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FDIC Needs to Get Wounded Players Off Field

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With failing banks, early identification is crucial.

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In covering the FDIC's Quarterly Banking Profile yesterday, the financial media focused almost exclusively on the increasing number of problem banks on the FDIC's watch list: There were 90 at the end of 2008's first quarter, as compared to 117 at the end of the second.

What the media didn't cover was the associated increase in problem bank assets - from $26.3 billion to $78.3 billion. In digging through the FDIC's release, I discovered that a substantial portion of that increase ($32 billion) was due to the inclusion of IndyMac on the list during the second quarter.

At a time when the US Treasury and the Federal Reserve are seeking greater oversight of "systemic risks," I'm struggling to understand how the FDIC can first put a bank on its problem list just 2 weeks before it becomes the third largest bank failure in US history.

Is there another Bear Stearns out there?
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Did no one notice the stock price decline from $24 last November to $5 at the end of the first quarter (let alone the decline from its $50 high in 2006)? Or the serial downgrading of IndyMac's long term debt (ultimately to BB by) Fitch in January?

I realize these are volatile times, but as someone who's been generally supportive of the innovative leadership that Sheila Bair has provided to the FDIC, I have to throw in the flag.

In times like these, the role of the FDIC should be geting the wounded players off the field quickly and effectively. But early identification is crucial.

At the risk of overstepping, given the magnitude of our credit issues, I would suggest that the FDIC strongly consider a baseline scenario in which 5% of all US banks fail over the next 2 years. Based on yesterday's Quarterly Banking Profile, that would be 422 banks with $665 billion of assets.

I'm not saying this scenario will play out, but these figures sure help frame the necessary response from the FDIC, the Treasury, the Federal Reserve and Congress.

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No positions in stocks mentioned.
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