Wednesday, August 19, 2009

Chris Martenson, "The FDIC Is Broke- Now What?"

"The FDIC Is Broke- Now What?"
by Chris Martenson

"Executive Summary:
• With the most recent bank failures, the FDIC is out of funds.
• The FDIC is levying a one-time fee on member banks to cover the shortfall, but it will not be enough and it punishes the prudent.
• The FDIC has been suspiciously slow at shutting down banks that have admittedly already failed.
• Banks have been allowed to overestimate the actual worth of their assets using "mark-to-fantasy" accounting.
• Hundreds of banks are likely already mortally wounded and set to fail.
• The FDIC means well, but creates a moral hazard the effects of which now haunt us.
• Take prudent action: Choose only high-rated banks, and keep cash out of the bank.
Five more banks failed this week, resulting in a long weekend for the FDIC. The largest of these, by far, was Colonial Bank, which will cost the FDIC some $2.8 billion. And that's assuming that their loss estimates pan out as expected and that the $15 billion in shaky assets on which the FDIC will share future losses do not turn into larger than expected losses.

SAN FRANCISCO (MarketWatch) - Colonial BancGroup Inc. became the largest bank failure this year after the Federal Deposit Insurance Corporation seized the struggling Alabama-based lender Friday and sold it to BB&T Corp. The Colonial BancGroup deal will knock roughly $2.8 billion off a pool of money, known as the Deposit Insurance Fund, which the FDIC maintains to guarantee bank customer deposits. 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.

Let's add up the estimated costs to the Deposit Insurance Fund (DIF), which is the FDIC pool of money toward which banks pay a premium and out of which all bank failure costs are covered:

• Union Bank: The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $61 million.
• Community Bank of AZ: The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $25.5 million.
• Community Bank of NV: The cost to the FDIC's Deposit Insurance Fund is estimated to be $781.5 million.
• Colonial Bank: The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $2.8 billion.

All together, that adds up to $3.67 billion dollars in new costs to the Deposit Insurance Fund. The problem is that this turns out to be $3 billion more than currently exists in the Deposit Insurance Fund.

With this latest series of bank closings, the DIF ratio is now solidly in negative territory. Interestingly, we might also note that insured deposits have declined for the first time since at least 1999, which is as far back as I have found data. I suspect this deposit decline reflects the fact that people who are out of work are drawing down their savings, but I lack the data to confirm it at this time. Regardless of the cause, declining deposits are a significant threat to the banking system, which is only ever stable and happy when it is continuously growing. Okay, so the FDIC is out of money. Now what?"

Author Profile: Chris Martenson, father of three young children; author; obsessive financial observer; trained as a scientist; experienced in business; has made profound changes in his lifestyle because of what he sees coming. Creator of "The Crash Course" video series.
Chris Martenson home page:

"Guaranteed by the full faith and credit of the United States Government..." What a joke.

No comments:

Post a Comment