FDIC Goes Bankrupt
By Bud Conrad
The link here will take you to the FDIC’s balance sheet through the third quarter of 2009.
As you’ll see, the FDIC is already bankrupt in that the Deposit Insurance Fund (DIF) is a negative $8 billion. And it is probably much worse than that, if its undoubtedly self-serving accounting were corrected.
Consequently, it is no longer a question of when the FDIC will have to go to Congress for more money – but for how much.
In the currency of the time, Resolution Trust went through a quarter-trillion in the 1990s, bailing out S&Ls in a crisis that was not nearly so serious and largely didn’t involve the broader banking sector. The bailout size gets mixed up between TARP, the Fed overpaying for MBS, and the FDIC itself, but there's probably $2 trillion of bad-asset write-downs coming. Of that amount, the FDIC will have to cover on the order of $400 billion, and that can only come from Congress (which means taxpayers).
While these are high-level, back-of-the-envelope projections, if I am even close to being correct, then we are nowhere near out of the current crisis.
A more optimistic forecast might assume that the economic recovery gathers steam and, along with price inflation, helps housing prices rise, preventing some of the damage that will otherwise occur to the banks… and that the FDIC will be required to cover. However, that seems unlikely with resets, low employment, and no wage growth.
When the cash runs out, the FDIC will be subsumed into the government, and the taxpayers will be paying themselves to keep their deposits whole.
Here’s a chart that tells the story.
David again... speaking of the continued struggles of the housing sector, and therefore the banks and other institutions now holding a lot of underwater paper, this just came in from our own Jake Weber…
Foreclosure filings – default notices, scheduled foreclosure auctions, and bank repossessions – hit 2.8 million properties in 2009, a 21% rise from 2008 and an astounding 120% increase from 2007. And the estimated 1,000,000+ backlog of delinquent loans looming over the market ensures that the housing crisis is far from over.
“The foreclosure crisis isn’t letting up. Between 3 and 3.5 million homes are expected to enter some phase of foreclosure this year.” Rick Sharga of RealtyTrac, quoted in the New York Times on January 14, 2010.
The number of foreclosed houses hitting the market isn’t the only thing making new records. Gold is the only asset that has consistently appreciated in value for each of the last nine years. And as the folks on Capitol Hill continue throwing loads of money at the rapidly deflating housing bubble, the odds remain tilted in favor of another great decade for gold. |
