That Sucking Sound? It's FDIC Insurance Taking Over

by: Andrew Horowitz August 12, 2008 | about stocks: BAC / C / JPM / USB / WB / WFC    

Andrew Horowitz

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According to Meredith Whitney of Oppenheimer, there is a huge amount of uninsured deposits at many banks, which could soon be causing a huge problem. If you think about it, it makes sense. As time goes on, more and more money will be moved from bank to bank as depositors become more concerned about the amount of money they are insured for. Essentially, money will be spreading around:

  • Fewer people will qualify for mortgages
  • Banks will recapitalize and not provide credit
  • Wachovia (WB) will be 35% uninsured
  • Capital will be flowing from weak hands to strong hands
  • People who need capital/credit will not get it, those that don’t, will
  • Available credit for consumers will shrink
  • Some financial stocks will revisit lows

Think about the above list for a moment. What I think is the most interesting takeaway here is the fact that money will be moving out of banks at a very fast pace if we continue to see banks taken over by FDIC. This is because it will actually be detrimental for the FDIC to rescue ailing banks since any intervention will create greater uncertainty, greater withdrawals and effectively less deposits. Banks will need to find other ways to bring in assets as this will affect their lending requirements substantially.

According to Nouriel Roubini, the FDIC issue is a concern as only a small amount of the banks are on the “watch list” that should actually be there - 94 to be exact as of today. More to the point, my friend Mish gives us this little tidbit:

If uninsured depositors start asking for cash on the barrelhead, things can get mighty ugly mighty fast.

FDIC Recap:

  • There is $6.84 Trillion in bank deposits.
  • $2.60 Trillion of that is uninsured.
  • Total cash on hand at banks is $273.7 Billion.

So, if people start to get worried about their money and begin to move funds around, the banks that are having trouble could have a run-on-the-bank situation arise, quickly but inadvertently. The run could conceivably be more like a fast-walk as the $100,000 limit spooks retail depositors.

Now, for the big finale….. What about all of the corporate money that is in banks? The money used for paychecks, operating funds etc. If companies start to pull money for protective measures, what will be the outcome of that? Not a good one of course. All arrows are still pointing down.

This is one more of those pesky shoes that keep dropping.

Needless to say, I am not ready to put my money in one of these banks. That goes for both a deposit account and/or the stock.

Now, the better-late-than-never-news gang is catching on and should help to accelerate the problem. Rest assured that once they get a hold of this, they will milk it for all its worth since it will be targeted to those that are easily scared. This was just released by Bloomberg and already the colorful descriptives are showing up.

Besides increasing premiums, the FDIC has options if failures escalate and further drain the fund. The agency can tap a $30 billion line of credit at the Treasury Department and borrow up to $40 billion from the Federal Financing Bank to cover assets at failed banks.

As a last resort, the U.S. Congress can step in to protect depositors with legislation and appropriations as it did during the savings-and-loan crisis by creating the Resolution Trust Corp. in 1989 to manage the closings of 747 failed thrifts.

`Armageddon Scenarios’

“So if Armageddon scenarios did play out, the people’s deposits would be backed by the full faith and credit of the United States government,” Bair, 54, said on July 30.

The banking industry would ultimately be responsible for any government spending, Bair added.

“Even if we did have to call upon our taxpayers’ backstop, our statute requires us to pay back those funds over time through industry assessment,” she said. “So, ultimately, the taxpayer would not pay.”

The FDIC insures deposits of up to $100,000 per depositor per bank and up to $250,000 for some retirement accounts at 8,494 lenders with $13.4 trillion in assets.

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This article has 12 comments:

