Saturday, August 02, 2008

The Week of August 1st - The Unders take it! FDIC Nationalizations Continue Apace

My younger brother (LB) has set the over/under on FDIC weekly depository institution nationalizations at 1.5. He sent me an email about this on Thursday of this week. I think he's spot on. Last weekend we had two (over). We picked up one more this week (under).

While trying to avoid schadenfreude, I have to admit that I start checking my Blackberry every Friday evening at around 6:30pm EST to see which banks the FDIC chose to euthanize that week. I keep expecting SnaFu to show up on the list, but it's probably still six or eight weeks out. As fear builds, housing prices fall, and credit values decline, SnaFu loses. I can't help but feel it is only a matter of time. Part of me hopes I'm wrong... (see my July 15th and July 27th posts for more on the pending death of WaMu/"SnaFu" - for the record, I'm personally short WaMu, but primarily as a macro hedge).

This week's "victim" (I'm not sure that's the right word, since really the bank is the culprit) is Florida based First Priority Bank. It's a fairly small bank with only $260 million in assets and is almost entirely deposit funded. The FDIC is expecting a $72 million loss on the nationalization. At 28% of assets, that is a relatively enormous hit. Let's hope for all our sakes that if, oh, I don't know, some hypothetical $320 billion depository institution was nationalized it doesn't suffer a similar loss ratio since a $90 billion hit would be astoundingly high. Seriously, how is nobody talking about this? This is a potentially enormous issue with a reasonable probability and there seems to be this radio silence on the topic.

First Priority is the first bank in Florida to go down since March 2004, which is kind of surprising to me given how overbanked Florida is, how crazy its housing situation was, and the generally low level of good corporate governance in Florida. Florida's situation just screams "pending wave of banking failures". I suspect that this will not be the last depository institution to go down this year in America's Right Foot (frankly, I suspect it won't be the last one in August!). By the way, how horrible did the bankers of the 2004 banking failure have to be? Was there a better place and time in history to run a bank?

Anyway, strap your boots on. I'm worried the snowball is still near the top of the mountain just beginning to gain strength.