Capital Gold Group Report: Is the White House pushing bank failures onto the next administration's plate?

The Washington Post reports that the number of bank failures has been surprisingly low. But the crunch count is likely to grow as the problem bank list triples from 90 to 300 over the next three years. Meanwhile, the Federal Deposit Insurance Corporation (FDIC) could run out of money to pay off depositors of future failed banks unless it raises its deposit insurance rates from their current 5.4 cents per $100 deposits.

But the most interesting question is whether the White House is propping up banks that should fail so that it can push the biggest part of the cleanup into the lap of the next President. It is certainly bringing out all the biggest economic guns to delay the inevitable reckoning from the $8 trillion credit collapse. It spent $29 billion bailing out Bear Stearns, sent $160 billion worth of checks to taxpayers, cut interest rates from 5.25% to 2%, and seems belatedly to be enforcing regulations against manipulation of oil trading.

The Post quotes industry experts who think that the FDIC is propping up many banks. For instance, Bert Ely of Ely & Co., a bank consulting firm in Alexandria, VA, told the Post, "They are dragging their feet in forcing these banks to reserve realistically. Some of these banks could have been closed two or three quarters earlier." And Ken Thomas, a lecturer in finance at the Wharton School at the University of Pennsylvania, told the Post that the FDIC's foot dragging would only cost taxpayers more in the long run. Thomas said, "In some of these cases, I believe regulators should act sooner than later to prevent future losses to the fund."

With record bank losses possible this year, the FDIC's fund could drain to a dangerously low level. The Post reports that "The failures so far this year will drain the FDIC's insurance fund by an estimated $9.2 billion." And this year's losses could hit the inflation-adjusted record of "$12.8 billion set in 1988."

The drain on the FDIC's fund could happen fast. Losses so far this year will cut 17% from its record high balance of $52.8 billion at the end of the first quarter. That could drop the fund below its minimum requirement of 1.15% of all U.S. insured deposits. The reason? The number of problem banks is likely to rise from 90 to 300 in the next three years according to Gerard Cassidy, an analyst with RBC Capital Markets. The Post reports that historically, regulators end up closing "about 13 percent of the institutions" on the problem bank list.

I spent the summer of  1982 working with the FDIC's liquidation division which was in charge of selling off the assets from failed banks. And it looks like that division will be very busy in the next few years. It would not surprise me if that spurt in activity begins after the November elections.

Peter Cohan is President of Peter S. Cohan & Associates.

Capital Gold Group, gold group, gold, gold prices, gold news, gold coins, gold bullion, gold IRA, IRA gold