A Growing List of Troubled Banks

The Federal Deposit Insurance Corp (FDIC) reported that the number of distressed banks rose to the highest level in 15 years. The number of troubled banks rose to 416 at the end of June from 305 at the end of March. Assets at these troubled institutions totaled $299.8 billion – the worst level since the end of 1993.

The FDIC’s insurance fund, as of March 31, was down to its last $13.5 billion. Bank failures in the 2Q cost the insurance fund an estimated $9.1 billion, but were mostly offset by an emergency special assessment of $6.2 billion and an additional $2.6 billion raised as part of the regular quarterly assessment on FDIC-insured banks.

With the recent failure of Colonial Bank, the FDIC took another hit with an estimated loss of $2.8 billion and the failure of Guaranty Bank is expected to cost $3 billion. It is no surprise if FDIC to draw on a $500 billion line of credit set up from US Treasury Department, if we are going to take into account for possible situation in 1Q2010 which may tip several more banks into failure.

The cost could be even higher if the agency cannot merge that failed institutions with a healthy player, or can’t sell it outright. Otherwise, it has to manage the ‘unwinding’ of every failed bank’s stockpile of illiquid and toxic assets.

Alternatively, private equity firms could be an option and they could be spared the requirements of other bank holding companies and will not be called upon as a ‘source of strength’, should their investment in a bank need shoring up. Private equity companies don’t want to expose their vast pools of capital to any one investment. The agency spared them from having to cross-guarantee their portfolio bank investment – unless they owned at least 80% of two or more banks.

The day of reckoning is on its way. We have no one to blame but ourselves.