Psst! Barack…the FDIC has no money…
December 20, 2008 – 1:57 pm
The FDIC is running out of cash. Quickly. In a press release earlier this week, the FDIC noted that the Deposit Insurance Fund shrank considerably last quarter:
The FDIC also announced that in the third quarter, the Deposit Insurance Fund (DIF) decreased by 23.5 percent ($10.6 billion) to $34.6 billion (unaudited). The reduction in the DIF was primarily due to an $11.9 billion increase in loss provisions for bank failures, which represents the estimated losses for FDIC-insured institutions that are likely to fail over the next 12 months. Accrued assessment income increased the fund by $881 million. Interest earned, combined with realized and unrealized gains (losses) on securities, added $653 million to the insurance fund.
According to the Journal article that covered the release, that figure represents 0.76% of total insured deposits ($4.6 trillion) in the U.S. For instance, WaMu alone had over $180 billion of deposits, of which about $140 billion were FDIC-insured.
The key fact to understand here is that the Federal Government, via FDIC, is on the hook to bail out bank depositors. Keep this in mind next time you wonder why the banks have received an open credit line to the U.S. Treasury. The Federal Government is on the hook to bail out depositors and it doesn’t have the money to do so. It has to prop them up or let them fail.
What would have happened in early October if the banking system had been allowed to collapse? Depositors would have run to the bank to discover not only that banks are insolvent, but that FDIC doesn’t have the cash to pay them off.
The FDIC does have an open credit line at Treasury if it runs short of cash. But what would Treasury have done if the whole system collapsed? Where could it borrow the multiple trillions necessary to bail out, well, everyone?
As large as it is, the $700 billion TARP bailout is small by comparison. I know the Fed has now agreed to “print” an unlimited amount of money to buy Treasuries in order to keep interest rates low, but could they fund $4.6 trillion of government obligations in one shot?
Three other observations I’d like to make:
- FDIC’s $34.6 billion fund is mostly invested in Treasury bonds. Like the Social Security “Trust Fund,” it’s invested in IOUs the government has written to itself. But what is Uncle Sam’s IOU actually worth when he’s already written $60 trillion of them? (Adding the long-term liabilities for Social Security/Medicare to the trillions of new guarantees made in the last few months.)
- I’m reminded of the Brad Pitt/Edward Norton movie “Fight Club.” Their plan, you may recall, is to blow up credit card company buildings so that their records disappear and “everyone goes back to $0.” If the banking system fails, the Federal Government very likely won’t be able to bail out depositors. Everyone with money in a bank could theoretically go back to $0.
- The $4.6 trillion figure is only insured deposits. It doesn’t include the FDIC’s new guarantees backing corporate debt under the “temporary liquidity guarantee program.” Banks including B of A, Goldman, Morgan Stanley, Chase, Citigroup, GE and Wells Fargo are availing themselves of this program, selling tens of bilions of dollars of debt insured by FDIC. Asset managers are thrilled to scoop up this debt. They get a little extra yield over Treasuries and a government guarantee to boot! Nevermind that FDIC doesn’t actually have any cash to pay claims should any of these companies default…
…
I wonder if the $4.6 trillion figure of total insured deposits takes into account the new limit of $250,000. According to a chart on page 32 of the FDIC’s 2007 annual report, insured deposits as of Sept. 30th 2007 were about $4.1 trillion and growing quickly. But back then, deposits were only insured up to $100,000. Did the boost to $250,000 only increase insured deposits by 10%? Maybe. I’m not sure.
Posted in Fed, bailout, banking, taxpayer issues |
15 Responses to “Psst! Barack…the FDIC has no money…”
The real problem with a 4.6t depositor bailout is that, unlike tarp, it would not be “sterilized”. tarp money basically disappears immediately into a black hole, repairing far over-leveraged bank balance sheets.
Mass payouts to depositors, on the other hand, would likely get “spent” or go to flight-to-safety assets (gold, etc) which would constitute masive immediate inflation. This is major reason the government is trying so hard to “prop” up the banking system and only “monetize” it at the balance sheet level.
I suspect this game will end in an even more spectacular explosion fairly soon.
By Aaron krowne on Dec 20, 2008
So, assuming there are people out there who don’t trust the FDIC to be able to pay them back if the banks fail, where are these people putting their money? They can’t *all* be like that farmer who buried his savings on his property … can they?
http://www.smartmoney.com/Investing/Economy/time-to-bury-your-cash/
If you have any articles/opinions on what the little guy can do with what little money he has, I’d love to see it.
By Jas. Marshall on Dec 20, 2008
The absolute best place to put money now is in food storage and other necessities. You can’t eat or drink gold. Our once great and prosperous constitutional republic is now a bankrupt police state empire. We will soon descend into the abyss of history, as Rome, Greece, and every other empire has done before us, and for the same reasons. It will be very, very ugly.
By Walter on Dec 21, 2008
By printing money everybody is going back to zero anyway.
