FDIC To Go Bankrupt in 2009?

If you keep up with LRC, you probably already know that a major role of the FDIC is to give the public a false sense of confidence. Typically the FDIC keeps a little over fifty billion dollars in its Deposit Insurance Fund to cover the deposits of account holders in the event of bank failure. According to the data published on September 30, 2008, there is just under $8.8 trillion deposited in US banks. The fact that the FDIC has squat for cash to cover bank failures isn’t really news. So long as there are only three or four bank failures each year, the FDIC is able to cover the losses, and life goes on.

In 2008, however, there were more than three or four bank failures. There were twenty-five in total. As a result, the Deposit Insurance Fund has been drawn down to about $35 billion, of which approximately $20 billion is liquid. That’s still okay so long as there aren’t many more bank failures, but each quarter the numbers are looking more and more dreadful. Last we heard from the FDIC, there were 117 banks on its secret “troubled” list, which matches pretty well with my list of banks with incredibly high Texas ratios. If we add up the deposits for those troubled banks, we get a value of $76 billion. So, the FDIC has $20 billion to cover 76 billion dollars of deposits in banks that are on the brink of collapse. Things are looking pretty bleak for the FDIC.

So how many of those 117 banks would it take to fail in order for the Deposit Insurance Fund to completely dry up? The answer could be as low as three. For example, if Westernbank of Puerto Rico, BankUnited, and Ocean Bank go under, and mind you they each have Texas ratios over 110, the Deposit Insurance Fund will be completely bankrupt. In fact, if a slightly larger bank, like AmTrust (which has a Texas ratio of 86) goes under, it would only take one of the other three to bring the Deposit Insurance Fund to the brink of collapse.

Don’t worry, folks. Your money is safe, and the FDIC has everything under control.

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