The FDIC Is Way Beyond Broke

 By Greg Hunter’s

The Federal Deposit Insurance Corporation announced this week that the insurance fund that covers more than $4.5 trillion in deposits was not only depleted but has a negative balance of $8.2 billion according to the Wall Street Journal.   The FDIC is now an insurance fund with no money of its own.  The FDIC says it still has $23.3 billion to cover failing banks.  It also has a $500 billion line of credit at the U.S. Treasury.  FDIC Chairman Sheila Bair said in early September, “…We can tap up to $500 billion in a line of credit if we needed to, I can’t imagine that would ever be necessary…”  Well, now it may be necessary because The FDIC said this week that 552 financial institutions were on the government’s problem list at the end of September.  That’s 137 more “problem” banks added to the list in just three months.  These banks have combined assets of $345.9 billion.  The “problem list” will surely get longer as we go into 2010!  Some experts say the real “problem list” of bad banks is more than 1000.  Chairman Bair surely knew she would have to use the $500 billion line of credit when she asked for it from Congress.  While we’re on the topic of bank losses, the head if the IMF, Dominique Strauss-Kahn, said this week, “It’s possible that 50 percent are still hidden in their balance sheets…”  We don’t even really know how bad this will get, but it will get very bad!   I wrote about the grim banking trouble facing America in a September post called “The Banks Are (Still) In Trouble.”    

It is not just a raw numbers game because just a few big banks with lots of bad debt can also create big headaches for the FDIC.  For example, Wells Fargo has some real debt issues it is dealing with regarding credit cards and commercial real estate.  It also has billions in Payment Option ARMs.  These loans typically add to the principal of the mortgage because that is what homeowners pick as a payment.  With a collapsing residential real estate market, this spells even more trouble for the bank.  Wells Fargo’s problems are so bad the respected banking analyst Dick Bove said in September that Wells Fargo is a “volcano, with numbers of tremors, that is possibly about to blow.”  If Wells ends up needing a bailout, it will cost tens of billions of dollars and that is just one bank.  

Recently, the FDIC announced that it will require banks to prepay three years worth of government insurance fees, now!  The government hopes that will bring in $45 billion by the end of this year to help more failed banks.  Can you imagine walking into your state DMV to renew your license plate and the clerk behind the counter says, “Mr. Smith, we need to collect license fees up front for the next three years because we are broke and need the money.”  How about if your car insurance company told you that you need to pay the next three years of premiums because the insurance funds were depleted and  the company needs your money now to stay solvent.  What is going to happen in a year when the FDIC runs out of money again?  Will it then collect money through 2015?  This should make everyone with a bank account feel uneasy.  Will my mattress be better than my bank?

All this is going on under the backdrop of $32 billion in bank bonuses.  Well, that is at least what our brilliant banking executives raked in last year.  Yes, the same people that caused the financial meltdown and got $175 billion in taxpayer funds paid themselves $32 billion in bonuses last year.  I would like to point out the $175 billion does not include the bailout money given to the banks by the Federal Reserve in secret!  In many cases, some of the biggest banks paid more in bonuses than they made in profits!  For example, according to New York State Attorney Andrew Cuomo, in 2008:  Morgan Stanley earned $1.7 billion and doled out $4.475 billion in bonuses; Goldman Sachs earned $2.3 billion and paid out $4.8 billion in bonuses; JP Morgan Chase took in $5.6 billion and gave $8.69 billion in bonus bucks.  The average salary, bonus and benefits for top bank executives in 2008 were $2.6 million.  I do not expect 2009 to be any different.

