Testing the strength of the FDIC

For all intents and purposes, IndyMac is done as an ongoing concern. The current administration desperately wants to kick the collateral damage of this blow-up down the road to the next regime, so you will see a slow and painful winding down. Of bigger concern are a couple of fundamental issues that are affecting this blow-up which are pervasive across all the financials. There is little capital to be raised and mortgage assets can only be sold at a loss. In the current environment of deflation, this is a death-blow to balance sheet impaired banks. This is and will not be contained to IndyMac. They are large, but not too large to fail and there are others like them out there. This will ultimately get unwound through the FDIC and the FDIC is woefully under-capitalized to handle the significant amount of loss that is headed its way. This administration knows this and does not want any semblance of a public funded bail-out on its watch and in a worse case, a panic on teetering banks.

Look for a significant number of bank failures beginning this year and accelerating into next. FDIC will be overwhelmed by the sheer numbers of banks and the size of the losses. The next administration has a hell-storm on its hands. There's no difference between the levee's in New Orleans and the FDIC. Both were built to contain disasters and neither was adequately built. We'll be testing that statement over the next two years.