Where Does the FDIC Get Its Money?

I have had a lot of clients ask about where the money to fund the FDIC comes from and what would happen if it went broke. Historically, the money comes from the banks themselves in what is basically an insurance premium. However, as you can see below the Senate has passed some new and exciting bills to make sure nobody needs to worry about those bad bankers and their greedy ways. I must give credit to Joan McCullough from East Shore Partners that brought this travesty to my attention. This came from the ‘Highlights’ section of the U.S. Senate Republican Policy Committee Legislative Notice:

FDIC – The substitute increases the borrowing authority of the Federal Deposit Insurance Corporation (FDIC) from $30 billion to $100 billion, provides temporary authority to exceed the $100 billion threshold (up to $500 billion) for necessary circumstances, and makes permanent the increase in federal guarantee for bank accounts from $100,000 to $250,000 per account.

You can see that this is not a joke. FDIC can now 'borrow' (as if it is sitting in cash someplace, perhaps next to the Social Security surplus) up to $500 billion to shore up the system. Everyone understand that this money is not actually sitting in a bank account under the name FDIC? You just create more debt and hope the Chinese will keep buying it. I am not trying to be difficult here, but people need to understand what is in the sausage. We are clearly not done yet with the bogus stress tests or with continued bank weakness. The government is doing the best they can: just try to convince the public we will be fine. What other option would you propose? Most of us don’t even understand the problems let alone how to solve it.

Right now I am bearish on banks and long SKF. This is no picnic and just because the fundamentals are crap doesn’t mean you will make money. The market is always right, but I think this love fest could end soon.

Disclosure: Long SKF at time of writing.

Comments

[Alan von Al...:]

Long SKF too. Looks stupid today, but today is not the question.

May 08 07:51 AM

[Alexiad99:]

Don't forget that most community banks stuck to the fundamentals of banking yet faced a doubling or more of their FDIC premiums.

May 08 09:39 AM

[billp37:]

Silverton Bank, N.A., Atlanta, GA was taken over on May 1, 2009.

www.fdic.gov/bank/indi...

Wife had a CD with Silverton.

Smith-Barney financial advisor phoned May 8, 2009 to tell us that FDIC paid principal and interest into Smith-Barney account.

This is our second CD experience with failed bank. First was with
Security Savings Bank, Henderson, NV.

In both cases FDIC paid principal and interest quickly.

May 08 03:47 PM

[Lee Eugene ...:]

Alan,

I am right there with you feeling the pain. Just remember the system has not been fixed.

Lee


On May 08 07:51 AM Alan von Altendorf wrote:

> Long SKF too. Looks stupid today, but today is not the question.

May 10 03:25 PM

[Lee Eugene ...:]

This is a good example of how the major banks, and many smaller banks have now pushed a couple of decent smaller banks with proper risk controls into the red. The point is, the current system doesn't care about what you did as a risk manager, everybody pays more. In auto insurance the guy with five tickets and a DUI has to come up with more money. In this case the DUI got another 75 billion. . .


On May 08 09:39 AM Alexiad99 wrote:

> Don't forget that most community banks stuck to the fundamentals
> of banking yet faced a doubling or more of their FDIC premiums.

May 10 03:28 PM

[Lee Eugene ...:]

Well, with 500 billion on a line of credit and the 250k limit now permanent, it looks like people will continue to be bailed out at the expense of those who hold the treasury debt. No wonder the Treasury auction on Thursday was a disaster. It is not taxpayers who pay, but those that hold the bonds.


On May 08 03:47 PM billp37 wrote:

> Silverton Bank, N.A., Atlanta, GA was taken over on May 1, 2009.
>
>
> www.fdic.gov/bank/indi...
>
> Wife had a CD with Silverton.
>
> Smith-Barney financial advisor phoned May 8, 2009 to tell us that
> FDIC paid principal and interest into Smith-Barney account.
>
> This is our second CD experience with failed bank. First was with
>
> Security Savings Bank, Henderson, NV.
>
> In both cases FDIC paid principal and interest quickly.
>
>

May 10 03:29 PM