The FDIC

Earlier this week, I posted an article about the second largest bank failure in American history. This of course was the closing of California based IndyMac, a bank that specialized in Alt-A loans. These loans are traditionally defined as loans that have less than full documentation (incomplete or no documentation) behind the application. Another way to describe these loans are ones that have a lower credit grading, usually with an A minus grade or lower.

Immediately, the FDIC was named conservator by the Office of Thrift Supervision, a department of the US Department of the Treasury. All non-brokered insured deposit accounts and substantially all of the assets of IndyMac Bank, F.S.B. have been transferred to IndyMac Federal Bank, F.S.B. (IndyMac Federal Bank), Pasadena, CA a newly chartered full-service FDIC-insured institution. So, they created a new bank name to continue operations and to facilitate depositors to get their federally insured funds.

So, who is the FDIC and what do they do?

This is directly from their website (www.fdic.gov/index.html):
The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $100,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.

An independent agency of the federal government, the FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure.

The FDIC receives no Congressional appropriations – it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities. With an insurance fund totaling more than $49 billion, the FDIC insures more than $3 trillion of deposits in U.S. banks and thrifts – deposits in virtually every bank and thrift in the country.

The FDIC insures deposits only. It does not insure securities, mutual funds or similar types of investments that banks and thrift institutions may offer.

The FDIC directly examines and supervises about 5,250 banks and savings banks, more than half of the institutions in the banking system. Banks can be chartered by the states or by the federal government. Banks chartered by states also have the choice of whether to join the Federal Reserve System. The FDIC is the primary federal regulator of banks that are chartered by the states that do not join the Federal Reserve System. In addition, the FDIC is the back-up supervisor for the remaining insured banks and thrift institutions.

To protect insured depositors, the FDIC responds immediately when a bank or thrift institution fails. Institutions generally are closed by their chartering authority – the state regulator, the Office of the Comptroller of the Currency, or the Office of Thrift Supervision. The FDIC has several options for resolving institution failures, but the one most used is to sell deposits and loans of the failed institution to another institution. Customers of the failed institution automatically become customers of the assuming institution. Most of the time, the transition is seamless from the customer's point of view.

The FDIC is managed by a five-person Board of Directors, all of whom are appointed by the President and confirmed by the Senate, with no more than three being from the same political party.

So, let me translate this information and tell you how it fits in the grand scheme of fraction reserve banking and the Federal Reserve System. The Fed needs another agency to regulate those institutions not under its control. The have to protect this fraudulent system of fractional reserve banking to maintain credibility with the public. Since there is no real assets of gold or silver backing the currency, there has to be very tight control when any institution does fail or risk a leak in the massive dam of consolidated debt of Americans.

Note from above that the FDIC is an independent agency of the federal government. They are a separate corporation that is under control of the Federal Reserve. They have to step in to preserve the faith in the system to prevent bank runs (a situation in which numerous bank customers try to withdraw their bank deposits simultaneously and the bank's reserves are not sufficient to cover the withdrawals). They insure each depositor up to $100,000 of deposits, but not other financial products offered by banks such as mutual funds, annuities, stocks, bonds, insurance policies, and any other financial products. They only protect checking accounts including money market accounts, savings accounts, and CDs. These are all the financial vehicles that return the lowest rate of return. Thus, most people have their money in products that are not covered.

But, that prominent statement of being insured up to $100,000 gives people confidence that their money is secure. Yeah, right! Also note that the FDIC has an insurance fund of $49 billion, but insures deposits of more than $3 trillion. If there are a lot of bank failures in a short period of time, how long will the $49 billion last with more than $3 trillion of deposits out there. And, this is only deposits! What about the many trillions of other financial products out there that are not covered? In short, there is very little assurance that this insurance could really protect the public on massive bank failures.

Also note that the usual tactic for resolving institution failures is to sell the deposits and loans of the failed institution to another institution. If a loan is bad and not going to be repaid, why will another bank think it is good and that they will get their money? When will they realize that you can not continue to throw good money after bad? As long as they don't get stuck with the bill at the end, they don't care.

IndyMac is only the second casualty. There will be many more. The house of cards will eventually fall. The only hope that you have is to not have your assets in with the house of cards.

As always, the choice is yours.

The LORD detests differing weights,
and dishonest scales do not please him. Proverbs 20:23 (NIV)

If you have comments or questions, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com