Is The FDIC Bankrupt?

Lou Scatigna

August 18, 2009

As I have reported here the last few days, 5 banks failed this past Friday and 2 of them were huge. Colonial Bank's failure was the sixth largest in US history, depleting the FDIC's Deposit Insurance Fund (DIF) by $2.8 billion. Community Bank of Nevada was also seized on Friday with the DIF taking a $782 million hit. Total losses for FDIC on Friday is estimated to be $3.7 billion.

So how much is left in the DIF? Well according to this report Saxo Bank Research LINK prior to Friday's bank failures the FDIC DIF had been depleted to only $648.1 million. Subtract $3.7 billion in losses from Friday's closures and the DIF is technically bankrupt by at least $3 billion(or $3,000 million to give you the proper perspective).

There will be many more bank failures before the financial crisis is over. With the DIF technically bankrupt should you worry about the safety of your savings? Certainly not. There is no way the FDIC will not make good on any and all insured deposits.

This past Friday FDIC Chairman, Sheila Bair says it’s nothing to worry about. “The FDIC's guarantee is as certain as ever,”. “Our industry-funded reserves have covered all losses to date.”

It's kind of a misnomer to call FDIC insurance "insurance". With less than 2/10 of a penny (or not even that according to Saxo) in the insurance fund for every dollar of deposits, it is more of a government bailout plan using taxpayer, borrowed or printed money (most likely).

In May the FDIC petitioned Congress and received a pre-approved credit line of $100 billion to back bank failures. It looks like it's time to start drawing down that credit line but it won't be enough.

Depositors of the 1,000 plus banks that will fail will be paid back with freshly printed and depreciating dollars. Could a currency crisis and resulting hyper-inflation be far off?

Maybe the rumors of a "bank holiday" in September are not that far fetched.