The FDIC has 400 banks in its watch list, but further examination sees 2,256. That means at least 900 more banks will fail in this cycle. These banks are using mark-to-model, so there is really no knowing whether the failure figure during the cycle will be 3,200 or 4,200. On just 900 banks, which are certain to go under, the loss figure will be at least $300 billion. Incidentally top banking professionals have verified these figures. They say one of the biggest problems is that solvent banks, some of who received TARP funds, are refusing to accept failing banks no matter what federal guarantees. They tell us that they believe that once a solvent bank is loaded up with failing banks they will then be taken over by bigger banks.
Historically losses for failed bank resolutions have been about 11%. Today they are 25%. Thus, far losses are estimated at more than $300 billion. The FDIC believes, although they won’t tell you this that more than 1,000 banks will fail at a cost of $500 billion. The FDIC has $10 billion. the FDIC will borrow $100 billion from the Treasury and borrow additional funds from insolvent banks that have received loans from the Treasury and the Fed. You might call this a financial daisy chain.
In addition to the foregoing problems the commercial real estate industry is facing $500 billion in losses to be absorbed by banks. That means the FDIC will have to borrow $1 trillion from some of the institutions they are trying to save.
Facing these problems and others tells us that one-year recovery we foresee will be tepid at best and what will be left for an encore? [MORE]