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.