Sunday, August 16, 2009

Say It Ain't So Sheila !

Today I want to talk about the FDIC. In the past I have written some regarding the FDIC and it's predicament. Back on July 21 of 2008 in a post entitled 'Thinking Too Much'. I outlined the current situation, which based on my simpleton math showed the FDIC with approximately1.25% in reserves against obligations. In other words $1250 in cash for every $100,000 in deposits they have insured, at that time.

Then on June 1 of this year I wrote a post entitled 'Basic Math' where I took the updated FDIC numbers and rather than use the "new and improved" deposit insured limit of $250,000 but rather the "old" number of $100,000 and found that the FDIC then had $306 in cash for every $100,000 in deposits even though the limit had been increased to $250,000.

Fast forward to today where we now are treated to the weekly ritual sadistically known as BFF, Bank Failure Friday. Where the FDIC quietly, after the markets have closed and hopefully all have left for the weekend, announces which banks have failed. For what it's worth this week the number is 5.

Some readers have emailed me asking why I have not blogged more on this subject, given its importance. They are right as it is extremely important and I am watching it closely but I have refrained from blogging on it for two reasons. First off, others are covering the subject with much more insight than I ever could. Secondly and much more importantly, one must be EXTRAORDINARILY careful when talking about insolvent banks and the FDIC as one would never want to be accused of instigating a run on a bank. Remember now the esteemed democratic senator from New York Chuck Schumer was accused of triggering IndyMac's collapse. So if a dem senator can be called on the carpet what to become of little ol' me, hence my reticence on blogging on this subject. It all seems to be like a tragic Shakespearean comedy. Funny if it were all not so tragic.

This weekend is particularly, what word shall I use.... okay.... interesting. We have the largest bank failure to date with the failure of Colonial Bank out of Alabama getting caught up in the black hole that is Florida real estate. I am not going to get into a rant regarding the disgusting practice by regulators of continually looking the other way, in a colossal abdication of responsibility, while the books deteriorate and the banks continue to stay open as the losses to taxpayer mount by the day. Others have documented this practice by the regulators with increasing venom.

I will focus on the fact that letting this absolute toxic cess pool of a corporation called Colonial continue on as a going concern will now cost the FDIC (re: taxpayers) $2.8 billion instead of much less had it been shut down when even the financially illiterate knew it was insolvent. The $2.8 billion is not my number but rather the FDIC's own estimate of the cost.

With the failure of Colonial by most accounts the Federal Deposit Insurance Fund is now depleted. As if this were not enough we get a report from Bloomberg news that toxic loans topping 5 % are threatening more than 150 banks. Gee you think we will get more extend and pretend from the bankers and their bought and paid for regulators? Waiting till the stench of the dead bodies is so odorous something must be done.

So here we are now late summer 2009 with the FDIC on empty.

With apologies to Shoeless Joe Jackson and the 1919 Chicago 'Black" Sox please "Say it ain't so Sheila !"

Yes I know the serial apologists, the propagandists, the keep-the-game-going-at-all-costs shills will claim of course that all this is very bullish for equities, (seriously...would you expect anything less?) and that all the FDIC has to do is pick up the phone, call the treasury and get $500 billion in funding. So really, there is nothing to see here, please move along.

The problem with all of this is that confidence can be a very fragile thing. Oh, and as we learned from Mr. Madoff, a ponzi scheme is only a ponzi scheme until people wisen up and it ceases being one. I have no idea how all this will play out but for certain there everywhere and always is a bagholder. To a large extent and via the actions of our cheque writing, bailout approving proxies in Washington we all have become one. This notwithstanding, I dutifully intend NOT to be a bagholder any further than I already am.

Maybe I should start brushing up on my 1907 history along with the sordid details of the Knickerbocker Trust Company. Just a thought.

Good speculating and remind them to please don't ever forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Long 1 unit US Gold ticker UXG @ $3.05 stop @ $2.68
Long 1 unit Ultrashort FTSE/Xinhua China 25 ticker FXP @ $10.15 stop @ $8.89
Long 1 unit Ultrashort MSCI Emerg Mkt ticker EEV @ $16.65 stop @ $15.88
Short 1 unit Spiders ticker SPY @ 100.45 stop @ $102.23

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