FDIC Facts and Figures – Not Encouraging 08/14/08

What one should look forward to in the early stages of the USA banking crisis (now) is the following:

• Capital from the banks will flow from the lesser banks to the big boys. Mergers.
• Available Credit will be much less, loans will be harder to get and those who need them the most will not be able to qualify under new tougher underwriting of loans. Those who are not in need of credit will qualify. The strongest potential borrowers will be getting reevaluated constantly and find themselves dropping into lower credit ratings. Secured loans will be about the only type of loan average credit people are going to be able to get for a long while. People with marginal credit will have a tough time. Terms will be harsh, large down payments and high interest rates
• Banks will be reorganized and not be able to provide new credit, they will just try to get deposits and service their existing loans hoping for the best.
• Financial stocks will see new lows.

Some banks have about of 1/3 of their deposits uninsured by the FDIC. Mostly due to maximum insurance limits. This might cause a run on cash. More sophisticated people may decide they want their money out of the banks. The US dollar is not dropping in fact it is rising to new recent highs against the Euro. People will start saying hey let me put my money in another country and wait to see how this mess plays out.

If the FDIC reserves are exhausted and congress does not give them enough new reserves it can be end game, that is to say the FDIC could go bankrupt. More and more sophisticated people will become aware of this fact and stop wishing such a thing never happens; instead they plan for it to avoid financial devastation and ruin.

Let us review the state of the USA banks to see how a cash drain may topple more banks even faster.

The USA banks and thrifts have $6,480,000,000,000 in deposits. This is roughly 6.5 trillion dollars. Of this 2.5 Trillion is not insured by the FDIC. The total available cash on hand at the USA banks and thrifts is $273 billion, which we could say is about ¼ of one trillion dollars, not much. It is easy to see that the banks and thrifts do not have enough cash to handle a run if depositors get scared and think they are safer with their uninsured deposits out of the country in banks of another more stable nation. It is also going to be more bleak if those that are insured get scared and realize the FDIC is not such a sure thing and this capital takes flight as well. This will introduce a new dimension to the banking crisis as the liquidity levels of the banks drop causing more banks to be in trouble and thus get merged or closed. Then more insured deposits get paid by the FDIC and this further reduces their reserves bringing the doom and gloom closer and faster.

What happens is the banks getting drained of reserves start to pay higher interest rates to attract more CD deposits and restore their liquidity. This is the Savings and Loan crisis of the early 1980’s all over again. Then they need to get a higher yield on their loans to pay the higher interest rates they needed to pay on these CD’s and this means they need to take lesser grade loans. The good projects and good borrowers will not pay the higher interest rates they need to avoid losing money on the loans. Thus the large banks with the uninsured deposits (think big corporate accounts in the many millions) are in danger of going bad fast. These corporations are not stupid. Many of them already operate offshore now. They just start moving money abroad to more stable jurisdictions that had the brains to never write 125% home equity loans and zero down payment mortgages.

When countries start issuing fiat money backed by nothing, it can create a myriad of problems as we are now seeing. So one needs to ask themselves how many people have confidence in the current USA administration and do they think this administration is capable of a correction and save the banks after they caused this mess in the first place. This is a subjective question but most of you know the answer.

The major financial press and websites are full of doom and gloom stories regarding the banks, financial stocks, the FDIC etc. You can’t fool all the people all the time. The big corporations are going to do the move quietly and not overnight but they will move funds to save themselves from possible ruin, wouldn’t you. Corporations have little chance of getting protected with the FDIC. They could put $100,000 les allowances for interest in every bank but that does not allow for operating a major corporation. Their safe haven is out of the USA. Think about it. If you keep your money in the USA and everything works out great. If the FDIC fails well then what are you going to do? Which is more prudent to place money offshore like in the Panama banking system or hope for the best with your money onshore in the midst of a major crisis.

Possible worst Case Scenarios

If there is a run on the banks and resultant capital flight there might be an emergency law passed or an administrative ruling to stop money from leaving banks or going offshore. Before money can go offshore then an invoice would need to be presented and an affidavit signed as to the purpose of the funds leaving. This is how many countries with currency controls operate now. Then you’ll see people using credit cards and atm card overseas to get money out. This was the case with Venezuela in 2007. You cannot travel with over $10,000 cash without declaring it. Keep your ear to the ground looking for talk of such measures and then ask yourself where you want your money.