What Happens If The FDIC Runs Dry?
The Federal Deposit Insurance Corporation (FDIC) will be the next billion and possibly trillion dollar government bailout. We have the FDIC that insures over 8,000 banks with an insurance fund that is in the negative. From 2000 to October of 2007 only 27 banks were closed down by the FDIC. Nearly eight full years and 27 banks were shut down in the face of epic gambling from the banking industry. Since the recession started, the FDIC has closed down 237 banks with more to come. Without a doubt, given the enormous amount of bad debt and commercial real estate loans we will have 1,000 bank failures by the time this recession is over. Is this so hard to envision? In April, 17 banks were closed and so far in May, 15 banks have seen their doors shut. The rate of bank failures is increasing.
Why will this happen? Because there are at least 763 more banks that are full to toxic waste in the U.S.:
Even the FDIC has 700 banks on their troubled institution list. Keep in mind failures like WaMu and IndyMac which cost billions of dollars weren’t even on the initial list. The issue at hand is you have 4 banks that dominate 55 percent of all banking assets:
We already know that the government is unwilling to break up these banks in an orderly fashion. But the other 8,000 banks don’t have this guarantee. In fact, if you look at this from a corrupt banking perspective, a giant amount of bank failures is good for these few gigantic banks. Customers will have less banking options and will have to rely on a tiny group of banks that run like monopolies. This will provide a fertile ground for anti-competitive practices and will result in unfriendly consumer products in the end. We’ve already seen that. These bailouts simply help to consolidate power and transfer wealth to a select few in the economy.
Then on the other hand, you have the FDIC spending millions if not billions each week closing down banks. We are told that the FDIC is completely solvent. But at this rate it will be broke rather soon (the DIF is already negative although they have a bit more in cash reserves by front-running premiums for years to come). Don’t think this will happen? Here is irony for you; the FDIC which insures banks needs insurance from the U.S. Treasury:
“(FDIC) Chairman Bair distinguished the DIF’s reserves from the FDIC’s cash resources, which included $22 billion of cash and U.S. Treasury securities held as of June 30, as well as the ability to borrow up to $500 billion from the Treasury. “A decline in the fund balance does not diminish our ability to protect insured depositors,” Chairman Bair concluded.”
You know exactly where this is heading. Why put that $500 billion figure out there? Why not $20 billion or $50 billion? If we’ve learned any lesson with Fannie Mae and Freddie Mac or AIG is that Wall Street will raid the taxpayer for every penny they have and use supposed government entities to dump their junk onto the public.
Consider the two giant GSEs for a moment. You hear Wall Street berate these companies but banks would have zero mortgage market if it wasn’t for them. Wall Street investment banking is a giant group of crony welfare capitalist that is anti-competitive and has perverted the current economy. I read current articles on how some people are surprised of the current market volatility. What do you expect? 27 months of the worst recession since the Great Depression and no fundamental change has happened in the way Wall Street conducts business.
The DIF at the FDIC is in the red:
“(FDIC) The Deposit Insurance Fund (DIF) balance improved for the first time in two years. The DIF balance – the net worth of the fund – increased slightly to negative $20.7 billion, from negative $20.9 billion (unaudited) on December 31, 2009. The fund balance reflects a $40.7 billion contingent loss reserve that has been set aside to cover estimated losses. Just as banks reserve for loan losses, the FDIC has to set aside reserves for anticipated closings. Combining the fund balance with this contingent loss reserve shows total DIF reserves of $20 billion. Total insured deposits increased by 1.3 percent ($70.0 billion) during the first quarter.”
This is the latest press release for Q1 of 2010. It has gotten worse. In one week in Q2 the FDIC had to pay out roughly $7 billion on 7 bank failures in one week. You know where this is going and everything has become one giant bailout.
FDIC insured institutions have assets of $13 trillion. We have $3 trillion in commercial real estate loans and many banks are valuing these loans at optimistic day prices that were up to $6 trillion at their peak. Just with CRE we will see at least $1 trillion in losses.
Gear up for another taxpayer bailout although the U.S. Treasury and Federal Reserve don’t even have the money for that.