Dear Jim,

The FDIC closed another five banks on Friday 11/6/09. I find the details of the closings more interesting than the number of banks closed, though both figures are quite sobering.

The largest bank closed was United Commercial Bank of San Francisco, California, which had (according to the FDIC’s Press Release) 63 branches in California, China and Hong Kong, $11.2 billion in assets and $7.5 billion in deposits. The projected cost to the FDIC is $1.4 billion, plus the FDIC entered into a loss-share arrangement with the acquiring bank on approximately $7.7 billion of United Commercial Banks’ assets. It’s not clear to me whether the $1.4 billion estimated cost to the FDIC includes a projection of the losses it will take under the loss-share arrangement or whether one is in addition to the other.  However, the nature of a loss-share arrangement implies the assets in question are so illiquid and hard to value that neither party is willing to assume the full risk of future losses.  Therefore, the $1.4 billion needs to be understood as a bare minimum cost to the FDIC.

$1.4 billion is a big hit in absolute terms, particularly to an agency that’s already broke.  The fact that this closing will pass with very little press coverage is a testament to how overwhelming this economic disaster has become. We have literally become numb to the enormity of these figures.

What’s even more disturbing, however, is what these numbers say about the terrible condition this bank was in by the time the FDIC got around to closing it. To repeat, the FDIC says the bank had about $7.5 billion in deposits and the FDIC’s projected cost of closing the bank is at least $1.4 billion. That means that about one-fifth of the deposits had effectively disappeared.  Also, $7.7 billion of the bank’s assets turn out to be of such questionable value that the acquiring bank will only take them subject to a loss sharing agreement with the FDIC.  That implies that in the final analysis, none of the deposits were backed by collateral that could be characterized as being of sound value.

The remainder of the banks closed this week, while much smaller in size, show a similarly alarming loss of value by the time the FDIC got around to closing them.

Gateway Bank of St. Louis, MO, had total deposits of about $28 million, and the FDIC projects it will cost about $9.2 million to close it — about one third of the value of the deposits.

Prosperan Bank of Oakdale, MN, had total deposits of about $176 million, and the FDIC projects it will cost $60.1 million to close it — a bit more than one third of the value of the deposits.

Home Federal Savings Bank of Detroit, MI, had total deposits of about $12.8 million, and the FDIC projects it will cost $5.4 million to close it — a bit more than two-fifths of the value of the deposits.

United Security Bank of Sparta, GA, had total deposits of about $150 million, and the FDIC projects it will cost $58 million to close it — just shy of two-fifths of the value of the deposits.

It’s pretty terrifying to think that institutions directly under the FDIC’s supervision, that are not alleged to have engaged in fraud, were allowed to lose such a large chunk of the value of their customers’ deposits before the FDIC got around to closing them. It’s clear the FDIC is overwhelmed, both practically and financially. It’s also quite likely that the architects of MOPE will continue to try to limit the number of banks that are permitted to fail each week in order to manage peoples’ perceptions of the health of the banking sector. Therefore, it stands to reason that future bank closings will continue to show increasing losses to the FDIC as a percentage of deposits.

This is just one of the many ongoing indicators screaming that this financial crisis is far more serious than anything this country has ever experienced.

Against this background, it is truly incredible that people continue to buy into the MOPE that the situation is under control and that Western governments’ printing tens of trillions of dollars to prop up the banking sector will not have serious negative consequences. It brings to mind Monty’s recent sage advice, one should never underestimate markets’ abilities to behave irrationally over prolonged periods of time.

Respectfully yours,
CIGA Richard B.

Jim,

Commercial trader outflows as the dollar rally illustrates the formation of a textbook bearish setup.  See 2006-2007 for comparison.  The most aggressive portion of this primary downleg should begin within in weeks.  Jim, you know what that means for gold and silver.

CIGA Eric

Click chart to enlarge in PDF format

Dear Jim,

When I started following JSMineset close to four years ago it was often difficult for me to get through as much as a paragraph of the discussion. You and other contributors have such a facility with the subjects you discuss it’s probably beyond your comprehension how "greek" all of it sounds to someone who has never been exposed to it before.  I’m not sure when that changed for me exactly, but I know it happened because I kept reading the words over and over until they began to make sense to me.

The amazing thing for me now is that I can look at an article like the following and know before the end of the first sentence the key point that will come out in the discussion. A gold and silver miner has a record quarter in terms of production and revenue, yet suffers a multi-million dollar loss.  How is that possible?  Answer: derivatives.

I hope everyone who has found their way to this site will stick with it and put in the time to understand what is being taught. These are unprecedented times and I believe the contributors to this site are among a very few who understand the keys elements of what is happening.

Respectfully yours,
CIGA Richard B.

Coeur loses money despite record precious metals production, revenues
Author: Dorothy Kosich
Posted:  Friday , 06 Nov 2009

RENO, NV – While Coeur d’Alene Mines has experienced what CEO Dennis Wheeler called "a year of exhilarating growth" with record gold and silver production, the Idaho-based silver miner still reported a net loss during the third quarter of $17.3 million or negative 52-cents per share.

Wheeler told analysts Coeur will mine 18 million ounces of silver this year, twice the 2008 production levels. The company also expects to produce 70,000 ounces of gold for this year, a 52% increase over last year.

However, losses on derivatives based on the Palmarejo gold royalty obligations, the Franco-Nevada warrant, put and call options, the gold lease facility and forex contracts cost the company $35.7 million in income during the third quarter.

Losses on derivative instruments for the first nine months of this year were $49.6 million, while interest expense was $12 million related to the gold lease facility, royalty obligations and other short-term borrowings.

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