These Piggies? Not So Little

Seven more banks were closed by the FDIC on Friday, bringing the total for the year to 64--and the total since January 1, 2009, to over 200. Ho-hum, business as usual, right? Not exactly. What makes Friday's tally noteworthy is the cost to the Deposit Insurance Fund: over $7.3 billion for these seven, compared to $8.6 billion for the previous fifty-seven. So losses to the DIF are accelerating.

The FDIC knew coming into 2010 that a year's worth of premiums from the insured banks would not be enough to cover expected failures. So it billed the banks not only for 2010, but for 2011 and 2012 as well, all of it due last December 31. That meant an infusion of over $45 billion into the DIF, some of which was needed to paper over a deficit from 2009. At the current burn rate, the DIF will be wiped out by the end of July. After that the FDIC will be borrowing from the U.S. Treasury, which itself is so far in the hole that Chinese airspace is almost visible underfoot.

Ever since April 16, short-sellers have been circling Goldman Sachs in a feeding frenzy sparked by a complaint by the Securities Exchange Commission that the firm had defrauded investors. The scary part is that Goldman never thought it was doing anything wrong by peddling synthetic CDOs without transparent disclaimers. It was more business as usual, no moral compass required. Goldman still believes it is clean--godly, even--but at least now it is disclosing legal risks to those who do use a compass. Yesterday the firm revealed that it has been hit with seven lawsuits so far (not counting the SEC's), alleging “breach of fiduciary duty, corporate waste, abuse of control, mismanagement and unjust enrichment.” The plaintiffs allow that, other than those few things, Goldman has done a fine job.

The cost of insuring Goldman's debt (using five-year credit default swaps) has nearly doubled since the SEC announcement, suggesting that investors do not share Goldman's estimation of its own invincibility.

Pollyannas have cheered U.S. auto sales figures for the past two months as proof that the economic recovery has taken hold. However, a glance at the graph below from CalculatedRiskBlog.com confirms that sales are nowhere near the 15-16 million units per year needed to sustain the existing manufacturing capacity. We can detect a Cash-for-Clunkers spike in 2009 and the more recent (and less robust) Toyota-incentives spike. Otherwise we are stuck at a run rate of 10-11 million units annually, about where we were twenty years ago when there were far fewer registered drivers.

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