exploded financial venture is to this day called a South Sea Bubble.

The South Sea Company in its time was the rival of the Bank of England. It was the ambition of the Tories that it should supplant the Bank of England. When the bubble burst, the extreme decline in the price of the stock was from 1,000 to 135. The company withstood the shock, however and continued in business for eighty years.

Here is an example from out own times: United States Steel and General Motors stocks, the two leading industrials of the country, declined from the high quotations of 1929 to 8 per cent of that price. The decline in the stock of the South Sea Company was only to 13 ½ per cent of its highest quotation. Take another: The stock of what has long been one of the premier banks of the country declined from 585 to 23 ½. That is to say, it fell to 4 percent of its highest quotation. The decline in the market price of this great American banking institution was therefore more than three times as severe as was the fall in the stock of the South Sea Company.

That illustration is by no means a unique one. There were innumerable American bank stocks which made a more distressing record. Between October 1, 1929, and August 31 1932, 4,835 American banks failed. They had deposits aggregating $3,263,049,000. . . . .

The decline in the price of bank stocks was only a minor phase of our debacle. The quoted value of all stocks listed on the New York Stock Exchange was, on September 1, 1929 $89,668,276,854. By July 1, 1932, the quoted value of all stocks had fallen to $15,633,479,577.

Stockholders had lost $74,000,000,000. This figure is so large, that not many minds can grasp it. It is $616 for every one of us in America. It is, roughly, three times what we spent in fighting the World War (WWI). . . . . . .

Not only did our investments shrivel in the last three years but we even frequently lost our pocketbooks. Cash in hand, left for safekeeping in a bank, often went the way of our investments, and worse. Almost $3,000,000,000 of our daily-used cash funds were sequestered in the doubtful assets of the 4,835 insolvent banks. Widespread communities were left with only the mattress as a safe depository, and with little to put into it. People became so frightened in regard to the safety of the banks that they locked up in safe-deposit vaults, or secreted elsewhere, more than $1,500,000,000.

I expected a lot more bank closures January 8th and there was only one. Do you get the feeling that everything is OK now and we can stop worrying?


Rob in NS said...


FDIC is broke isn't it? Maybe they can't close down anymore banks.

Anonymous said...

Last year, many state and local government jobs were saved by the federal govt. bailout.
Has anyone run any numbers about how many layoffs that state and local govts. will have to do, in order to balance the budget in 2010?

Ohio Loan Officer said...


Of course the number of banks closed in the last few weeks dropped---- it was bonus season.

Why do you think BoA and all those other banks suddenly paid back TARP funds in December? Because they are now solvent? Hardly!
It was bonus season and they didn't want Washington to meddle with the party.

AIM said...

When the banks and the government are in cahoots... anything can happen. All the rules, laws, axioms and fundamental principles regarding finance, banking, investment, economics, etc. become dislocated and of no use to any of us.

As I stated in the previous blog, current events and who is ambitious gives you your forecast for where you are headed.

Figure out how to prosper from the coming circumstances.


Anonymous said...

The bank failures chart only shows bank failures. Haven't we consolidated banks since the 1930s? I would like to see the same chart, except with dollars on the y axis, or better yet, a relative indicator like (bank assets / GDP) so we can compare these events using the same perspective.

Jim in San Marcos said...

Hi Anon 4:43

I run this blog on the back of an envelope. So sometimes the data is lacking somewhat.

I did edit out some information to cut down on the size of the article. It was getting a little long. Presently there are over 9,400 banks in the US and if we go back to 1930 the population was only 122 million as verses today 315 million. Trying to compare the current mess with 1989 and 1929 gives you a frame of reference.

1929 is a benchmark for how bad it can get. 1989 is an indicator of how bad the recent Savings & loan mess was. Right now things are a lot worse than 1989 and the resulting bank failures are almost non existent.

From the data I have presented, it's a pretty obvious conclusion that something is bent way out of whack. There is a fox (Bernanke)in the chicken coop.

Thank you for your comments.

Jim in San Marcos said...

