Looks like another problem that has been brewing for a long, long time is finally coming to a head. The FDIC is scrambling to come up with the money to cover the deposits in failed banks.
According to my (usually imperfect) research, the FDIC has shut down a total of 16 banks this year. These are not BofA's or WaMu's, these are generally more along the lines of Ted's Bank of Toadsuck Ferry, Arkansas. The FDIC has been collecting insurance premiums since its inception in 1933. Unless something were truly rotten in Denmark, I doubt the failure of 16 no-name banks would be enough to bankrupt the FDIC.
Nonetheless, the FDIC is currently scrambling to pay the bills. They just proposed a massive assessment on all U.S. banks to cover their shortfalls. Understandably, the banks are in no position to pay right now. So who rides in on their white horse to save the day? You guessed it; the federal government:
http://online.wsj.com/article/SB123630125365247061.html
Stay with me kids, because this is important. This is a preview of what is to come with the Social Security system in the next couple years.
For years, arguably since its inception, the FDIC has charged an unreasonably low premium to insure bank deposits. This served two purposes. First, it duped convinced bank customers that their deposits were safe (and, in fairness, they were). Second, the premiums were low enough that the banks didn't bitch and they actually made more money because of the increased depositor confidence.
How low were the premiums? As of 2008, the FDIC had enough cash on hand to cover only 1.25% of their overall exposure. And remember, that was before they raised the limit on deposit insurance from $100,000 to $250,000. After raising the limit, their cash reserves drop to a mere .5% of total exposure. Oops.
Like I said, guys, this is a preview of what's to come with Social Security. It is the elephant in the room that no one is willing to talk about. 25 years ago, people started sounding the alarm on FDIC premiums being too low. Now we're in a real jam.
One possible solution is to eliminate the FDIC altogether. Private insurance companies would fill the gap, but it wouldn't be cheap. Banks would become money warehouses, paying little or no interest on savings in order to offset the insurance costs. Not an optimal solution, but better (in my opinion) than throwing another $500 billion down the drain. Remember, that money isn't an investment in anything. Once it's gone, it's gone.
Correct me if I am wrong, but didn't the FDIC have around $50 billion in cash to pay out insured depositors?
Since the article claims that the FDIC had $19 billion at the end of 2008, it means that it had gone through roughly $30 billion last year.
If it is asking for an additional $500 billion (nearly 20 times more than it spent so far) then we are in some deep shit...
They shut down 25 banks last year, in addition to the 16 this year, so that's where a lot of the money went. IndyMac was the biggest one, and that was a mess.
But to ask for a credit facility almost 20 times greater than the one that has been in place for decades (and hasn't even been used until now) should set off alarm bells in everyone's head.
Government has always shown an inclination to discount risk and assume clearly established facts won't repeat themselves. Examples include the FDIC, Social Security, the Pension Benefit Guarantee Corporation, Federal Reserve, etc. The entire thing is designed from the top down to encourage moral hazard.
Dolore harum nemo culpa id quod iure modi. Tenetur numquam veniam ut sint perferendis.
Consequuntur et accusamus excepturi. Et in perspiciatis quod nam est aliquid omnis. Accusantium iure repellendus odit mollitia quia voluptatem.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...