Last week we learned that, of
America’s 8,195 banks, 416 are in trouble right now. The FDIC calls them "problem banks." That means the FDIC is watching those
416 banks like the proverbial hawk.
If any, or all, of those 416 banks have reserve numbers which dip below
the fail-safe levels established by the FDIC, those banks will fail, just like
the 81 banks which have already crashed and burned so far this year, 45 in the
second quarter of this year alone.
Banks lost $3.7 Billion in the second quarter – loans that went south
are the reason.
No
problemo, you say – that’s what the FDIC is for – the FDIC which proudly
says that not one single dollar of deposits insured by the FDIC has ever gone
unpaid. Why, Congress last Fall,
during that blizzard of financial meltdowns that scared us all so profoundly,
even went another step and raised the FDIC’s level of insured deposits from the
old $100,000 per account to a new $250,000 threshold. Not to worry, right?
Not so fast.
The FDIC announced late last week
that its reserves – the do re mi used
to make good on those deposits in failed banks – have now dipped to their
lowest level in nearly 16 years: a 20% drop to only $10.4 Billion left. One mid-sized bank failure out of the
416 on the endangered species list could take out all of that $10.4 Billion and
more.
So, amid much media attention
lately to announcements, hints, suggestions and prayers that the end to our
long national financial nightmare is finally in sight, the stark reality that
the banking industry is still in need of emergency care has been made quite
clear, like an old-time window shade suddenly snapping up to its full, upright
position, with that sharp cracking sound that only an old-time window shade
rolling up could make.
This news is an indicator of
something, which is painfully obvious to those in the commercial real estate
field. Those refinancings (known
as "re-fi’s" by the real estate cognoscenti),
which are the very lifeblood of American commercial real estate and like
Mother’s Mile to those with the guts to try to ride that tiger to untold wealth
beyond dreams of avarice, are just not happening. You see, when times are good, commercial real estate owners
use their ability to re-fi a property (which they bought a year or two ago and
whose value is climbing) to get most or all of their original funds out of the
deal and even to obtain more funds to do more deals or to renovate and perhaps
environmentally remediate the property.
That is hardly happening at all in this current market and therein lies
the problem.
You would think in a time when the
cost of money from the Fed which banks use to loan their customers is nearly zero, that bankers would jump
at the chance to do all those re-fi’s and make a handsome profit using the
Fed’s money nearly for free. Well,
that would be the case if the banks were not saddled with so many
non-performing loans right now.
Banks must keep adequate reserves according to the FDIC’s measure or one
fine Friday at the end of the day, the Boys from the FDIC show up, shut the
bank down, and usually re-open the next Monday with their owners having lost
their entire investment in that bank.
That requires the FDIC to have adequate funds to pay the depositors,
something which is not happening right now with the FDIC’s reserves so low that
one mid-sized bank will literally ‘break their (the FDIC’s) bank."
This dire, Daisy Chain effect is
further enhanced by record unemployment and massive bankruptcies of commercial
real estate tenants. Even where
the tenants manage to remain solvent, they have all the leverage now to demand
that their landlords re-negotiate their leases which were entered a few years
ago when values were high and all were living high on the hog. Either way, without sufficient rent
paid, commercial real estate owners cannot service their debts and the banks who
lent the money get the short end of the stick.
The New York Times quoted FDIC
Chairwoman Sheila C. Bair as saying: "these credit problems will at least
outlast the recession by a couple of quarters." That does not bode well for the 416 banks on the FDIC’s
hit list or the owners of commercial real estate.
Some have recently said that the
‘other shoe’ still has not fallen in the world of commercial real estate and
that the worst is still yet to come.
The FDIC’s rather startling announcement of its dried up reserves may
prove to be the sound of that other shoe falling.