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Bank Failures Will Accelerate in 2010


It's likely that 500 to 800 banks will fail into 2012 and 2013.


Editor's Note: This article was written by Richard Suttmeier, chief market strategist at, a fundamentally-based quant research firm in Princeton, New Jersey, that covers more than 5,000 stocks every day.

FDIC Chairwoman Sheila Bair Says Worst of Bank Failures Not Over Yet

The FDIC expects that bank failures will accelerate in 2010, which plays into my standing prediction that 500 to 800 banks will fail into 2012 and 2013.

The Deposit Insurance Fund will pick up $45 billion from members by year-end. This inflow is a pre-payment of regular fees for 2010 through 2012. FDIC Vice Chairman Martin Gruenberg says that this money will be enough to cover bank failures for the next three years, but I say, no way!

The FDIC Deposit Insurance Fund is $16.8 billion in arrears, so 37% of the $45 billion has already been pre-spent. With $5.3 trillion in insured deposits, the DIF needs to exceed $54 billion at the end of June 2013 to be above the 1.15% ratio required by law.

Since June 2008, insured deposits are up $168 billion per quarter. Given this growth rate, insured deposits could top $9 trillion in mid-2013, which requires the Deposit Insurance Fund to be above $100 billion, and is what the FDIC projects to be the the total cost of failures. This money will have to come from the FDIC's lines of credit from the US Treasury.

This justifies my suggestion that the remaining TARP funds be deposited into the Deposit Insurance Fund to provide capital to the banking industry, not to specific community banks.

While three banks failed last Friday, five Credit Unions and two S&L's received TARP money under the Incentive Payments for Home Loan Modification Program. One bank, Sterling Savings Bank (STSA), got $2.3 million, and it's overexposed to C&D and CRE loans. The bank is also on the ValuEngine List of Problem Banks. This program will prove to be another waste of taxpayer money.

FDIC Chairwoman Bair says that the current crisis won't close as many banks as the 1988 to 1992 experience. Of course not -- the number of FDIC-insured institutions is currently 8,031, which is 61% of the total of 13,221 at the end of 1993. This is another ridiculous spin of regulatory Fuzzy Math.

See also, Fuzzy Math From the Bank Bailouts

Mortgage Rates Are Low, But Banks Are Reluctant to Refinance

Tight credit not only hurts homeowners, but also adversely effects consumer spending, which is needed to fuel economic recovery. Lower monthly mortgage payments would be a boon to consumer spending.

It's estimated that 60% of mortgages have rates that exceed the current 4.8% going rate for mortgages. In 2009 refinancing activity may reach $1 trillion, well below the $2.8 trillion in 2003. Mortgage applications to purchase a new home have recently fell to the lowest level in 12 years.

The Gold Bubble, the Rising Dollar and the Slide in Crude Oil

Gold shifts to negative on its weekly chart on a close this week below the five-week modified moving average at $1110. This week's resistance is $1178.

Source: Thomson / Reuters

The Dollar Index is positive on its weekly chart with weekly support at 76.05 and quarterly resistance at 78.65. Remember that I predicted a Thanksgiving low for the dollar.

Source: Thomson / Reuters

Crude oil is negative on its weekly chart and my annual pivot at $68.81 has held as support as expected. My weekly resistance is $72.13, as we are in the 10th week of the downward slide.

Source: Thomson / Reuters

The Dow Is Still Barely Below the Multi-Year Bear Market Down Trend

The weekly chart for the Dow is positive but overbought as this week's pivot is 10,435, down trend resistance at 10,520, and this month's resistance is 11,035.

Source: Thomson / Reuters

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No positions in stocks mentioned.

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