Chris Whalen to Bloomberg: Shut Up
Chris Whalen says the FDIC's deposit insurance fund is in no danger of going kaput. The noted banking analyst sent an open letter responding to a piece today by Bloomberg columnist Jonathan Well saying the fund is "broke." Presumably, the message is also aimed at other credulous financial journos (of which I seem to be one) echoing the theme.
Fuggedaboutit, says Chris:
Repeat after me: The FDIC does not run out of cash. The FDIC does not run out of cash.Well OK, then. In an analysis accompanying his letter, Whalen acknowledges that the FDIC deposit insurance fund may well rack up a "triple digit billion dollar" deficit as more banks collapse. But the real risk isn't that the fund goes broke -- it has ways of raising dough, as noted above. It's that banks may have to divert money to the FDIC to replenish the fund. That would severely reduce bank earnings, Whalen states.FDIC can confiscate all of the net assets and earnings of all FDIC insured banks. That is trillions in total. FDIC can borrow from Treasury, the Fed and even from FDIC insured banks. They can also issue notes.
Our worst case loss to the FDIC fund is $300-400bn THROUGH THE CYCLE (see attached). Where is the problem? It is in your minds and the minds of your editors. If you can't get your collective minds at Bloomberg News around the nuances of federal finance and the workings of the FDIC, THEN STOP WRITING ABOU[T] IT.
Either you and your editors just don't get it or Bloomberg is intentionally trying to whip up public fear regarding the FDIC to sell media. Either way, I am going to start doing the Mexican hat dance on anyone at Bloomberg who touches this story until you boys & girls get in right. Juan, please begin the music ...
The implication of a cumulative, triple digit billion dollar deficit in the DIF is quite grim for forward bank earnings. At the very least, it implies that investors can expect no stock buy backs or dividends for years to come and that reported bank earnings will be significantly below the past decade even if the US economy recovers at a pace well above consensus estimates. . . . Such insights have been largely ignored by the Buy Side community, who anxiously purchased bank stocks in 1H 2009 in a manner that suggests that these investors believe that the crisis is over and the future bank earnings are entirely unencumbered.