The FDIC Is Way Beyond Broke

The Federal Deposit Insurance Corporation announced this week that the insurance fund that covers more than 4.5 trillion dollars 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.

Greg Hunter

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Hunter joined ABC News in 1999 from WTSP-TV in Tampa. He has earned a “National Headliner Award," an International “Freddie Award” for health and medical reporting, as well as investigative reporting awards from both the “Society of Professional Journalists” and the “Radio Television News Directors Association.”