FDIC: Insolvent!

The Wall Street Journal reports today that, "The Federal Deposit Insurance Corp.'s fund that protects more than $4,500,000,000,000 in U.S. bank deposits fell to just $10.4 billion at the end of June 2009, as the banking industry continues to struggle with souring loans and regulators brace for pain in trying to clean up the mess."

It further states, "The level of the FDIC's fund, the lowest since the savings and loan crisis, almost guarantees that the government will have to hit the banking industry with another special fee to recapitalize its reserves. The agency said it had 416 banks on its "problem" list at the end of the second quarter, up from 305 at the end of March."

Folks, that was back in June. On August 14, we had Colonial Bank, sixth-largest bank failure in U.S. history, was taken over by FDIC and then sold to BB&T Corporation with some extremely favorable terms. (Favorable terms simply means the FDIC took over all the toxic assets from Colonial Bank.)

Now, let me see if I understand this correctly. Last year, during the financial debacle surrounding our financial institutions (commercial and investment banks), most of these entities had Equity Multipliers (Leverage Factor) in excess of 30:1. That simply means that if a financial institution has to write-off just 3% of its loan portfolio, it is insolvent. Guess what? That is exactly what happen last year. Right now, the FDIC has an Equity Multiplier of 433:1. You guessed it, and it is not pretty! We are talking about just a .23% decline in its equity will make FDIC insolvent. Since this calculation was based on its June 2009 data, I would surmise, especially with the failure of Colonial Bank, that FDIC is insolvent and needs a tremendous infusion of equity capital from the Fed, Treasury, and Banks. What does that mean for you? Well, you will be paying more in bank fees that is for sure; and that pittance of interest income that you receive on your CD will be even smaller.