Hi Rob

I don't think that the FDIC is broke, they still have 30 billion projected for covering the new year. Just how long that will last is not certain.

An issue not mentioned much is mutual funds. There are over 10,000 of them and there is no insurance on them to speak of. I've suggested that 30% of those are mail drops, for personal retirement plans. You can't go to jail for managing a plan that pays you 100K per year as it goes broke.

Jim in San Marcos said...

Hi Anon 9:29

California is facing bankruptcy so the layoffs are pretty much a moot point.

It looks like it it time to raise taxes again.

Tyrone said...

Here is a letter someone wrote to Jim Sinclair. I thought he had some interesting observations related to the bank closure:

Dear Jim,

Yesterday evening the FDIC released information regarding the first bank closure of 2010 – Horizon Bank of Bellingham, Washington. The statistics regarding this closure are terrible. If it is indicative of things to come it will be a very rough year for the FDIC.

According to the FDIC, Horizon Bank had $1.1 billion in deposits and balance sheet assets of $1.3 billion; yet the FDIC’s estimated cost to close the bank is $539.1 million. That means the real market value of Horizon’s assets is believed to be about $561 million – 41.5% of the value claimed. As has become the norm, the FDIC had to enter into a loss-share transaction with respect to $1.0 billion of the assets purchased, meaning there is significant concern the assets will turn out to be worth even less than presently estimated.

This cost of closing this bank amounted to 49% of the value of Horizon’s deposits – the highest relative cost seen so far in this crisis. By way of comparison, the cost of closing the first three banks in this crisis (in late 2007) was about 5.7% of deposits.

Pretend and extend is proving to be a very costly strategy.

Respectfully yours,
CIGA Richard B.

AIM said...

As long as there is "mark to myth", off balance sheet accounting, relaxed regulations, foreclosure moratoriums and principle reductions and forgiveness programs, the Fed buying mortgage backed securities and treasuries, and who know what other monetary/fiscal policies and legislation the government will come up with to prop up banking and prevent the correction... we can go a long time without these banks throwing in the towel and going under.


Jim in San Marcos said...

Hi Tyrone

Thank you for the post.

It's funny that you mention that bank in Washington. When I read the FDIC release, it prompted me to write the present post. It is pretty unbelievable stuff.

I was expecting to see about 24 bank closures for the week ending January 8th and there was only one. And boy was that one was a duesey!

Take care.

Jim in San Marcos said...


Time is running out. Things are getting progressively worse as we are being told that the recession is over.

The facts do not support the government news releases.

Commercial real estate is now hitting the fan. This stuff was written for 5 years and has to be refinanced to buyers and there are none.

I think that the second shoe is about to drop. But you could be right, it could drag out a few more years. My crystal ball is no better than yours.

Thank you for your comments.

Take care.

Rob in NS said...

The only difference between 1930's and now is people back then knew they were getting screwed and media supplied the cigarettes.

AIM said...

Hey Jim,

We've got serious government and banking intervention going on in our economy giving the public a false veneer of "recovery". Agree?

This is why banks that should be failed by now, aren't. Why auto sales are "up". Retail sales are "up", and so on.

But let's keep our eye on one indicator that can really help us to see where we are headed... employment... jobs. Isn't that what GDP is really all about?

Forget the stock market as it really isn't an indicator of the health or future condition or our economy. (It's news driven, based on emotion, and it is manipulated by government and the power elite.)

But even if you paid attention to the stock market, what you have is very scary... the S&P 500 index right now is about the exact same level as it was in the Summer of 1998. So... investors who bought stocks 11 years ago haven't made one dime... and if you consider the hidden demon of inflation, investors are actually down 25%! So we've had a major correction period over these last few years (and think what it would've been like if things hadn't been propped up by Uncle Sam). Enough said for the stock market (we know about the madness of crowds, herd instinct, etc.).

Back to the real indicator... employment. Similar to our stock market, our employment level is about what it was 10 years ago. No new jobs in ten years for a country who's population grows by about 3.2 million per year? Over 32 million and no new jobs? U6 gives the better idea of unemployment, and our falsifying government has it pegged currently at 17.3% (you can bet it is higher, probably closer to 20%... maybe more).

