Tuesday, August 18, 2009

Is the FDIC Bankrupt?

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August 18, 2009  

Alabama regional lender, Colonial Bank, just became the 6th largest bank failure in U.S. history and the largest since Washington Mutual last year.

Regulators seized Colonial last Friday, selling the bank's deposits and assets to their competitor BB&T. Colonial was founded by real estate developer, Robert E. Lowder in 1981. The bank stayed true to its roots, right to the end (of the housing bubble).

In a 2006 interview, Lowder said, "We've always been a real estate bank. We understand real estate lending. For us, we think it's a good safe market to be in." Evidently, they didn't understand the market as well as they thought. The bank sunk under the weight of $1.7 billion in losses on bad real estate loans.

The real question regarding the failure of Colonial, is what this will do to the Deposit Insurance Fund (DIF) maintained by the FDIC.

The FDIC Deposit Insurance Fund started 2008 with $53 billion. By March 31st of this year it had dwindled to approximately $13 billion. But there have been 56 bank and savings and loan failures since then. In fact, there were five bank failures last Friday.

So, how much is left of the Deposit Insurance Fund? A report published by Saxo Bank Research two days before the Colonial failure suggested that the DIF was down to $648.1 million. Colonial is expected to take a $2.8 billion bite out of the fund. And Community Bank of Nevada, which also failed on Friday, took a $781 million slice from the pie.

If that's true, it means the FDIC insurance fund is technically bankrupt. But FDIC Chairman, Sheila Bair says it's nothing to worry about. "The FDIC's guarantee is as certain as ever," she says. "Our industry-funded reserves have covered all losses to date."

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Market Window

But should you be worried about your deposits in the bank? After all, those deposits are "insured" up to $250,000… right?

We take issue with the notion of the government "insuring" bank deposits. It's nothing more than a confidence scam. It holds up only as long as the depositors have confidence in the system.

How can you insure the base of deposits, when banks are allowed to loan out $10 for every $1 on deposit? You can't. It's mathematically impossible. The same way it would be impossible for every depositor to get their money back if they all showed up at the bank on the same day.

When swindlers and crooks pull a scam like this we call it a "pyramid scheme". When the banks do it, it's called "fractional reserve banking." When the government does it, it's called "Social Security."

While the Deposit Insurance Fund may be temporarily depleted, the FDIC is unlikely to become truly bankrupt anytime soon…

In May, Congress authorized the Treasury to set aside $100 billion as a "backup insurance" fund for the FDIC. And they're going to need it. A Royal Bank of Canada report suggests that there will be "thousands" of bank failures in the U.S before this crisis is over.

While your bank deposits might relatively safe… the dollar is not.

When the speed of the printing press is the only limitation on money creation, the government will never run out of dollars to fund their programs – FDIC "insurance" included. But what about the value of those dollars?

That's a different story. And that's why you should protect your wealth and savings by holding percentage of your assets in gold and silver bullion. How much is prudent? That's up to you. But with every passing day, holding dollars for the long-term becomes more imprudent.

Bullion is for savings and a store of wealth. But for life-changing profits, look to the precious metals miners, royalty companies and select exploration outfits. And Investor's Daily Edge analyst Rusty McDougal has made it his life's work to identify the best of the best. To learn more about his latest ideas, click here.

If you need to purchase a decent amount of bullion, why pay the hefty premium most people pay to buy it? Steve McDonald has a better idea…

Whether coins or bars, most people pay a fat premium for physical gold. With these dealer markups, you would have to make a return of anywhere from 5% to 30% just to break even.

But Sound Profits editor Steve McDonald has a better idea. The advice comes by way of Steve Belmont of RMB Group in Chicago, an analyst who Steve says "has nailed every major price move in gold and oil for the eight years I have known him."

Here's what he's saying now. You should own physical gold – not gold held in an ETF. And if you want to buy it with no markup or premium, buy a near month futures contract on gold and take delivery. This allows you to purchase around $30,000 in gold, and only pay $100 for delivery and about a $50 commission.

This is exactly how banks and mints buy their gold, and it's available to you at the same price! According to Steve, "Gold has never looked better and this is the cheapest way I have found to own it."

A buying opportunity… or the first major cracks in the rally?

Bank failures and lousy consumer confidence numbers on Friday, and another sell-off in the Asian markets contributed to the biggest decline in U.S. markets in more than a month. The Dow lost 186 points yesterday.

It was enough to get the attention of the talking heads. They wonder aloud whether this pullback is a buying opportunity, or the start of something serious. We suspect the latter.

A true bull market (as opposed to a fleeting bear market rally) and a genuine recovery need an economic boom. But where is the boom? From the data points that cross the newswires to the stories at the barbershop, there is far more evidence of recession than recovery.

Even the "improving" employment numbers are no cause for celebration...

We are inherently distrustful of government statistics. The reporting is often manipulated and the results are notoriously skewed to fit the bias of the state. The inflation numbers are the most often cited, since the government removed food and fuel from the "core" inflation calculation.

The employment numbers are no different. One of the ways the numbers of "unemployed" are kept down is by removing "discouraged workers" from the total. That's how the national unemployment rate "fell slightly" from 9.5% to 9.4% earlier this month – even as 247,000 more workers were given pink slips.

According to government statisticians, the size of the American workforce declined by 422,000 in July. These people were removed from the official count, because they have given up their active job search.

Thanks to a little government math, we got a "slight improvement" in the unemployment numbers. But don't try to tell that to the guy who's been looking for work for six months.

Good Investing,

Bob Irish
Investment Director
Investor's Daily Edge

We want your feedback! Let us know your thoughts on this article. Email us at Email: feedback@investorsdailyedge.com


Bob Irish - Investment Director
Andy Gordon - Editorial Contributor
Jon Herring - Editorial Director
Ted Peroulakis - Editorial Contributor
Christian Hill - Managing Editor
Dr. Russell McDougal - Editorial Contributor
Steve McDonald - Editorial Contributor
Michael Masterson - Editor Emeritus


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