9/25T8:58 News & Notes

FDIC may need $150 bln bailout as local bank failures mount - Bloomberg.com
Bloomberg.com reports FDIC insures all accounts up to $100,000 at its member banks, and it has never failed to honor a claim. The IndyMac debacle is taking a large bite out of FDIC reserves, and if scores of other banks fail in the year ahead, the fund will be depleted. Taxpayers will have to step in. The FDIC knows which banks are at risk; it has a watch list with 117 institutions. The agency won't disclose their names because doing so could cause depositors to panic and pull out all of their funds. It won't take many more failures before the FDIC itself runs out of money. The agency had $45.2 bln in its coffers as of June 30, far short of the $200 bln Whalen says it will need to pay claims by the end of next year. The U.S. Treasury will almost certainly come to the rescue. Emergency federal funding of the FDIC could swell the cost of government rescues of failed financial institutions to more than $400 bln -- not including the $700 bln general Wall Street bailout now under discussion in Congress. That number would be even higher if the government were on the hook for uninsured deposits -- which amount to $2.6 trillion, 37% of the total of $7 trillion held in the U.S. branches of all FDIC member banks... As recently as March, an internal FDIC memo estimated the cost to cover bank collapses in 2008 would be just $1 bln, dropping to $450 mln in 2009. It wasn't even close. The IndyMac failure alone, which happened four months after that memo was circulated, will cost the FDIC $8.9 bln -- and the bill for all 12 collapses will be about $11 bln, the FDIC says.

TED Spread widens to record 317 basis points - Bloomberg
Briefing.com note: The TED Spread (ticker .TEDSP Index on Bloomberg) measures the price spread between active three month U.S. Treasury bill futures contract and the 3 month eurodollar futures contract (for which LIBOR is used as the proxy). A higher spread indicates banks are less willing to lend to each other. As such, it's used as an indicator of credit risk and investor confidence in the U.S. markets. The spread has widened materially over the past few days as the $700 bln rescue plan is being debated in Washington. The spread was only 1.2105 only two weeks ago. During the failure of Bear Stearns, it briefly touched over 2.0.
RCM Comments: We monitor the TED spread and LIBOR rates to see if the credit crisis is easing. So far all the talk of financial bailout has not helped to ease the real problem: lack of liquidity.

China lenders ordered to halt interbank deals with US cos - SCMP.com
SCMP.com reports China regulators have told domestic banks to stop lending to United States financial institutions in the interbank market in a bid to prevent possible losses during the financial crisis, industry sources said yesterday. The ban from the China Banking Regulatory Commission applied to interbank lending of all currencies to US banks but not to banks from other countries, a source said. The decree appears to be Beijing's first attempt to erect defences against the deepening US financial meltdown after the mainland's major lenders reported billions of US dollars in exposure to the credit crisis. Another banking source said the CBRC issued the ban after obtaining data about the exposure of mainland banks to bonds issued by bankrupt Lehman Brothers. Top officials said they were keeping a close watch on the crisis and warned mainland financial institutions to be cautious in their daily business and overseas expansion
RCM Comment: Question: If the Chinese government is directing the private sector to stay away from US debt, how far away is the decision for the government itself to begin limiting the amount of US Treasury debt it buys? This reduced Chinese buying will be devastating for the US$ as it will lead to higher interest rates and will be very bullish for gold.