This isn't recessionary, this is depressionary. Even establishment economists (Keynesians) state that we need over 300,000 jobs per month over the next 5 years to get back on our feet (18 million jobs). We lost 85,000 jobs in December... the government thinks this is a positive change of characteristic.

Historically payrolls start to expand rapidly at the end of a recession. Hello?!

Mr. Obama do you realize that you have a depression on your hands? Do you realize that you are surrounded by criminals, liars and incompetents? Are you one of them? Do you realize that current government fiscal and monetary strategies and policies are totally out of orbit and not in any way paralleling our actual troubles?

How long will you continue borrowing, printing and spending? Until we are completely vanquished into oblivion as an economic entity?

Prepare for a major stock market crash (down to levels much lower than the March crash) and much upheaval in our society when America finally catches on and sees what condition we are truly in and that the blind (and corrupt) have been leading the blind.

Can anyone argue with the above?


Jim in San Marcos said...


There is no argument by me.

It was a great party. I was warning people in 2006 and no one listened. The difference with this party is everyone gets to share in the hangover.

My neighbor has a million dollars in real estate and the payments to prove it. He only makes 36K per year.

One thing though, no government is going to admit that we are in a depression. After the fact, they will take credit for avoiding it or getting out of it. No sense in panicking the sheep (voters).

Jim in San Marcos said...

Hi Rob

Sex and cigarettes go together. It's a stretch to include government in the mix with what they are doing to the taxpayer.

I just don't feel like lighting up to reflect and enjoy the moment--not sure why;>)

Throw another log on the fire for me. Take care.

Rob in NS said...

I agree Jim

Governments everywhere are performing indecent acts on taxpayers. Collectively we shouldn't be shocked, we elected them. Sort of like being asked to Prom and date is surprised when you want a slow dance at end of night. Gives the song Stairway to Heaven a whole new meaning for me.

That said what has happened in Haiti has given me pause. We should all be thankful that we have time to complain. It can get cold here but I never have worry about freezing to death. I'll throw another log on fire and let's all pray for those people.

Take care everyone

Anonymous said...

I think this is a powerful thing to do. It will have huge impact if many buy red stampers and start doing this. The continuation of a growing, popular, peaceful revolt. Let’s advertise our frustration, disgust and demand for positive change and reform to the government and the whole US population. US dollars… what a great marketing vehicle to get the message out. It will assist in getting other Americans educated and aware of what is going on (“Hey Joe, look at this… what is this ‘End the Fed’ all about?”).

Read the suggestion in the two blogs below. Spread it around.

Tyrone said...

Three more banks, Jim. I'm sure you've already seen it, though. Given the staffing up at FDIC, my sense is that a steady stream will be closed throughout '10--best case.

Barnes Banking Company, Kaysville, UT
St. Stephen State Bank, Saint Stephen, MN
Town Community Bank & Trust, Antioch, IL

Jim in San Marcos said...

Hi Tyrone

I am predicting that the bank failures will be over a thousand for the new year.

I don't think that the bank failures are the problem. The real issue will be the mutual funds. There are over 10,000 of them, and I would expect about 80 percent of them to collapse. Plus, they are not federally insured. It could prove to be a very interesting year.

Rob In NS said...


You are predicting bloodbath in Mutual Funds. Does that go hand in hand with Stock Market averages? I too wonder how these funds will unwind when people want their money back. I don't know a whole lot about how they work but from what I've read these funds work on a lot of margin. If market is dropping it is going to be really hard to payout while maintaining portfolios. At least that is how I've come to understand this from what I've read.

Anonymous said...

Jim --

You say that you expect 80% of mutual funds to collapse. Is this because there will be a mass attempt by investors to exit these funds simultaneously, causing them to collapse, or something else?

Jim in San Marcos said...

Hi Rob and Anon 6:32

What we are really dealing with here is a lack of government regulation. That's how the real estate bubble got it's start.

For about $10K a person can start an offshore fund and spend the incoming money as their own. My next post is a reprint on how to do it.