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There is the sniff of panic in the air. I watched Sheila Bair on the Larry Kudlow show the other night. She is intelligent and as honest as a government employee can be these days. That's not saying much. It was her demeanor that concerned me. She assured Larry that the banking system was safe. She seemed to be saying the words, but her body language was that she didn't believe her own words. The FDIC is broke. She knows it. They use cash accounting at the FDIC. They have been making multi-billion sweetheart guanantee deals in order to dump the bankrupt banks on other banks. The FDIC will be paying out billions on these bad loans.

Wilbur Ross predicted this morning that 500 banks will fail by the end of 2010. There are $4.5 trillion of deposits supposedly guaranteed by the FDIC. There are only 8,000 banks in the US. If the FDIC was being perfectly honest, they would be accruing for expected losses of $300 billion in the next year. They secretly put into place a $500 billion line of credit with Treasury earlier this year. Did they just guess to get that number, or is that what they expect to need?

The Treasury gets the $500 billion from you and I, so what they have done is a backdoor bailout for the banks, without having to go before Congress and have the public have a say. Got it?

But we do have a say. The banks in this country are paying you essentially 0% on your deposits. What is the point of keeping your money in the bank? A safe in your house, or under your mattress will do. Better yet, some gold coins would hold their value compared to a depreciating dollar bill.



Can the coming FDIC bailout cause a run on the banks?
September 2, 10:21 AMState of the World ExaminerMark Reinoso

I saw this article in the Wall Street Journal. My comments afterwards.


Americans are about to re-learn that bank deposit insurance isn't free, even as Washington is doing its best to delay the coming bailout. The banking system and the federal fisc would both be better off in the long run if the political class owned up to the reality.


We're referring to the federal deposit insurance fund, which has been shrinking faster than reservoirs in the California drought. The Federal Deposit Insurance Corp. reported late last week that the fund that insures some $4.5 trillion in U.S. bank deposits fell to $10.4 billion at the end of June, as the list of failing banks continues to grow. The fund was $45.2 billion a year ago, when regulators told us all was well and there was no need to take precautions to shore up the fund.

The FDIC has since had to buttress the fund with a $5.6 billion special levy on top of the regular fees that banks already pay for the federal guarantee. This has further drained bank capital, even as regulators say the banking system desperately needs more capital.


Everyone now assumes the FDIC will hit banks with yet another special insurance fee in anticipation of even more bank losses. The feds would rather execute this bizarre dodge of weakening the same banks they claim must get stronger rather than admit that they'll have to tap the taxpayers who are the ultimate deposit insurers.

It isn't as if regulators don't understand the problem.


Earlier this year they quietly asked Congress to provide up to $500 billion in Treasury loans to repay depositors. The FDIC can draw up to $100 billion merely by asking, while the rest requires Treasury approval. The request was made on the political QT because, amid the uproar over TARP and bonuses, no one in Congress or the Obama Administration wanted to admit they'd need another bailout.


But this subterfuge can't last. Eighty-four banks have already failed this year, and many more are headed in that direction. The FDIC said it had 416 banks on its problem list at the end of June, up from 305 only three months earlier. The total assets of banks on the problem list was nearly $300 billion, and more of these assets are turning bad faster than banks can put aside reserves to account for them. The commercial real-estate debacle is still playing out at thousands of banks, even as the overall economy bottoms out and begins to recover.


Meantime, even as it "resolves" and then sells failed banks, the FDIC is also guaranteeing the buyers against losses on tens of billions of acquired assets. This is known in the trade as "loss sharing," which is another form of taxpayer guarantee that taxpayers aren't supposed to know about. Most of the losses won't be realized if the economy recovers. But this too is a price of taxpayers guaranteeing deposits. Even as Treasury and the press corps broadcast that the feds are making money on TARP repayments, these guarantees go largely unnoticed.



FDIC Chairman Sheila Bair continues to say that deposits will be covered up to the $250,000 per account insurance limit, and of course she's right. But we wish she'd force Congress—and the American public—to face up to the reality of what deposit insurance costs. Amid the panic last year, Congress raised the deposit limit from $100,000. While this may have calmed a few nerves—though the worst runs were on money-market funds, not on banks—it also put taxpayers further on the hook.


The $250,000 limit was supposed to expire at the end of 2009, but in May Congress extended it through 2013, and no one who understands politics thinks it will return to $100,000. The rising bank losses mean that the FDIC's ratio of funds to deposits is down to 0.22%, far below its obligation under the insurance statute to keep it between 1.15% and 1.50%.

Rather than further soak capital from already weak banks, the FDIC ought to draw down at least $25 billion from its Treasury line of credit. Ms. Bair is going to have to ask for the cash sooner or latter, and she might as well do it before the fund hits zero and we get another round of even mild depositor anxiety. We suppose Congress could raise a faux fuss, but these are the same folks who ordered the FDIC to broaden the insurance limit. They need to face the political consequences of their promises.’



Most people don’t understand the real reasons behind this economic crisis. They don’t understand the difference between stocks and bonds, how interest rates affect inflation or even understand what money truly is. Don’t even start on about CDO’s or CDS’s, because you will lose your audience.



 What they do know, is that the FDIC protects their money up to $250, 000 in their bank. They take comfort in knowing that the FDIC will insure their account should something happen to their financial institution. That’s their money, and the ‘government says so’.  So when the FDIC comes out and basically says that it is broke, that’s not a good thing. If there is anything that could cause people to panic and cause a run on the banks, this is it.



If I went up to an average person on the street acting excited and stressed, yelling, “ There are 1 quadrillion dollars worth of outstanding derivatives out there, and they are a time bomb ready to go off!....the average person wouldn’t really know what I was talking about.  Their eyes would glass over and they would probably walk away muttering to themselves,  which is what my wife does whenever I start talking about finance.



But If I said: “FDIC is broke, and they have to borrow money in order to insure your deposits”, the average person would be pretty nervous. They would probably go down to the bank and take at least some of their currency out of the bank, just in case.



What if everyone did that? What if everyone took SOME money out of the bank? Only a few people would need to take out all of their money, and the banks would suddenly start limiting withdrawals. That would cause more panic among the people, and then a bank run would occur. This system is in a very precarious state, and it is about to get even more precarious.


 I read somewhere that only 1 out of 40 US Dollars in the world are actually in the form of cash. The rest is simply stored electronically. So, even if all the currency in the world was actually in the hands of the banks(which it isn’t) then there would only be 1 out of every 40 dollars available to people in currency, if everything was distributed evenly. Of course we know it won’t be. Only the first few people in line at the bank would actually get their money, and the rest would be stiffed. 


Another thought I had about this article: with more and more bailouts and inflation eating away at the value of our currency, why do people want to keep their money in the bank anyway? That is a recipe for financial disaster. I guess it should occur to people that if the FDIC is bailed out with more money, doesn’t that dilute the value of THEIR money in the bank? Our "whiskey" keeps getting watered down more and more every day