Lets Play Commercial Crisis: Inning 1

When you deposit money in the bank, that money is insured by an organization called the FDIC. That means if the bank you keep your money at should fail or go bankrupt, the FDIC will guarantee that you will receive up to $250,000 of the money you hold there.

The FDIC currently guarantees $4.5 trillion in American bank deposits. As of last year, the FDIC held $45 billion in their reserve account. Last week they reported that the reserves fell to $10 billion to end the second quarter. (June)

Every Friday night they announce 3-5 new closings and most likely their fund is now at zero. Back in March they asked Congress for an additional $500 billion should their reserves run out. That request was granted, and the FDIC only has to go ask for the money when needed.

You'll probably be hearing about the first $100 billion being tapped in the next few weeks.

Meanwhile, whats causing these banks to close their doors is the commercial real estate crisis which has just kicked off. We are in inning one of this four year blood bath as loans begin to reset and explode on bank's balance sheets.

There is no Fannie Mae, Freddie Mac, Ginnie Mae, FHA or other government lender to buy commercial mortgages. Those entities only purchase residential mortgages. Commercial loans are for the big boys, and they are in serious trouble.

35% of the lending for commercial loans during the boom years came from securitization. Just like housing, commercial loans were bundled and sold off in packages to investors around the world.

That lending today is non-existent. Commercial owners were counting on that market being there when they took on five year short term loans. Now they have run off a cliff and realize they do not have a parachute.

There is only one person that can help them now: Ben Bernanke. His actions will determine where the market ultimately goes.

He can let the free market work, let the loans fail, and let new investors purchase these loans with real capital. Or he can try to paper over the losses as he has done with everything else.

Either way the losses will be the same. Prices will still fall for real estate across the board, but they will fall priced in gold, not dollars.