Hat tip: Panama Law
Introduction – The FDIC is a private corporations licensed by the US government to insure the banks and 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 failed or 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 happens for 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 the reserve fund was valued at $52.843 billion USD, or 1.19% of the insured deposits. Deposits are insured only 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 cost the fund 4 billion dollars. This is going to drop the fund below the 1.15 level. This may force the government 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 go here:
The total of what the FDIC paid out on these institutional failures is in the billions. The author did not take the time and trouble to add it all up since they practice creative accounting like leaving brokered deposits 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 run Panama 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 down the 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 resulting in 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 FDIC estimates 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 the 25% figure that is $80 billion way over the FDIC reserve limit. Doom and gloom time. If Wachovia goes down with 808 billion in assets and we use the 25% figure we get losses of 202 billion. This is more serious doom and gloom for the USA banking system. Do you think these big institutions with all their 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 mortgage industry 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 time high for 90-day delinquency. Sounds like the mortgage crisis in the early days. Problem is the credit card loans are unsecured. When the bank writes them off there is no offset such as the house or condo to carry on the books as an asset. They can ding a persons credit and try to get blood out of a turnip by chasing 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. The FDIC 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 are filed and how much is on reserve. The delay for getting paid may run into the years on something like this. 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 court authorizes 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 a few 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. Running their banks without insurance will result in extreme lack of confidence in the banks and flight of capital from the USA banks. There would be a strong possibility that private insurance companies would emerge (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 so low and their loan portfolios is so overstated.
Another possibility is the FDIC treats banks selectively and charges them a rate for insurance based on their individual risk criteria. This would cause some of the better run banks to pay better interest rates than the poorly run ones and thus eventually cause a trimming of the herd. I doubt you will see this since it would instill doubts about the integrity of their banking system, which remember fell apart just 75 years ago. When their banks went under the last time the depositors were responsible for the debts of the banks. When the banks failed bill collectors chased the depositors who were responsible for the debts of the bank. This was revamped in the 1930’s and they started the FDIC to instill confidence in the banks again. Looks like some new tactics are going to be in order to maintain confidence in their banks. On the other hand they may just keep pumping up the reserves of the FDIC and keep passing the costs on to the bank customers in the form of rising interest rates and lower deposit interest rates. It should prove interesting to watch how this banking crisis develops.
What to Do – Well you can keep your balances under $100,000 per bank and hope for the best. That might work out, only hindsight is 20/20 vision. You can get more proactive and take your money out of any endangered banking system and put it in a country not likely to experience widespread bank failures due to wildly low bank ratios and ridiculous lending practices. Go offshore. Diversify into Euros and USD accounts as well as other countries currencies. Buy real estate offshore. Get a stock brokerage account offshore and invest in non-USA instruments through your offshore corporation or foundation. Holding gold and silver is also a good move. Remember that bank safety deposit boxes are not insured. In the 1930’s when the banks failed the banks were closed and there was widespread looting of the safe deposit boxes and the contents were stolen. If rioting breaks out and the banks get stormed by mobs well good-bye safe deposit box contents. Sometimes a home safe works better. The safe should be UL rated for at least 15 minutes of burglar attack and it should be hidden in the house. Avoid the department store safes and gun safes. These can usually be opened in about 3 minutes with a powerful saw or opened with pry bars and entry tools fire departments and swat teams use. Use a good digital lock. Precious metals can be held offshore but again there is a storage problem and a transportation problem. Questions welcome.