FDIC: "We Aren't Bankrupt and Everything is A-OK"

"The banking industry... can look forward to better times ahead." - FDIC Chairwoman Sheila Bair, August 2009.

In my last piece, "The FDIC is Bankrupt," I reported that the Deposit Insurance Fund (DIF) that the FDIC uses to insure banking deposits was negative following the $2.8 billion August 14th failure of Colonial Bank in Alabama. However, today the FDIC released it's latest quarterly report and reports the DIF is not yet depleted and I was incorrect. To achieve this feat, the FDIC assessed "special assessment fees" of $9.1 billion and the bailout program, Temporary Liquidity Guarantee Program (TLGP), added $1.1 billion to the DIF. Special assessments in the past have been rarely used since the early 1990s – in 2008 Q2 just $0.6 billion was raised, and in 2006 Q2 the total assessments were just $0.007 billion.  (photo)

I agree with their claim, but please understand the entire monetary system is really more akin to a shell game of paper tickets and electron blips than anything scientific or logical as related in "Yes, Virginia, There Are No Reserve Requirements." Plus, as I pointed out earlier, the FDIC simply cannot technically go bankrupt since it has the money-printing power of the FED and Treasury behind it. Please see the accounting balances of the DIF from page 19/30. Without the special assessment infusion and TGLP bailout, the DIF would have indeed gone bankrupt.

Other lowlights from the Quarterly:

• Total deposits are $9.0 Trillion, while assets are reported as $13.3 Trillion (page 9/30)

• The FDIC reports that total notional value of derivative contracts held by FDIC-insured institutions rose slightly to $205 Trillion. (page 15/30)

• The "Problem Banks" grew from 305 to 416, reaching a 15-year high (page 7/30, see figure)

• The industry’s reserves for loan losses increased by $16.8 billion (8.6 percent) during the second quarter, as loss provisions of $66.9 billion exceeded net charge-offs of $48.9 billion. (page 2/30)

• Total assets declined by $238 billion, following a $303-billion decline in Q1, mostly due to loan losses. (page 2/30)

• From the above DIF balance report, expected insurance fund losses due to bank failures this quarter is $11 billion, and July and August failures are well on their way to meeting this.

• The DIF reserve ratio is 0.22 for the lowest level in 16 years. The FDIC notes on page 19 that "the Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250,000" in their assessment of estimated insured deposits. However, this increase most likely covers a majority of the $9 Trillion in total deposits. Realize that if these were factored in, the DIF reserve ratio would be significantly smaller.

In plain english, FDIC "insurance" is a Ponzi scheme, except in this case Mr. Ponzi has the power to create money and bail himself out indefinitely. The FDIC DIF is about $10 billion and also has $12 billion in expected losses in the current quarter. In propaganda that boggles the mind, the public is led to believe these funds are "insuring" the majority of $9,020 billion in deposits. The public is also led to believe that their "deposits" are THEIRS, when there is, in fact, no bailment made by the account contract, and the legal truth is that you have lent your money and the bank is NOT requred to pay you back.

As Murray Rothbard noted in The Case Against the FED:

"The very essence of fractional-reserve banking is that the bank is inherently insolvent, and that its insolvency will be revealed as soon as the deluded public realizes what is going on, and insists on repossessing the money which it mistakenly thinks is being safeguarded in its trusted neighborhood bank. If no business firm can be insured, then an industry consisting of hundreds of insolvent firms is surely the last institution about which anyone can mention "insurance" with a straight face. "Deposit insurance" is simply a fraudulent racket, and a cruel one at that, since it may plunder the life savings and the money stock of the entire public." (p. 138-141/162)

What lies in the future? As King Louis XV of France once said, "After me, the deluge."

My thoughts are that more small bank failures and mergers will occur, and international trouble for the dollar and Treasury markets will continue developing. Hopefully I will shortly get a chance to publish an insightful piece and presentation on monetary systems I've been working on, as well as Part 14 of the Money Matrix series on the US treasury market.

To steal some of my thunder, if the system falters, expect foreign currency fixed exchange controls just like those that occurred after the collapse of the London Gold Pool in 1968. If gold breaks through the stranglehold of the futures market, expect controls to be clamped on the gold price. A reversion to the IMF's SDRs is still fairly far-fetched without a commodity backing, as it is just a fluctuating basket of fiat currencies at the moment. This may elongate the current monetary system's life span, by years even, but likely will still not avoid the inevitable event horizon of a sucking black hole that economist Ludwig von Mises referred to as the "crack-up boom." Most importantly, the economic pain will continue.

The good news is that time yet remains to save our country from disaster at the hands of these economic incompetents. A future without the FED and sound money becomes more possible and probable every passing day as our modern-day John Laws scramble to fix an economic machine that just several years ago they could milk of its wealth with little noticeable effect. They are aware of the utter danger in their tinkering, but the situation at this point is as helpless as a Volvo mechanic trying to fix an Abrams tank at this point. Our central planners - Sheila Bair of the FDIC, Tim "Turbo Tax" Geithner of the Treasury/NY Fed/BIS, and Ben Bernanke of the FED – must be stopped unless we want to be in a depression until 2020.

Readers should note that I would not be running for U.S. Congress if I was not extremely optimistic in the long-term and if they are interested in what specifically they may want to do can read an article of mine, "Off a Cliff with No Airbag," and make decisions at their own discretion as I am a politician for the moment, not a financial advisor.  Another article published today "The FED Dances as Rome Burns" is also recommended.