Rolfe Winkler at Option Armageddon on the dire condition of the FDIC deposit insurance fund:
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The FDIC, which was created to protect society from deposit runs, is no longer able to fulfill its mission because the biggest banks have grown far beyond its grasp.
The FDIC deposit fund is supposed to get its operating money from member contributions. Financial institutions put money in the fund so that the FDIC can make sausage out of failed banks without causing alarm in the general population.
In March, the FDIC deposit insurance fund held about $13 billion to cover the cost of running failed banks through a grinder.
That was before two large regional banks, Colonial and Guaranty, failed.
The FDIC estimates its cost for Colonial will reach $2.8 billion. Guaranty will cost $3 billion.
Do the math: $13 billion less $5.8 billion leaves $7.2 billion.
Yet the other 55 failed banks since March cost the FDIC enough all by themselves to run the insurance fund dry. And there are literally hundreds of banks in trouble around the country.
Now consider Bank of America, JPMorgan Chase, Citigroup and Wells Fargo: together, they have assets of $7.5 trillion.
Imagine the credit line needed to guarantee those assets.
With the federal deficit already running over a trillion dollars, imagine how many treasury bonds would have to be sold to China and Japan if one or more of those “Big Four” banks failed.
That’s a $7.5 trillion dollar obligation that doesn’t appear anywhere in the discussion of how to pay for federalized health care, or Cap’n Trade, or continued bailouts of automobile manufacturers.
Draw your own conclusions on whether the current stock and housing rally is likely to survive through autumn.
UPDATE: Reuters reports that the Obama Administration has revised its 10-year estimate of the federal deficit to $9.1 trillion — still without any accounting of the FDIC obligation.
