FDIC Announces IndyMac Losses Approaching $9 billion; Predicts Depositor Insurance Will Need to be Socialized

Seriously? $9 billion of losses on IndyMac? When they took IndyMac down, they announced losses would be between $4 and $8 billion. After a few weeks, they announced it would be over $5 billion. Now, just two months later, we are at $9 billion?

How on Earth does anyone trust the balance sheet of any bank???!!!???!!! This is coming from the FDIC. Sheila Bair has been nothing if not straightforward. They don't have the same incentive to lie and deceive that bank management teams have. So, even in their effort to be realistic, they've mis-estimated the magnitude of the problem at one medium sized bank by a mile.

Makes me wonder if perhaps one lesson they have learned is to euthanize broken banks sooner...

It is not as if we are talking about Bank of America where a couple billion is just basis points on its balance sheet. We are talking about a $32 billion asset institution and in two months, the value of its assets has ranged by $4+ billion. If you are levered 12:1 (as a well capitalized bank) and your assets are fluctuating in value by over 10% in two months, your business is broken.

IndyMac is not alone. It does not own uniquely bad assets. While it may be far out on the bad spectrum, it is certainly not alone in its positioning.

What's even scarier is the thought of how much capital it would require to get IndyMac back to "well capitalized". We start with the $9 billion of insured losses (assuming the FDIC doesn't bump this further yet!), add $1 billion of uninsured losses. No we are at a zero equity position. In order to be well capitalized and have some margin for continued deterioration, it probably would require another $2.5 - $3.0. So, just to get the bank back to minimum operating standards, IndyMac would have needed a $12.5 billion injection. Well, that doesn't work from a return standpoint, so nobody in their right mind would be willing to plug that sort of hole (particularly given its lack of any meaningful franchise value).

Now, imagine our good friend Snashington Futual (or SnaFu). SnaFu is 10x the size of IndyMac but claims to have "recapitalized" by raising $7.5 billion. Ha! I laugh at that $7.5 billion. Per the FDIC's own work, that $7.5 billion is nothing in the context of this situation. It is a rounding error.

Also ignored by the mainstream press is that the FDIC is basically stating they expect to blow through their entire deposit insurance fund and may need to rely on the good graces of the American Taxpayer (not that there are many of us left, it seems...and wait until Obama becomes President) via the Treasury to insure further losses. Well, the deposit insurance fund is still about $45 billion strong. Given that losses are averaging more than 20% of assets, the implication of more than $45 billion in losses still to come means that the FDIC is expecting depository institutions with at least $225 billion in aggregate assets to fail in the coming year!!!

How is this not news?! That is failure on a massive, massive scale!

Strap your boots on, the carnival is just getting underway.