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Local law firm Venable LLP has pointed out two little-noticed signs that the government is taking aggressive measures to buttress a clearly overstressed financial system. One is the Federal Deposit Insurance Corp.’s recently announced plans to beef up the group that manages assets from failed banks by as much as 60%. The Division of Resolution and Receiverships will expand by a 140-person headcount. The second is the FDIC’s “prompt corrective action” notice delivered last week to Fremont General, a 22-branch California-based bank that at one time was country’s fourth largest sub-prime borrower. Today, it is literally running out of capital. Fremont has 60 days to raise its capital or, under the notice, will be forced to sell.

Both steps augur poorly for the capital markets in the near to mid term – not that further confirmation that there are hidden problems in the system was required. Venable West Coast financial services partner Joseph Lynyak notes that there have been virtually no bank failures for the last decade. The FDIC, he speculates, is concerned about having enough resources in place as the financial services industry enters a new and difficult cycle.

The last year and a half has seen a significant increase in the amount of commercial real estate assets held by local, regional and national banks – and these assets appraised value are going to be, if they haven’t already, called into question. Lynyak says the corrective action order will likely be the first of many to be issued in the coming months now that Q1 is all but over. “The FDIC posts these orders once a month, and I suspect we will be seeing many more of these. The FDIC has made clear it wants to be aggressive in these matters.”

There has been much speculation and discussion about the Fed’s evolving role in the credit crisis and what its actions may signal. Lynyak maintains that the FDIC is just as an important agency to watch, albeit in a different way. “Of course what the FDIC does on any given day or week will not be as dramatic as what the Fed can do in one day,” he says. “But the fact that the FDIC is ramping up staff, in particular, is a good sign that more troubles are expected in the banking sector.”

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