Financial panic: FDIC can’t insure deposit anymore!!

“Today, after protecting almost $300 billion in deposits since the current financial crisis began, the FDIC’s guarantee is as certain as ever,” FDIC Chairman Sheila Bair said in a statement late Friday. “Our industry funded reserves have covered all losses to date. In fact, losses from today’s failures are lower than had been projected.”

What? $300 billion only? Where’s Ben Bernanke’s Missing 2 Trillion?

“The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral. Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn’t require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=aatlky_cH.tY&refer=worldwide

FDIC is an accounting fiction.

“…the FDIC Insurance Fund is an accounting fiction. It takes in premiums from banks, then turns those premiums over to the Treasury, which adds the money to the government’s general coffers for “spending . . . on missiles, school lunches, water projects, and the like.”

According to About.com (here): Between 1986-1995, over 1,000 banks with total assets of over $500 billion failed. Even if the current crisis falls far short of the 1,000 bank total, the total assets involved will still be vastly larger. Just in the failures of Wachovia Bank and Washington Mutual, the total assets were $619 billion. Add to that the IndyMac failure and the six banks in the troubled list above and there is another $164 billion.

And I am not even mentioning the shadow banks (Merrill, Bear Stearns, Lehman and AIG are examples), which add hundreds of billions more.

There should be no false comfort taken in the prospect that we may have far fewer bank failures this time compared to the S&L crisis. The dollar amounts are likely to be many times larger.

“In the United States, the Federal Reserve’s printing press is running low on ink, and Ben Bernanke has his own choice to make: Buy a new cartridge or shut the thing down. He should shut it down.

In particular, I’m referring to the Fed chairman’s commitment to print $300 billion to buy Treasury bonds by the end of September.”

The Fed will stop buying Treasury by the end of September which puts Treasury in a very tough spot because now Treasury has very limited money supply for unknown demand from troubled banks.

500~1000 banks are in line waiting for FDIC
Remember what Sheila Bair reported to senator Jim Bunning recently. 500 banks are in trouble and the FDIC needs money. Harry Schultz says the same thing. Jim Willie says aprox. 1000 could close. Harry Schultz says possible bank holiday on 8/26 /FDIC reports 8/25. Its coming folks, be prepared, have some cash at home just in case.

The expected loss per the FDIC website is $2.8 billion, but expect that number to be higher because of additional losses on the loss sharing agreement between the FDIC and BBT:

“BB&T agreed to buy about $22 billion of Colonial’s assets. The FDIC said it will hold on to the rest - about $3 billion worth - and will try to sell them later.

The FDIC and BB&T will share losses on $15 billion of Colonial’s assets. Loss-sharing deals have become common since the financial crisis struck last year, as the FDIC tries to encourage more stable banks to take over failing institutions. “

Banks are already hit with a special assessment to keep the FDIC insurance fund solvent, but at the rate of bank problems, it may soon become a taxpayer’s problem.

$26 billion won’t hold this year’s record for long.

Karl Denninger estimates that Colonial’s failure would be a huge hit to the FDIC’s sparse funds and cause them to go to treasury for more funding. There are two other big banks he mentions - Corus and Guaranty that have negative Tier Capital Ratio.

Denninger’s take on FDIC’s solvency (or lack thereof) at this point:

http://market-ticker.org/archives/1335-One-Of-Three-Down;-Is-The-FDIC-Still-Solvent.html

“Left unsaid is what’s going to happen to the FDIC’s deposit insurance fund on this one - my guess is that it will be ugly, as these guys were up to their necks in Florida on development projects that went bad. The “value” of that paper may be very close to zero; if the FDIC avoids doing one of their 40% loss deals I will be quite surprised.

A 40% loss on this one would, if my math is right, kill the rest of their insurance fund plus quite a bit and put the FDIC in the position of immediately needing to go hit up Treasury for more money.

Rolfe Winkler (here) points out that the accelerating rate of bank failures may exhaust the Deposit Insurance Fund (DIF) at the FDIC, requiring that agency to draw on its credit line with the Fed. Rolfe calculates that the FDIC is currently on the hook for $8.3 trillion in insured deposits, had only $41.5 billion in reserves as of March 31 and has drawn that lower since.

Since only a small portion of deposits actually are paid out of DIF (failed banks have assets that cover most deposits), FDIC needs only a small fraction of covered deposits in reserve.

However, less than 0.05% is most likely several fold too small in a distressed banking system. The section title says the FDIC is in trouble. That is a polite way of saying they are bankrupt.

I don’t think Colonial will end up being the biggest failure of 2009, that one is yet to come and will probably be exceeded by 4-5 larger players.

We haven’t even finished with the other big regionals yet. Guaranty Bancorp in Texas might be due next.

With Mark-to-Market rules suspended, its only a temporary blind to hide the upcoming bank losses. Subprime was just the tip, next up are the other residential loans becoming non-performing : Alt-A, Option Arms. Not to mention the big commercial real estate sector and consumer debt.

FDIC will run out of money real soon. They will ask for a loan from the Treasury. How much more they will need if continual bank shut downs continue is a matter of question, but it will lead to another financial panic if Treasury run out of the bailout money.

Related Posts:

• How many banks will file bankruptcy without recent $2 trillion emergency loan from Fed?
• Federal Reserve refuse to identify expending bailout–almost $2 trillion of emergency loans from American taxpayers
• The U.S. government is the Fed’s footstool.
• Fed Covers Up Financial Crisis–Bailout Cost May Be Much Higher
• “Tons of Money” - Heavy Concept

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