Today I wonder if a half trillion dollars will be enough to get the country through the waves of bank failures coming from the residential and commercial real estate meltdown.  Make no mistake, we are nowhere near a bottom.  In my August post called “Real Estate at A Bottom…NOT!” I said this,“A Deutsche Bank report claims that 25 million homeowners will probably owe more than their mortgage is worth by 2011.  That will be nearly half  of all homeowners in the U.S.  The bank estimates 26 percent of homes are currently underwater.”  You should check out the chart in this post that shows just how big the wave of residential real estate will get when ARMs reset!  If you add up all the trillions of dollars in sour debt in residential and commercial real estate, you have all the ingredients for a banking calamity.  I do not know when it will happen, but I predict before it’s all over we will have a “bank holiday.”  That’s when the government closes all the banks and then takes some sort of extreme action to try and right the ship.  For me, that’s just the way the math works out.  By the way, gold hit yet another all time high this week.  Do you think some people are buying gold as insurance for defense against a possible banking meltdown?   

Regardless, I’ll bet while shoppers are blissfully gobbling up bargains on “Black Friday,” the FDIC will celebrate what I call “Red Friday” because, once again, it will be quietly closing down some more insolvent banks.

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  1. Jeff

    Very well researched and informative piece. Thank you for the info. Everything I have independently searched, tells me that the game is probably about over.
    Central banks are methodically buying up precious metals, as they know that they have to jump off the “dollar wagon”.
    The only question is what will be the tipping point? The Dubai mess, a military conflict, a run on the banks, the ARMs resetting…?
    Anyway, thanks for helping me to understand the actual condition. Forewarned is forearmed (or should be).

    • Greg

      It will be very sad because when this blows most people will not know what hit them. Thank you for your comment!

  2. George

    SNAP! I need to check my bank. I know that their rating has dropped. I need to move savings to the safest institution I can find and just use the current one for bill pay. I have moved my IRA to one of the safest brokerage firms I can find.

  3. Brad

    We sent congress persons to Washington because they assured us that they could get more of other people’s money for us than their opponent could or would. In other words… a looting (of other people) mandate.

    Surprise!!! Lo and behold they had promised some bigger dogs with much more money to give them to do the same thing. Except it was to get more of other people’s (we being in this case the other people) for them.

    Live with it folks. We asked for it and will be getting it for a long time to come. I don’t think most of us can imagine just how poor we are going to be.

  4. Dave

    Apparently no business or government entity can go broke!
    All that is needed is to load rail cars full of C notes and deliever it to the FDIC or banks in need.
    Something tells me that this little game of throwing monopoly money at everything won’t last for long though…
    I have a feeling that $1,200. gold will seem a wonderful bargain in 6 months.

    • Greg

      I have thought the same thing as you. The Government cannot let any company go under. What they are doing will make the dollar take the hit! Thank you for the comment.

  5. Todd

    Brad — Re children electing thieves

    I suspect it’s closer to ignorance and acquiescence than bear baiting.
    I mean, “Change we can believe in”!? Gimme a break. Mr. Hunter is absolutely correct that most Americans will not know what hit them. Most think we’ve turned the corner on a mild recession! It’s what daddy tells the eager children on his lap.

    Checks and balances have rotted and collapsed while usurpers have bribed their way in, laying waste to financial, social and political systems as they enrich themselves. The entire system is a criminal syndicate, replete with narcotics and murder for hire!

    Hell at least the Robber Barons ushered in brave new technologies and raised the national wealth while enriching themselves. Today’s illuminists are nothing but murderous parasites — and not bold but craven. “Corrupt” is a step up for these miscreants.

    Now that we hoi poloi are so impoverished that we can no longer pay billions in loan interest, I suspect that we’re rather more expendible, don’t you think? Better plan as though we are.

    “All fiat money returns to its intrinsic value: zero.” Voltaire
    “People have the government they deserve.” Joseph de Maistre
    Religion and patriotism are for suckers.

  6. DrTorch

    ” Can you imagine walking into your state DMV to renew your license plate and the clerk behind the counter says, “Mr. Smith, we need to collect license fees up front for the next three years because we are broke and need the money.”

    HA! That’s exactly what happened to me as I just moved back to Maryland. I HAD to pay for 2 years worth of car registration. And when I said I only wanted to pay for one, I was told I didn’t have that option.

    Ok, it’s two years instead of three, but the point remains the same.

    • Greg

      That is a sure sign your state is having financial trouble. Thank you for the info!

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