FDIC Chief Whistles Past The Graveyard

FDIC Chairman Sheila Bair, perhaps looking for a break in the relentless storm of the financial crisis, said that only 13% of banks on the agency’s watch list actually fail. According to Reuters, "The agency has a running tally of problem banks that its examiners closely monitor. At the end of the first quarter, 90 institutions were on the list that is expected to be updated next month."

It is, in many ways, like saying only 13% of people who smoke will die of heart disease. For those who pass on to their rewards, the prediction may not be comforting.

The comments from the FDIC chief are also a cruel trap that distorts the trouble underlying the nation’s banking system. By looking at old numbers, an analyst can paint a modestly optimistic picture. The truth is much more insidious and dark.

The IMF’s Global Financial Stability Report predicts that total losses by financial institutions due to the mortgage crisis will top $1 trillion. Since the trouble originates in the US, the brunt of those losses will probably be realized by American banks. The swell out at sea has hot hit land yet.

It may be the job of government to talk down trouble. It placates the citizens and gives them false hopes.

The FDIC numbers say that, based on the best information they have, only about ten more banks will fail. There is no truth whatsoever in the figure.

Douglas A. McIntyre