  •  
    Aug 12 05:48 AM
    Backed by the full faith and credit of the almost bankrupt United States government
    Reply | Link to Comment
  •  
    Aug 12 08:08 AM
    Government bailout here, government bailout there. The government is us, and all the money we use to bail out ourselves is borrowed from China. Never has this country been so vulnerable to a meltdown. I don't think it will happen, but the conditions are ripe.
    Reply | Link to Comment
  •  
    Aug 12 10:12 AM
    Buy a house way over your head in affordability. Don't make the payments. Stay in the house during the foreclosure process-free of charge of course. A forced move. Onwards and upwards to another home thanks to the U.S. Government bailing out a bunch of people who didn't have the intellect to spell cat even when spotted the "c" and the "a", let alone read what they signed without hesitation. Did Uncle Sam bail out the stockholders in 2000 when the market tanked? No. Why should we bail out these irresponsible people now? Why is it that we as taxpayers are sucked dry because of the stupidity of a few? Why does this government reward welfare behavior? Here's a solution: get off your rumps, work for a living, and live BELOW your means. Stop expecting everyone else to rescue you from your own ignorance. Gee, wonder why we have an immigration issue? Who wouldn't want to come here with the free ride for education, medical care, housing, food stamps, etc.? When will this dumbing down of America come to an end?
    Reply | Link to Comment
  •  
    Aug 12 11:29 AM
    Those who are being referred to as needing a real job are not on welfare as the above is referring to but people that are making a lot more than those on welfare. Gee, you mean some of the middle class, even though they are working may not be so intelligent? Again, the dumbing down has even effected numeracy. If you have teachers who are "uncomfortable teaching math" as one teacher told me then what do we say? I have heard this tripe from people who supposedly went to teachers college to get a piece of paper to teach mazth or what have you and they are AFRAID of it!! There is where the dumbing down has led us.....
    Reply | Link to Comment
  •  
    Aug 12 11:48 AM
    The article plays to emotion and I would say is borderline irresponsible. Our banking system has been and continues to be the strongest and most admired system in the world. To suggest otherwise in an attempt to undermine our confidence in the system accomplishes nothing. Do you expect the corporations and other large depositors to move their money to a mattress? Perhaps to some Wall Street money market funds? Some banks are having some problems - it's the nature of the business and, actually, a sign the system is working. No pain, no gain.
    Reply | Link to Comment
  •  
    Aug 12 11:51 AM
    Retriever
    Your comments are simplistic crap. Though many took on debt that they shouldn't have, many more were scammed by salespeople who told lies to entrap and sell at any cost. If regulations were in place instead of the Gramm system (do whatever you want style of "oversight") those salespeople could not have gotten away with it. If you are told that you qualify for something and get additional assurances that are bogus, whose to blame then? Never simple, aside from what you think, retriever.
    Reply | Link to Comment
  •  
    Aug 12 11:57 AM
    exb
    What is happening now is not the nature of the business. It is because of lack of regulation and GREED. The system is not working-unless by system you mean, anything goes; just don't get caught. Whose money will bail these greedy bastards out? Ours. Yes, that system always works!
    Reply | Link to Comment
  •  
    Aug 12 12:18 PM
    RAB-then those people who invest in companies should be bailed out when there is a loss! Obviously, you're one of the ones who need the bailout. Stop whining and blaming the sales people. Read the fine print. Get educated!
    Reply | Link to Comment
  •  
    Aug 12 12:35 PM
    Ret
    Nope, wrong again. No loans - no losses - no personal complaints. The difference between us is that I never assess blame before knowing the COMPLETE facts. And that means avoiding political, personal or religious biases when I analyze and reflect. It also means I never do it quickly, because as I already said, nothing is as simple as most think it is. Based on your comments, you are quick to blame the individual. Sometimes that's accurate - and sometimes it isn't. Knowing what you DON'T know is the most valuable skill of all.
    Reply | Link to Comment
  •  
    Aug 12 07:09 PM
    The cause of are problems are lax monetary policy (i.e. The Fed). Hayek and Von Mises explained this long ago. The cycle persists. Inflation of the money supply leads to speculation, malinvestment, and loss of the value of a currency no longer backed by hard asset (e.g. gold). The elites closest to the fed make billions in the spike up. The government then steps in to "bail out" the banks. The taxpayer is left with the bill and is ravaged by the multi-headed beast; lower asset value of his property, a devaluation of his currency, a larger tax burden, and the worst of all taxes - inflation. His wages are the last to rise to hedge inflation. Not so for the elite wall street guy who made millions and is part of the "too big to fail" crowd. If you want a better explanation you must read: The Revolution: A Manifesto, Ron Paul's recent bestseller.
    Reply | Link to Comment
  •  
    Aug 14 01:36 PM
    Classic Minsky theory of capitalisim. It always has and always will correct itself.
    Reply | Link to Comment
  •  
    Aug 17 10:57 PM
    retrieve: Rarely have I seen anyone get so much wrong. Get the self-righteous hypocritical chip off your shoulder.
    Reply | Link to Comment
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