What Has Been Seen…

This is frightening on many levels. People are slowly slipping back into complacency as gas prices settle, the US Dollar seems to be doing slightly better, and Bush has declared a “soft end” to the war in Iraq.

But don’t get too excited. With the recent mortgage loan crisis and massive shutdown of many banks and credit unions across the US, many folks are worrying if where they have their money is safe.

For many, they need look no further than the re-assuring manta, “Don’t worry, the FDIC insures up to $100,000 of your money!”.

Phew.

But doesn’t that imply that the Federal Deposit Insurance Corp (FDIC) actually needs to HAVE all that money to back up the money your banks are unable to cough up?

It turns out that the FDIC may have to borrow some of that money to make it through the continued failures of banks all over.

The borrowing could be needed to cover short-term cash-flow pressures caused by reimbursing depositors immediately after the failure of a bank, the paper said.

The borrowed money would be repaid once the assets of that failed bank are sold.

“I would not rule out the possibility that at some point we may need to tap into [short-term] lines of credit with the Treasury for working capital, not to cover our losses,” Chairman Sheila Bair said in an interview with the paper.

Bair said such a scenario was unlikely in the “near term.” With a rise in the number of troubled banks, the FDIC’s Deposit Insurance Fund used to repay insured deposits at failed banks has been drained.

In a bid to replenish the $45.2 billion fund, Bair had said on Tuesday that the FDIC will consider a plan in October to raise the premium rates banks pay into the fund, a move that will further squeeze the industry.

The agency also plans to charge banks that engage in risky lending practices significantly higher premiums than other U.S. banks, Bair said.

The last time the FDIC had borrowed funds from the Treasury was at nearly the tail end of the savings-and-loan crisis in the early 1990s after thousands of banks were shuttered.

The fact that the agency is considering the option again, after the collapse of just nine banks this year, illustrates the concern among Washington regulators about the weakness of the U.S. banking system in the wake of the credit crisis, the Journal said.

Keep the bolded line in mind there. Picture the houses in your neighborhood that renters or victims of foreclosure have stripped bare. Copper ripped out anywhere it could be found, windows, cabinets, doors, and fixtures completely removed and sold to cash in before heading out.

Then think about the term, “assets”. The banks have long been playing hot potato with loans wrapped into packages and sold on other markets to investors. As those hot potatoes explode, you have to wonder. When a failing bank holds most of it’s assets in debt secured by homes that are plummeting in value and remaining almost unsellable…

Will there really be enough to pay back what’s borrowed when the time comes?

Not to worry - the FDIC will insure your money. But whether you end up paying for them to do it via inflation and more money on the market, lowering the worth of the Washington’s in your wallet… That will be left to time to tell.

Wednesday, August 27th, 2008  |  Visited 906 times  | 

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