Vinny’s Blog

I hope you remember my previous posting about FDIC, if not please feel free to explore. [ http://www.diwakars.com/wordpress/2008/08/fdic-iii/ ] In case you skipped reading previous post here are some references from it - in previous posts news articles indicated that FDIC had approx 53 billion dollars, with that it insured approx 4.3 Trillion dollars worth of deposits.

Does not matter how odd these numbers (53 billion insures 4.3 Trillion) look to you (more on it soon) but ‘experts’ were not worried about FDIC running out of money. Not even 1 month goes by and bam ! these ‘experts’ announced that funds are strained and premiums may be increased.

FDIC Fund Strained by Bank Failures May Lift Premiums (Update2)
http://www.bloomberg.com/apps/news?pid=20601087&sid=abahg9z7p4wU&refer=home

Now, about those odd looking numbers - (reference same article above)
The FDIC is required to shore up the fund when the reserve ratio, or the balance divided by the insured deposits, slips below 1.15 percent or is forecast to fall below that level within six months. A 2006 law directs the agency to take steps to reach the 1.15 percent ratio within five years.

I will try to explain this in some simple English and that is the way I understand it also. If I and you were in similar insurance business then if you had 1 Dollar and 15 cents you would be able to sell insurance covering risk worth 100 Dollars.

-With this kind of business model there are two possibilities I can think of that will keep you in business.
A) Either the banks you are selling insurance for and covering risks for are too good and there is really no reason to fear that they will collapse therefore you could continue to charge premium as low as 1 dollar and 15 cents and really don’t worry about them going down.

B) You believe in the power of prayers and if and when things do go south. You believe your prayers would be answered just in time and you would be showered with required money to cover the losses.

point A) No debate FDIC keeps only 1.15% of the total value in it’s account news article indicates that.

Point B) is true as well…when in trouble for money you got to pray to the right god. God of money that is, in United States that god of money would be US Treasury or Federal Reserve, when Bear Stearns was rescued god showed up and read the first commandment fear no more citizens as long as I am here you will be rescued. Since then various financial institutes have given fairly good amount of headache and list of demands to money god, latest is Fannie Mae and Freddie Mac…….we will cover their prayer for money some other day. Today we are focusing on how FDIC thinks god can help……….

Besides increasing premiums, the FDIC has options if failures escalate and further drain the fund. The agency can tap a $30 billion line of credit at the Treasury Department and borrow up to $40 billion from the Federal Financing Bank to cover assets at failed banks.    (refer to same news article http://www.bloomberg.com/apps/news?pid=20601087&sid=abahg9z7p4wU&refer=home)

Now that we know how FDIC could get funds when needed….Let us see what lies in the future for FDIC. Is there a possibility they may have to use these funds ? why do they have to secure credit lines, increase premium if they don’t suspect any need for it ?

I wish I could give you an answer for those questions. But I don’t have a crystal ball and I don’t have any psychic abilities either…so, I looked for someone else who could.

Someone, who is good in the field of economics who could tell with more certainty than I ever could and Viola ! I found that someone, none other but IMF’s chief himself. Those who are wondering what is IMF.

The IMF is an international organization of 185 member countries. It was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment.
reference [ http://www.imf.org/external/about.htm ]

Now, an organization of 185 countries that deals with money issues of all those countries. It’s chief,  IMF’s chief, I would imagine will know a thing or two about economy better than an average Joe like you and me. I don’t doubt it and hope you agree with thought also…..he just announced a real bad news, just last week.

August 19, 2008
Credit crunch may take out large US bank warns former IMF chief
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4563171.eceÂ

“The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come,” Prof Rogoff said at a conference in Singapore.

In an ominous warning, he added: “We’re not just going to see mid-sized banks go under in the next few months, we’re going to see a whopper, we’re going to see a big one - one of the big investment banks or big banks,” he said.

FDIC  folks - are you taking notes ?

Sounds like this IMF chief is clear in what he says, he said  an investment banks OR big banks’ if he said only investment banks I could probably worry less (Lehman) has been on the chopping block for sometime now….waiting for the knife to fall. So, if they go under I won’t be surprised. But what’s bothering me is mention of big banks and clearly distinction is made in his statement between investment banks and banks. I am not sure the company I bank with is considered BIG BANK or not, and even if it’s mid-sized he has covered them too ( We’re not just going to see mid-sized banks go under in the next few months…)

This reminds me of an old saying ˜don’t carry all your eggs in one basket’ and I am now looking seriously at what ever little money I am left with  after paying kids school fee , taxes, social security, car payment, house payments and what not….I am going to distribute it among few banks.

I couldn’t guess which bank would/could go under but leaving all in one bank is sure a bigger risk. Distributing it might help. It may very well turn out that one single bank where I have had all my money might not go under and the other one where I land up putting a little bit might. But that’s a smaller risk than keeping all my money in one bank.

Typical of me first I have to find someone credible saying something. Then, I like to find someone else credible enough agreeing with that………that makes the case that much stronger. And it just happened, I found none other but chairman of Federal Reserve himself trying to figure out which banks could be allowed to go down…..

Bernanke Tries to Define What Institutions Fed Could Let Fail
Aug. 18 (Bloomberg) — Ben S. Bernanke is still trying to define which financial institutions it’s safe to let fail. The longer it takes him to decide, the tougher the decision becomes. http://www.bloomberg.com/apps/news?pid=20601087&sid=a0v71H6gketc&refer=home

Read again, not trying to avoid failures but figuring out which one are safe to let fail. FDIC - Good Luck. Wait a minute wishing them good luck is like I am wishing myself good luck……oh, well…….whatever…… in case you’re wondering these are the biggest depositors with FDIC….

Bank of America is the biggest U.S. bank by deposits, with almost $800 billion as of March 31, followed by JPMorgan Chase & Co., Wachovia Corp., Wells Fargo & Co. and Citigroup Inc., the FDIC said. Franklin National had $100 million in deposits. The FDIC insured $4.43 trillion in deposits as of March 31.

….now somebody correct me please…isn’t Citibank one of the worlds largest bank ? or is it only in size but not in deposits……I would never know….like I said - I don’t have a crystal ball and I am low on my psychic ability too.

Then it’s time to look at what FDIC has to say about themselves….

Problem bank list keeps growing
Last Updated: August 26, 2008: 5:31 PM EDT
FDIC says list of troubled banks in 2nd quarter grows to 117 with $78 billion in assets - up from 90 banks, $26 billion in assets in 1st quarter.
http://money.cnn.com/2008/08/26/news/economy/fdic_banks/index.htm?postversion=2008082617

Bank earnings fall to $5 billion
FDIC set to shore up deposit fund after challenging quarter
Last update: 3:55 p.m. EDT Aug. 26, 2008
http://www.marketwatch.com/news/story/bank-earnings-fall-5-bln/story.aspx?guid={A1D9F8DA-2632-4BBF-86B5-FF15C417C84E}

Here is what a noble prize winner has to say about banks…
Nobel prize winners warn financial system is still not out of the woods
Last Updated: 1:27am BST 22/08/2008
A top caste of Nobel Prize economists has warned that the world’s financial system may not start to recover for at least another year, leaving banks at mounting risk of an insolvency crisis.

As always here is the link to that post as well

[http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2008/08/22/cnnoble122.xml ]

Now, Any doubts about coming bank failures, pal  ? I didn’t think so.

Any questions about FDIC’s ability to deal with these problems ? your guess is good as mine.

[views and opinions presented in this article are mine and you need not agree with them. You must not make financial decisions or other decisions based upon what you read on this site. For that you must contact a professional with expertise in relevant area.]