Les Jones

The FDIC just spent the last of its money

Sunday, August 16th, 2009 | Economics |

Mish - As of Friday August 14, 2009, FDIC is Bankrupt. Mish puts a harsh spin on it, but he’s right that the FDIC’s funds were more or less depleted with Friday’s takeover of five banks. One of the institutions, Colonial, was the biggest bank to fail in 2009. The FDIC has now closed 77 banks in 2009.

Congress already approved $100 billion in additional FDIC money, so the FDIC can go right ahead closing banks next Friday. However, the depletion of FDIC’s existing funds does signal the seriousness of this country’s banking problems and the lack of seriousness in the FDIC’s preparations. Recall that in September, 2008 the FDIC was admonishing people that they were well-funded and would not need any taxpayer money:

Let me be clear: The insurance fund is in a strong financial position to weather a significant upsurge in bank failures. The FDIC has all the tools and resources necessary to meet our commitment to insured depositors, which we view as sacred. I do not foresee – as Mr. Evans suggests – that taxpayers may have to foot the bill for a “bailout.”

Now the FDIC’s “strong financial position” is wiped out and taxpayers will in fact have to “foot the bill” to rescue depositor’s money at other failed banks. That’s in no small part because the FDIC collected almost no deposit insurance between 1996 and 2006. Other big potential bank failures on the horizon include Corus, Guaranty Financial, and Regions and there is a long list of problem banks.

Here’s the iTulip.com prediction for the banking sector:

We estimate banks will continue to fail through the end of 2011, that more than 1,000 will fail, representing a total asset loss of $890B, based on RBS estimates, information from contacts at the FDIC, and our own calculations.

A thousand failed banks would mean 900 more failed banks between now and the end of 2011. At first I found that number unbelievable, but I’m starting to think it’s in the realm of possibility. The FDIC is now assuming the deposits of five to seven banks per week, which would be a rate of 250-350 per year. Calculated Risk recalls the Savings and Loan era of the early 90s, noting that the pace of closings accelerated as time went on, reaching a peak of more than 500 per year.

LATER: The quote above was from FRED’s summary of an iTulip.com article released today: August 2009 FIRE Economy Depression update – Part II: Snowball in Hell. The final version expands the timeframe to 2012, which makes it more likely. Follow that link for an excellent treatment of the deflation vs. inflation debate. iTulip’s verdict is the same as it has been for years - a little deflation now followed by lots and lots of inflation.

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