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Paul Kiesel
Paul Kiesel
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FDIC’s Worst-Case Scenario for IndyMac and Other Banks: Even Worse than Expected

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As Joe Biden said last year during the Democratic presidential primary debates, and will likely reiterate tonight in Denver, the main source for our current credit crisis lies in mysterious lending practices of banks over the last six years (TILA violations; other mortgage & securities fraud, etc.) and a lack of transparency; allowing for bank losses to spiral out of control and for the FDIC to underestimate the economic damage that has already occurred and will grow larger.

Yesterday, federal regulators boosted previous estimated costs of IndyMac Bank’s failure to $8.9 billion and prepared the public for more collapses, reporting that the number of troubled banks shot up 30% in just the last three months.

FDIC Chairwoman Sheila Bair said at a news conference, “Quite frankly, the results were pretty dismal.” With the exception of bank earnings reported from the fourth quarter of 2007, bank earning for 2008 were at their lowest since 1991, when another Bush was in the White House. Bair also stated that, “We don’t think this credit cycle’s bottomed out yet.”

Bair is most likely right; the credit crunch isn’t over and most conservative and liberal economists will at least agree on the fact that the U.S. economy has some months (12-18 possibly?) before it begins to recover from the damage drowning credit markets over the past 18 months.

A problem for the FDIC: If they can’t estimate or are underestimating the cost of bank failures, how will they be able to come up with the funds to cover those losses in the future (i.e. see WAMU, and Wachovia)? There have already been reports today that the FDIC might have to borrow money from the Treasury department, who’s already loaning more money than it should to help support a copious amount of Wall Street mergers and struggling financial firms that have been suffering the pangs of the mortgage mess (JP Morgan-Bear Stearns deal, Fannie Mae and Freddie Mac’s blank check, etc.).

The original estimated loss for IndyMac by the FDIC: $4 billion. Two weeks later it got revised to $4-8 billion. Now it’s almost at $9 billion. And the only reason why the figure (estimated loss) rose $5 billion from its initial “guesstimate” is because the FDIC finally performed its own evaluation of IndyMac’s assets and, according to the Los Angeles Times, it also discovered more deposits than initially estimated were covered by insurance. Conclusion: IndyMac was not as transparent as it should have been, and suffered the consequences. Let’s hope Americans won’t have to suffer for it, too.

And now because of the IndyMac failure, and as we get closer to seeing two other major banks’ possible implosions, the deposit insurance fund has dropped below its mandated level, which is a very troubling sign. How will they be able to cover funds, if they don’t have enough money?

Joe Biden was right back in late-2007. The wave of foreclosures, brought on largely due to mortgage fraud and TILA violations, and U.S. credit markets tightening, due to a lack of transparency in its business practices (CDO’s, hedge fund managers defrauding investors, etc.) over the previous five years, were the result of lax regulation and oversight from federal regulators. The FDIC, the Fed, and the FBI have no idea how deep the problems run. “We need more transparency,” Biden said, “particularly with regard to hedge funds. They are the ones that are causing this thing to go under. And there’s no transparency, no accountability. We don’t know how deep this problem is.”