Dead Men Walking

Every quarter, the FDIC publishes a "State Profile," which summarizes economic indicators, banking trends and a banking profile for the banks under the jurisdiction of the FDIC in each market. The Q4-2008 State Profile issued for the Maryland and Washington, D.C. markets reflects the doubling of past-due and non-accrual loans as a percent of the total outstanding loans, increasing from 1.81% in Q4-2007 to 3.87% in Q4-2008. That's an increase of $629.5 million in bad loans over and above the $611.3 million in bad loans at Q4-2007.

So who holds these loans? What is the underlying security? Why haven't they been sold?

The answer to these questions will not be found by the listening to Treasury Secretary Timothy Geitner who is busy performing stress tests while the patients rapidly die. Let's 'fess up. A lot of the American banking system is insolvent. New FASB rules on "mark to market," while providing a bump to the stock markets, won't suddenly bring current the $1.24 billion in bad loans in the Baltimore-Washington, D.C. region as of Q4-2008.

So what to do?

Sheila C. Bair, Chairman, FDIC Board of Directors, has the proper approach. Under her leadership, the FDIC has picked up the pace of closing failed banks. The FDIC has closed 21 banks year-to-date, versus 25 in all of 2008 and 3 in 2007. Someone should conduct a pool as to how many will be put down by year's end. I am guessing 200. Only when these insolvent are closed can the banking system return to normal. In a capitalist, democratic society such as ours, operating under fair rules, profitable enterprises live long and prosper, while failed enterprises close their doors and have their remaining assets, people and inventory scattered to the winds.

There is an abundance of equity capital standing on the sidelines today looking to acquire the real estate securing many of those non-performing loans. Let's put that equity to work! Every day this process is delayed is another day that the employees in those failed banks aren't working in another profession. Its another day that the depositors of those banks aren't sleeping soundly knowing that there bank is solvent. Its another day that the bankers who created the mess are collecting a paycheck trying to perfect a cover-up. And another day that a failed bank is sitting on the sidelines quaking at the thought of being outed as a dead man walking.