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What Will You Do if the FDIC Fails?
 
By Aurelia Masterson, www.panamalaw.orgIntroduction
– The FDIC is a private corporations licensed by the US government to insure the banksand savings and loans of the USA. The SIPC is the Securities Investor Protection Corporation. This is a private corporation designed to insure investors who have invested with stockbrokers who have failedor gone bankrupt. It too is a private corporation that can fail or go bankrupt. The point here is these are private corporations specifically chartered by the US government to insure these institutions. If the bank losses are too great and exceed the reserves these companies have then who knows what happensfor sure. Best to think doom and gloom.
Recent Scenario
– The FDIC reserve fund is currently at $50 Billion. The FDIC fund is currently set at$53 Billion. This fund is about as tangible as the social security trust fund. On March 31, 2008 thereserve fund was valued at $52.843 billion USD, or 1.19% of the insured deposits. Deposits are insuredonly to $100,000. If a person have $400,000 in one bank account only $100,000 of it would be insured.The FDIC must have a minimum of 1.15% on hand. The recent failure of IndyMac is estimated to costthe fund 4 billion dollars. This is going to drop the fund below the 1.15 level. This may force thegovernment to make changes in the fund, or not?
Analysis
– There have been 14 bank failures in 2008 alone. To see the list and read the financials gohere:FDIC: Failed Bank List The total of what the FDIC paid out on these institutional failures is in the billions. The author did nottake the time and trouble to add it all up since they practice creative accounting like leaving brokereddeposits out which can cost them a staggeringly high payout. It is in the billions.In July 2008 Wachovia Bank took an 8.86 billion dollar. This is more than enough money to runPanama for a year to put it in perspective. If they go down how much will that cost the FDIC?Washington Mutual got hit with a 3.3 billion dollar loss in the same month. Ouch! This comes on top of IndyMac taking down about 10% of the FDIC reserves. IndyMac may just have been a bit further downthe line than Wachovia and Washington Mutual. Troubled waters are ahead.In 1990 the FDIC fund was 13.2 billion. This tells us that banking in the USA is very questionable. A bailout of the FDIC is really something the government can do and has done in the past. It however will pass the costs onto the consumers in the form of higher costs for the banks for their insurance resultingin higher interest rates on loans and lower rates paid in bank interest on deposits. The FDIC endangered
 
species list has 90 banks on it with 26 billion in assets. IndyMac had 32 billion in assets but the FDICestimates a payout of 4-8 billion only. If we use the high figure we get 25% which applied to the $26 billion from the 90 banks is only some 6.5 billion. The problem is what if a few more giants cave in.Then it is doom and gloom. Washington Mutual has assets of 320 billion. If they go and we use the25% figure that is $80 billion way over the FDIC reserve limit. Doom and gloom time. If Wachoviagoes down with 808 billion in assets and we use the 25% figure we get losses of 202 billion. This ismore serious doom and gloom for the USA banking system. Do you think these big institutions with alltheir losses will not go down? Ok everyone is entitled to his or her own opinion.
More Trouble on the Way
– The problems we have been seeing are coming from what they call sub- prime mortgages. When they tightened up the bankruptcy laws a few years ago at the insistence of the banking community one could have seen the writing on the wall. The scapegoat is the mortgageindustry and the authorities are putting them in jail in wholesale quantities. Curious how they go after the mortgage brokers but do not incarcerate the mortgage banks themselves or the borrowers. Anyway,there is another crisis on the horizon and that is the credit card industry. The industry has hit an all timehigh for 90-day delinquency. Sounds like the mortgage crisis in the early days. Problem is the creditcard loans are unsecured. When the bank writes them off there is no offset such as the house or condoto carry on the books as an asset. They can ding a persons credit and try to get blood out of a turnip bychasing he cardholder until they disappear or go bankrupt.
FDIC Failure Possibilities
– If the FDIC goes one can ask how will it fail and to what extent. TheFDIC faced with claims that exceed their reserves can always go bankrupt being a private corporation.The bankruptcy courts would take their reserves and distribute them amongst the insured depositors(now referred to as creditors) accomplishing a proportionate distribution. This means one might get back 5% of their insured deposits or perhaps even as much as 50% depending on how many claims arefiled and how much is on reserve. The delay for getting paid may run into the years on something likethis. Then the devaluation of the dollar can also diminish the net real value of the payback one receives.If the dollar was 1.25 to the Euro when the deposit was made and at the time the bankruptcy courtauthorizes the payback the dollar is 2.3 to the Euro you lost some money, hidden loss but a real loss.Another possibility is the FDIC just runs through it reserves paying off claims as they come in. After afew good size bank failures they just run out of money and close. The thinking might be why even bother with a bankruptcy. This of course means the banks are now running without any insurance for the depositors. America has an extremely large and disproportionate amount of bank failures. Runningtheir banks without insurance will result in extreme lack of confidence in the banks and flight of capitalfrom the USA banks. There would be a strong possibility that private insurance companies wouldemerge (yes we know the FDIC is private). The cost of private insurance is usually 2% a year in other countries, which eats into interest nicely. The private insurance carriers would audit the banks and probably turn down most of them or charge 3%-5% annually to insure them since their reserves are solow and their loan portfolios is so overstated.
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