Who Says Friday’s are Boring?

Posted by Ray on July 10, 2009 under Main | Be the First to Comment

They aren’t, especially for the FDIC which handles failures on Friday nights. So far this year we have had 53 failures, and a small Wyoming bank failed tonight called the Bank of Wyoming, compared to only 25 banks last year. That is pretty surprising to many in America as the failure rate is up 110% in failures in 2009 and it is only July.

This is more embarrassing than anything else simply because we have thrown so much money at these banks and they are still failing. Most of the failing banks rely upon “hot money” which basically means they attract deposits through retail investment advisors through syndicated CD’s. This hot money pays more than typical CD’s and the broker or advisor also gets paid, depending on maturity it can be anywhere from $.50 – $5 per thousand or higher.

The hot money was then used to loan to construction loans or other higher returning loans because the money had such high carrying costs banks needed to take more risk to make this hot money growth plan work. As you already know real estate and the riskier loans basically all failed or had very high rates of failure. So, banks with high hot money flows are having a very bad time and are more likely to fail. I used to sell these products to investors and why not? They were FDIC insured and beat the banks rate by at least 50 bps or more.

There you have it, Fridays are fun for the FDIC, I guess, and failures are on the rise. Chances are we will see many more banks fail over the next 1-2 years. Like i said, this is more embarrassing than anything else, but still a problem to some extent.