The Road to Hell is Paved with Dead Banks

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12 Down…How
Many more to Go? And the FDIC pulls a Fast one on the First Regional’s
Retirees…

It’s just
one month into 2010, and the FDIC has already seized 12 banks –
the ultimate and embarrassing result of insolvency. Multiply that
out by 12, and it would appear, on the surface, that the FDIC is
on track to close about 144 banks this year.

In 2009, the
FDIC closed a total of 140 banks. With the second wave of subprime
and Alt-A mortgages set to hit in the later half of 2010, I’d
expect a ramp-up in the number of banks that need to be seized…and
my
colleagues are expecting something much more sinister might be underway…

Already, I’ve
compiled a list of the top 108 banks likely to fail this year. What
makes them likely? They’ve all got Texas Ratios above 100.
It sounds scary, but you won’t truly be frightened until you
understand exactly what that means…

A full-fledged
collapse in real estate occurred in Texas in 1980, as the high oil
prices of the 1970’s drove up land values. A team of analysts
at RBC Capital Markets, lead by Gerard Cassidy came up with a simple
equation to determine a bank’s solvency, becoming this mysterious
Texas Ratio.

The math is
understandable. Simply divide the value of the lender’s non-performing
assets (i.e., bad loans) by the total outstanding equity and loss
reserves. When the ratio is at 1, the bank is insolvent.

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the rest of the article

February
12, 2010

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