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« High River Gold Mines Update 07 August 2009 | Main | Foreign Investment in the U.S. – Going Down »

The FDIC Is in Trouble


In this mornings mail bag we have this article by Bud Conrad, Editor, The Casey Report which makes interesting, if not frightening reading.

As we all know, the Federal Deposit Insurance Corporation (FDIC) guarantees depositors that they’ll get their money back if a bank fails, at least up to a certain amount. To fund its operations, the FDIC collects small fees from the banks that are held in reserve for the purpose of taking over troubled banks and paying off depositors.

Since the Great Depression, a period marked by widespread runs on banks, the FDIC has done a good job of fulfilling its mandate. So how are they doing in this crisis?

In a nutshell, they are in trouble.

The FDIC insures 8,246 institutions, with $13.5 trillion in assets. Not all of them are going bankrupt, of course. Yet as of late July, a disturbing 64 banks had gone belly up this year – the most since 1992 – costing the FDIC $12.5 billion. At the end of Q1, the agency was already asking for emergency funding.

And worse, much worse, is likely yet to come. The following chart shows the total assets on the books of the FDIC’s list of 305 troubled banks. The list doesn’t include the biggest banks that are considered too big to fail, as they are being separately supported with bailouts. By contrast, if the banks on this list fail, the FDIC is on the hook to have to step in and take them over and, of course, make depositors whole.

Assets of Insured Problem Institions.JPG

Other measures of how serious the losses at banks are becoming can be seen in the chart below, which shows charge-offs and non-current loans at all banks. You can see that the Net Charge-offs remain stubbornly high, with banks charging off almost $40 billion in bad loans in the last two quarters alone. And the number of non-current loans – loans where payments are not being kept up – is soaring. 

Together, these measures indicate the potential for more big failures and more big bailouts coming down the pike. 

Bank Problem Loans Approaching $100B Are Dangerous.JPG

About Those Reserves…

Into the battle against bank insolvency the Fed brings a level of reserves that can best be described as paper-thin. From almost $60 billion last fall, the FDIC’s reserves have been drawn down to only about $13 billion today, a 16-year low. A quick look at the FDIC’s own data shows us how inadequate those reserves are compared to the deposits they are now insuring.

The chart below says it all:

Deposit Insurance Fund Reserve Coverage Ratio is Inadequate.JPG

As you can see, the Federal Deposit Insurance Corporation currently covers each dollar on deposit with a trivial 2/10ths of a penny.

And even that understates the seriousness of the situation: the $4.8 trillion in deposits the FDIC is providing coverage on doesn’t include the expansion that now extends insurance coverage from $100,000 to $250,000 for normal bank accounts. That likely brings the exposure of the FDIC closer to $6 trillion. But that’s pretty inconsequential at this point: using any reasonable accounting method, the FDIC is already bankrupt and will require hundreds of billions of dollars in government bailouts just to keep the doors open.

So, given the dire shape of its finances, what measures is the FDIC taking, you know, to batten down the hatches and all that?

For starters, they are expanding their mandate by guaranteeing bank loans – $350 billion and counting at this point. And the government has tapped the FDIC to play a pivotal role in guaranteeing the loans issued to buy toxic waste through the government’s highly problematic and fraud-prone new Private Public Investment Partnership (PPIP). The FDIC’s commitment to the PPIP is and may become limited based on its resources.

It is hard to draw any other conclusion but that hundreds of billions in new funding will be required to keep the FDIC operating. Given the catastrophic consequences of the FDIC failing, starting with a bank run of biblical proportions, there’s no question it will get whatever funding it needs. By loading the new loan guarantee responsibilities and the PPIP onto the FDIC’s back, the administration will go back to Congress and ask for the next large bailout.

Of course, in the end, all of this falls on the taxpayer, either directly in the form of more taxes or indirectly via the destruction of the dollar’s purchasing power. Another bale of straw on the camel’s back, and another reason to be concerned about holding paper dollars for the long term.

If you still trust the government to take care of you and yours when the feces hits the fan, you’re on the path to financial disaster. But even in times of crisis, there are things you can do to protect yourself – for example, by betting against the insane machinations of the government and Fed. You can’t make them stop, but at least you can profit from them. Read about Bud Conrad’s favorite investment of 2009… by clicking here.

Have a sparkling day.

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Reader Comments (8)

Clearly if more of the masses knew this information, my guess if just 1-2% of folks with an excess of $100K in these banks put that money in gold, we would be seeing gold really kick in the sooner-or -later major leg up...regardless of how this all plays out, it is very bullish for PM's...and yet the mass media, even Fox News channel, think the recession is on the rebound...??
Snakeman Scott

August 5, 2009 | Unregistered CommenterSnakeman

snakeman doesn't know what he's talking about, and this article is off too...100k is a useless gold investment, its not enough money too make a fair return. and if everyone dumps their money into gold companies (NOT gold itself) it will have the exact same cause and effect because that money still gets turned around and deposited into a bank. if that bank falls, the gold company loses their investment and can't continue mining (or whatever they do, maybe refine, etc) and they will still lose money, making you're investment WORTHLESS! physical gold is the way too go because all the investment is already finished, no mining, no refining, its just here and ready too sell. buy at 950/ounce, sell at 5000/ounce. whats the alternative? invest at $35/share and then that company realizes ALL costs have gone up (man power, energy, equipment) and the share price falls because they can't keep production peaked. its simple logic really, even the gold companies will start failing too.

August 5, 2009 | Unregistered Commentermm

DOOM to us all LOL

August 5, 2009 | Unregistered CommenterSnakeman

Wishful thinking is hard to separate from the facts that if all the gold bugs were right the price of gold would have zoomed years ago and stayed up. Not a bubble like in the 1980's. The people who bought gold are not the people who are commenting on the blogs. Those bloggers haven't enough money or courage to follow their own instincts.

August 5, 2009 | Unregistered Commenterwadouzinc

Thanks to Bank-Implode, I have been following the "Troubled Bank List" and the FDIC.GOV website.
"which fell to $13 billion at the end of the first quarter"

As you can see, Bloomberg reports the $13 billion reserve was as of the end of Q1. Since then, if you total the press releases from the FDIC regarding failed banks and "expected cost", you'll get a total of $12,173,900,000 (provided my math is correct).

Steps have been made to add $5 billion to the fund in Q2, and "expected" are not "actual" or "immediate", but if Guaranty Bank goes down the bill is expected to be $5 billion. What then?

August 5, 2009 | Unregistered CommenterMark

If it wasn't for the clear price manipulation by our Fed and Goldman Sachs, gold would have taken off airborne's not its run hasn't been fairly steller all doubters, some will catch the wave too late...Snakeman

August 6, 2009 | Unregistered CommenterSnakeman

Christ forgave those who crucified him, but totally lost it with the bankers. When you have lost everything, remember began with the bankers, and it's all ending with them too. This story though is not finished...go read about the French Revolution. We may be going down, but they are going down too.

August 9, 2009 | Unregistered CommenterDebbie

Yes indeed, the GUILLOTINE got a good workout back then!!...Snakeman

August 9, 2009 | Unregistered CommenterSnakeman

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