I generally like being factually correct in my reporting but this time I truly wish I was in the barking at the moon class. Based on the finance stuff I find at The Automatic Earth, the energy stuff I see at The Oil Drum, and the environmental coverage from Real Climate I’ve been expecting us to get a species sized shit sandwich sooner rather than later. Economic collapse is not caused by the other two, at least not yet, but it’s right here, right now, with the nationalization of Fannie Mae and Freddie Mac being just two of several predicted events.
Keeping with DailyKos tradition you get to read the paper a few weeks in advance, because the headlines are going to scream this one:
FDIC to be directly backed by U.S. Treasury
Jump the shark to read the ugly details ...
I wrote about Fannie Mae and Freddie Mac’s impending doom a previously, calling their demise a couple of months early. I’m trigger happy that way.
Around that time I also wrote a bit about Indymac, the poster child for bankers gone wild, publishing the diary right about the time the FDIC showed up and made them put their clothes back on. They then made all of the management leave the building and set about cleaning up the largest bank failure to date, one that nipped roughly 10% of the FDIC’s $51 billion in reserves.
The FDIC is an insurance operation. A few cents of every Benjamin that hits an FDIC insured bank’s books gets flipped to the FDIC to cover the inevitable bank troubles. Banks formerly got into trouble by not being diversified enough. A packing plant closing near my home town got the little two branch bank that served us; everything they were into went south when hundreds of jobs disappeared all at once. They closed down for one day, the FDIC people were around for a bit, and the bank got acquired, so now we have four locations instead of just two.
Bank troubles today are different. The problems we face are systemic. That’s an English word but it has grim implications that need some translation when applied to our banking system. When I use this word what I mean is that the problems that got Indymac are going to get a whole bunch of additional banks because they’re everywhere.
Fannie and Freddie were the mortgage lenders of last resort. Last fall the credit markets largely froze up, they were the only ones left still buying mortgages, and every bit of shit that could be packaged up and moved got stuffed into their books, with all parties involved knowing full well it would go *B00M* at some point, landing squarely in the taxpayer’s laps. That would be you, Mr./Ms. Taxpayer ... how do you like your estimated $525,000 tax burden, half of which came because we socialized the losses of our compulsive gambling "financial sector"?
Ah, but I digress – lets get back to the soon to be dearly department FDIC. While Fannie and Freddie got all of the worthless crap related directly to the housing business the 8,500 FDIC insured banks are stuck with the collateral damage that went along with that binge. Where do the construction contractors that are no longer building houses get their financing? The bank. Operating credit lines for every coffee shop, convenience store, and dog groomer? The bank. Vehicle loans for those construction workers and all those SUVs in those soon to be vacated suburbs currently populated by as yet unaware FWOs? (Formerly Well Offs) Oh, you’re catching on – the notes are with the bank.
So, 8,500 banks insured, 10% are in the "doomed" category by one credible analysts reckoning (I forget which, reading The Automatic Earth is like filling a tea cup from a fire hydrant), and another 15% are probably going to go down that path – hence my calculus that 2,200 banks were going to die.
The names most commonly mentioned among those who’ve qualified for front page coverage on the Bank Implode-O-Meter are Wachovia and Washington Mutual. Monday, while everyone else soared on the news of Fannie and Freddie’s new lease on life, WaMu staggered lower. I can’t find the link now but I believe that one of those two has about six hundred billion and the other about five hundred billion. Either one failing would totally overrun the FDIC’s remaining forty billion, fill up their thirty billion dollar credit line from the Federal Reserve, and immediately send them scampering off to Congress looking for assistance.
So ... any one of the biggest banks can knock the FDIC flat if they fail and I hear whispers indicating four of the very large ones are going to let go, with WaMu and Wachovia certainly being two of those. I bet one of the others is Bank of America, who sneakily swallowed up Countrywide a while back in order to conceal the risk they faced in having backed that operation.
Fannie and Freddie represent a five trillion dollar housing bubble that is certain to deflate by at least one third and perhaps as much as two thirds. The inevitable FDIC "bailout", which will come either right before or right after the election, means We, The People get to be responsible for a few trillion in deposits among those 2,200 dying banks.
This problem is systemic. A bailout presumes you have some way to spread the pain around, but in this case we’re got thousands of zombie banks that will cease to operate as the FDIC has the time and resources to unwind them and the malnourished survivors certainly can’t float the premiums needed to recharge the FDIC’s fund, unless of course depositors are willing to accept a -20% rate on their deposits, so it all lands in the taxpayer’s laps.
This is going to come hot on the heels of the Fannie/Freddie U.S. Treasury backstop. Our national debt doubles in the blink of an eye, then a quarter of our commercial banks implode, and it’s all backed by "the full faith and credit of the United States". This will bury the dollar, making imports crazy expensive ... and we’re importing 70% of our oil these days. Are you ready for $8/gallon gas and $10/gallon heating oil?
Oh, and don’t vote for John McCain. His lead economic guy is Phil Gramm, and the former Senator deserves a lot of credit(no pun intended) for this awful mess as he had a hand in the repeal of the Glass-Steagall Act.