By Alex on Dec 21, 2008
We are in very different times from Rome or the height of Greece, so it doesn’t fit at all to compare to them. And it also doesn’t hold water that the gov will grab all our gold again, stop production of food, and put us into anarchy. Yes this is the worst financial epic since the depression, but life in general cannot be compared to life in the ’30’s anyway. I mean, what Okie had the ability to own a PSP, iPhone, 500 channel cable and a luxury SUV? They were well off if they had a phone.
So to compare it to ancient history is foolish. What we can do is compare it to recent times, like Japan in the 90’s, or Argentina in 2001. And those countries still exist, and they didn’t collapse back into the feudal system.
So save the drama for your mama, and put cash into foreign gold or yen or Dollar Store stocks. Sit back, relax, and wait until you can be a vulture that swoops in when the time is right. The upside will come in a few years, and you will want to not be in a fallout shelter when it does…
By dan rossini, catholic times on Dec 22, 2008
The FDIC has an open line of credit with the Treasury should they run out of reserves. It has only once, IIRC, used that open line of credit . . . and that was back in the 80s S&L crisis.
Still, as you point out, one of the reasons the Fed and Treasury had to ram through the $700 Billion bailout was to stem a run on banks, just as you’ve explained.
Rock at http://www.a1anews.blogspot.com
By Rock Trueblood on Dec 22, 2008
Everyone is seeing scams everywhere. FDIC, SSI, USD… Yes, all those are scams. But there is one thing people don’t realize.
Stop fighting inflation! As long as you fight inflation, your efforts are doing everything to minimize it, and as a result making damned sure that the scam will continue. I am talking about the scam of inflation.
Anyone fighting against inflation is, off course, correct in first approximation. He behaves like a wimp who wants to make peace with a village bully. As long as he continues to whine and make peace, the bully is guaranteed the successful continuation of his game, because the other side takes up the suffering role voluntarily.
We should be all demanding inflation and instant magic. Only then the game of “only privileged can benefit from inflation, because somebody has to pay for it” will stop for good.
Save America. Stop being wimps. Demand inflation and instant gratification for everyone, not just the elites!
By cRavias on Dec 22, 2008
In certain ways the US may distinctly have it worse than other famous empires that collapsed. Today we are much more based on a far-flung petrol economy, and global trade, with virtually all manufacturing abroad, and just-in-time supply chains with very little inventory. Since people and communities are so much less self-sufficient, things could really get dicey.
I think Argentina is the closest contemporary model, and we have the potential to be an even rougher case due to the above factors. The UK is also an interesting model, since they went from global empire to global “average joe” in the early part of the last century. It was perhaps not as bad as Argentina there, but they had not-too-pleasant run of dysfunctional socialism that lasted for 50 years (sound like a familiar topic?)
I think Japan is a fluke — in many ways, the consequences of their credit excesses were put on hiatus in wait for the US/global bubble to burst. We are just barely seeing the beginning of the fallout. I think people who thought the last chapter had been written on Japan are in for a big surprise.
At any rate, I think a significant “allocation” to both gold and basic provisions are good ideas.
By Aaron Krowne on Dec 22, 2008
mr. krowne’s point made in the first paragraph of his last comment is right on the mark and cannot be over emphasized.
Adequate preparation and implementation of an ‘exit strategy’ must also take into consideration the location of where one lives. Land is of the upmost importance; that is, where you live.
The reminder of the need for the bailouts in the first place, as pinpointed in this commentary, is extremely important. It exposes the fallacy of those who still argue that the deflationary debt collapse should have been allowed to develop, thus constituting a massive correction and a cleansing of the economy.
Imagine if this had been allowed to occur. Those responsible for the non-decision, had this been the case, would have spelled the complete end of their political/administrative careers. They had no choice for two reason, saving their hides and for the reason pointed out here regarding bank runs.
The positive feedback loop between the financial and ‘real’ economy may return us to the point where bank runs could still occur, and shifting the risk from capital to taxpayers opens up new risks, with the potential to be all that more explosive. But the hail mary pass was necessary, as will more in the future.
By don smith on Dec 23, 2008
THESE ARE SOME VERY ERUDITE COMMENTS. I MUST BE READING SODA HEADS TOO MUCH. AS A FEDERAL RESERVE BANK EXAMINER, I NEVER THOUGHT TOO MUCH OF THE FED’S ECONOMISTS EXCEPT MAYBE VOLKER. THEY WERE A BUNCH OF EGGEADS WITH NO COMMON SENSE. MY TIME AT THE FED COVERED ‘63 TO ‘80. I HAVEN’T HEARD TOO MANY PREDICTIONS LATELY THAT HAVE IMPRESSED ME BUT THIS DATA IS PRETTY SCARY. OUR CURRENT LEADERS HAVE LAID US LOW SO WHAT DO WE DO…WE VOTE AN EGGHEAD INTO THE WHITE HOUSE. LET’S HOPE HE HAS SENSE ENOUGH TO LISTEN TO VOLKER WHO KEEPS ON TICKING.
By DANSHANTEAL on Dec 25, 2008