Before I begin, I promised you a list of the 11 financial institutions in the biggest trouble. If you have any money at these institutions, please seriously consider moving your money to a safer institution. Even if they are FDIC insured, continue reading and you may see why the FDIC might not be in shape to cover the increasing bank failures. The list is in no particular order and is created by The Market Oracle.
- Lehman (LEH)
- Washington Mutual (WM)
- Fannie Mae (FNM)
- Freddie Mac (FRE)
- Corus Bank (CORS)
- BankUnited (BKUNA)
- Downey Savings (DSL)
- Wachovia (WB)
- Regions Financial (RF)
- MBIA (MBI)
- Ambac (ABK)
How does the FDIC work?
The FDIC charges deposit taking institutions fees about $0.05 per $100 in deposits to display the group’s goofy logo (which dates to its Depression-era roots). This is meant to assure customers their money's safe, even if the bank’s risk management policies aren't.
What does the FDIC have to do?
Now, the FDIC's challenge is to raise sufficient funds to cover the coming wave of bank failures - without putting undue stress on the already shaky banking system or igniting fears that it would need to tap taxpayers' money to protect, well, taxpayers' money.
Small banks are often heavily levered to construction firms, small businesses and individuals in their surrounding communities, and are particularly vulnerable to regionalized economic slowdowns.
Downey Savings (in Orange County) and BankUnited (in South Florida), for example, are at the heart of the housing bust. Their local economies are sagging under the weight of job losses in both the construction and mortgage industries, as well as fallout from plummeting home prices. Both banks bet heavily on ill-fated Adjustable Rate Mortgages during the boom, and neither is likely to survive the current crisis.
How does this affect you?
The FDIC has a $30 billion credit line from the Treasury department. This is in effect a loan from the government to the FDIC fund that will be repaid in better times. The FDIC is hesitant to borrow because of the message it will send to Americans: the FDIC doesn't have enough money to insure all the deposits that could go bankrupt. Similarly, the FDIC could borrow from the Federal Reserve but this option is not much better than borrowing from the Treasury department.
The most likely option is that the FDIC increases the fees it charges to banks. Since most people won't go to a bank that doesn't have FDIC insurance, banks are forced to take any price increase the FDIC gives them. Most banks will pass this price increase right onto you. The rates banks offer you on Certificates of Deposits and Savings accounts will be lower and the rates you get on loans will be higher.
Either way, you as a consumer, are again the loser. Either, you will be forced to pick up the tab as a taxpayer, or you will pay for it as a consumer.
Source: Minyanville
