Spotlight turns to FDIC

Herb Greenberg

December 14, 1990|By Herb Greenberg

Get ready for more bad news on banks. Next week banking experts will testify before the House Banking Committee regarding the health of the Federal Deposit Insurance Corp.

The FDIC insures bank accounts.

Eric Hemel, an analyst at First Boston, said in a recent report that he believes the experts "will employ rigorous analysis to demonstrate that the FDIC is insolvent on an economic basis, and that the depth of the insolvency is potentially staggering."

Hemel was director of the Policy Office at the now-defunct Federal Home Loan Bank Board and knows the experts.

While a taxpayers' bailout of the banking industry is currently "politically untouchable," he believes that congressional reaction to the report "will confirm the obvious point that the banks themselves will be expected to bear the economic burden of this problem in the form of higher deposit insurance assessments -- either on an annual basis or through a series of one-time hefty contributions of cash."

Among the beliefs -- both real and perceived -- that he sees quickly spreading through the markets:

* The FDIC is insolvent and soon will be bankrupt "unless radical measures are taken quickly."

* FDIC losses could hit $50 billion to $100 billion "and possibly more under the worst-case recession scenario," versus this year's loss of $4 million. The FDIC's insurance fund stands at about $10 billion.

* The economic consequences of the FDIC crisis will fall on all banks, strong and weak alike.

RUMORS RETURN: Earlier this week the stock of Beverly Hills-based Hilton Hotels rose nearly 7 points in a single day on rumors that an investment group was being formed to buy the company for $75 a share. The stock has since deflated, but its rise suggests that the rusty rumor mill, which has been silent since the demise of junk-bond financing for takeovers, is trying to grind back into action.

"If this Hilton story had come a few months ago, it would have been up only a point or two," says arbitrager Frank Gallagher of Broadstreet Equities in New York. "But we've had a couple of deals lately where things have leaked out pre-deal" -- Matsushita's bid for MCA, and AT&T's offer to buy NCR -- "and people have made money in them.

"Now the market's up a bit, the Fed's easing and people are saying that deals are back."

Gallagher, who specializes in takeover arbitrage and short-selling, recommended shorting Hilton at the height of the takeover frenzy last year, when the company was trying (unsuccessfully) to auction itself and its stock was selling near 100. Now he doesn't think the stock is worth much more than 20 based on his 1991 earnings estimate and in view of the market's disdain for other casino and lodging stocks. It currently trades at about 38.

BLOWOUT: L.A. Gear, the maker of tennis shoes, earlier this year signed contracts with more than a dozen college basketball teams. One was the Marquette University Warriors in Milwaukee.

By early December the number of shoes that experienced "blowouts" had reached between 25 and 30, the Milwaukee Journal reported. In a recent 108-71 loss to Kansas, the sole of one player's shoes "tore completely away from the rest of the shoe," the Journal reported.

For the next game, the Warriors came on court wearing Nike shoes.

It's not clear whether the same problem has affected other teams. An L.A. Gear spokeswoman didn't return my call.

The incident comes at a crucial time, as the company is planning an imminent launch of its Catapult performance shoe, which is supposed to put it on equal footing with Nike and Reebok in sports. Anticipation of the Catapult had caused the company's stock, which had come unglued earlier this year, to come alive in recent days, before retrenching some. It currently trades at about 14.

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