Highlights include Citigroup Inc. (C), Bank of America Corp. (BAC), KeyCorp (KEY) and Fifth Third Bancorp (FITB).

Even before the FDIC gets into the business of insuring loan to the PPIP (there will be no losses there, according to their accountant Lewis Carroll), it looks like the fund is in pretty bad shape. As a percent of insured deposits, it fell to 0.40% at the end of the fourth quarter from 0.76% at the end of the third quarter, and 1.22% at the end of 2007.

Since then, 26 banks have failed — the same number as in all of 2008. The year-end reserve ratio for the fund was the lowest since the second quarter of 1993, at the tail end of the S&L debacle (back then, banks and S&L’s had separate funds, but on a combined basis).

Given the failures so far this year, there is no doubt in my mind that the reserve ratios have declined sharply since the end of last year. The graph below shows the trend (larger version available at http://globaleconomicanalysis.blogspot.com/2009/04/fdic-woefully-underfunded-problem.html).

Clearly we have not seen the end of bank failures this year. You should count on at least one FDIC pizza party each week for the rest of the year. At the end of last year there were a total of 252 banks that were listed as troubled by the FDIC, up from 76 at the end of 2007 and 50 at the end of 2006.

The assets of troubled institutions has grown even more quickly, to $159.4 billion at the end of 2008, from $22.2 billion at the end of 2007 and just $8.3 billion at the end of 2006. The FDIC historically has been very hesitant about putting banks on the list, for example, none of the biggest disasters of 2008 (Indymac, WAMU, Wachovia) were on the list at the end of 2007. Thus, it is likely that this list significantly understates the problem.

None of the big 19 currently undergoing the so-called “stress tests” are on the list.  If the results of the tests come out and they say that all 19 passed with flying colors, the whole world will rightfully yell WHITEWASH.

The AP story yesterday said that the tests are going to take a harder line on whole loans than on securitized investments. This makes no sense to me, except from a political gamesmanship point of view.

Somebody will have to be thrown under the bus, and since it can’t be Citigroup (C) or Bank of America (BAC), it will probably be KeyCorp (KEY) or Fifth Third (FITB). That would be the only reason to be tougher on whole loans (largely held by the regional banks) than on the securitized stuff (MBS, CDO etc). After all, with a whole loan, the banker probably even knows who the borrower is, not so true with the securitized stuff.

If one puts any sort of reasonable loss expectations from the PPIP, it is clear that the FDIC will soon be insolvent. Don’t worry, I’m not trying to start a run on the banks — your checking account will still be there if your bank goes under (up to $250,000). However, the FDIC will need an emergency loan from the Fed or a bailout from Congress to make sure that happens.

I have no doubt that such funding would come through. However, it is likely to be the next big ticket bailout coming down the line, and it will probably be a doozy.

Read the full analyst report on “KEY”
Read the full analyst report on “FITB”
Zacks Investment Research

Last 5 posts by Dirk Van Dijk

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