Friday, March 27, 2009

The F.D.I.C., or “Fantasy Deposit Insurance Corporation”

[The article reprinted below outlines a problem with US banks that I have been personally aware of for 20+ years, but which few who I have ever talked to have ever understood or acknowledged.

However the current systemic crisis has forced some of the newly nervous to reconsider my warnings and to look a little closer at what I have always maintained vis a vis US banks, and to perhaps take those warnings a little more seriously.

Simple Steps For Your Banking Safety

There are several steps that can be taken to ease concerns over US bank deposits, ranging from the simple and straightforward to the more esoteric and complex.

If you would like to discuss steps that you yourself can take to protect/ insure your own deposits, please let me know.]

Selling Certainty in Uncertain Times

"If there’s one thing that constitutes a bankers’ worst nightmare, it’s a bank run.

Because – as we can see in today’s markets – banks are more than happy to carry on the illusion of “solvency” as long as it’s in the banker’s best interest.

But a run? Well, with a run…all bets are off. Depositors cry “Show me the money!” and the jig is up. The bank doesn’t have time to wait for loans to be repaid. They suddenly can’t fulfill the massive demand from their depositors and everyone loses (except the lucky few that reach the teller’s window first).

That’s why the Federal Deposit Insurance Corporation (FDIC) is one of the greatest achievements in the history of bank regulation; because it prevents bank runs.

How? Not by actually insuring all deposits, but by assuring depositors’ peace of mind.
Uncle Sam Says: “Don’t Worry…The Money’s There”

You see, the FDIC’s dirty little secret is that they don’t really have enough money to back all the deposits they’re insuring.

They didn’t even receive the authority to collect their insurance premiums until 2006…shortly before Sheila Bair took office. Even more shocking is the fact that the FDIC collected no insurance premiums whatsoever from most banks in the decade between 1996 and 2006, according to the Boston Globe.

Why hasn’t this mattered? Because the FDIC is a security blanket…and it’s actual functionability is secondary to the psychological effect it has on the depositors it insures.

Step back and think about it for a second. Have you been watching the evening news lately? How many times have your local news anchors reminded you that the FDIC insures all bank deposits? Likely more than once.

Or perhaps you caught CNBC’s “Special Town Hall Event: Who’s Protecting Our Money?” featuring Jim Cramer and Erin Burnett. Did you feel like you were being “sold” on the legitimacy…the credibility of FDIC insurance?

If you can be convinced that the FDIC will protect your deposits, then it’s essentially served its purpose. Because it will keep you – and the rest of America – from rushing to the bank to collect your deposits in the case of an emergency. As such, it guarantees that banks won’t face the imminent demise of a run…giving them time to rebuild their balance sheets and muster the funding to make their depositors whole.

And the FDIC has had a massive impact, even on today’s crisis.

Think about it. If the FDIC didn’t exist, who would still have any money with Citigroup? Normally speaking, depositors would be extremely concerned by the fact that Citi (or indeed any bank) is – for all intents and purposes – currently insolvent.

What beyond the FDIC’s guaranteed insurance could possibly compel a depositor to trust that institution with his or her continued business?
Competing for the Title “Worst Insurer on the Planet”

Now we’re not saying that the FDIC is insolvent. We’re not saying that they’re likely to fail at their obligations. If worse comes to worst, Congress will back them and print fresh dollars to satisfy their obligations.

But inquiring minds want to know…just how deep in the hole are they?

The answer; pretty deep.

According to a Bloomberg report from September of last year (my, what a difference a few months can make) the FDIC had assets of US$45.2 Billion, and a US$70 Billion dollar line of credit, bolstered by promises of more credit being made available when it becomes necessary.

Behind that limited pool of assets, the FDIC was – as of Bloomberg’s report last year – guaranteeing some US$4.5 trillion in deposits (under the US$100,000 rule). And after expanding coverage to all deposits under US$250,000, that pool of deposits nearly doubled (see here for our full exposé). Either way, their coverage works out to 1% or less of the deposits in question.

And adding more fuel to the fire is the FDIC’s own “troubled bank” list. After 25 bank closures in 2008 and 17 so far this year, the list has ballooned from 171 to 252 banks, and the pool of associated “troubled bank” assets from US$115.6 Billion to US$159 Billion…roughly matching the FDIC’s pool of assets.

Facing a list of “troubled banks” that could wipe out the FDIC’s reserves, it’s no wonder that they’ve stepped up the PR campaign to sooth the public.

But the harsh reality is that they – like their long-forgotten sister organization, the “Federal Savings and Loan Insurance Corporation” – face a problem that’s too big for them to handle. They may, like the FSLIC, face several bouts of insolvency in the coming years. And the face of the organization might even change drastically before it’s all said and done.

But what if the FDIC takes over your bank? And what if they’re busy scheduling “emergency funding” when they do so?"

Article reprinted from : The Sovereign Society Offshore A-Letter
Thursday, March 12, 2009 - Vol. 11, No. 65

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