Wall Street Journal – Bill Seeks to Let FDIC Borrow up to $500 Billion:
Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department.
The Connecticut Democrat’s effort — which comes in response to urging from FDIC Chairman Sheila Bair, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner — would give the FDIC access to more money to rebuild its fund that insures consumers’ deposits, which have been hard hit by a string of bank failures.
Last week, the FDIC proposed raising fees on banks in order to build up its deposit insurance fund, which had just $19 billion at the end of 2008. That idea provoked protests from banks, which said such a burden would worsen their already shaken condition. The Dodd bill, if it becomes law, would represent an alternative source of funding.
This $500 billion is in top of the $700 TARP bailout and the several trillion dollars the Fed is using to prop up banks. As Mish likes to say, “What cannot be paid back will be defaulted on. If you did not know it before, you do now. The entire US banking system is insolvent.”
Act accordingly. Spread your deposits around. Pull money out of the bank whenever you can do it safely (meaning, not just stuffing the money in your mattress where robbers and fire can take it). Pay off your outstanding bills. Pay extra on regular bills like your utilities, car payment, or mortgage. Put cash in safety deposit boxes. We could wind up with massive inflation, so it might not hurt to have some physical gold in the safety deposit box.
A full pantry never hurts, either. If nothing else you can save money buying in bulk, you’ll make fewer trips to the grocery store, and you’re less likely to find yourself without an ingredient when you’re cooking dinner on a Wednesday night.
Needless to say, you shouldn’t hold any banking stocks or insurance stocks (AIG was primarily an insurance company). More to the point: unload stocks now. The Dow is at 6,594 and the S&P is at 682. Notice how both numbers start with 6? They’ll start with 5 not long from now and I wouldn’t be surprised to see 4 eventually for the Dow.
P.S. While I think the banking system is largely insolvent, that isn’t the same thing as being 100% confident the banks will be wiped out or that you won’t get your money back. Take considered steps like the ones above, but don’t do anything foolish. (Putting money in your mattress is foolish.) The steps above have almost no risk. At worst, gold might go down some. The upside of gold is that it might double or triple from here if things get really bad. And if things don’t get really bad, you’ve still got gold.
UPDATE: CalculatedRisk notes that just six months ago the FDIC was disputing a Bloomberg story claiming the FDIC would need taxpayer money to cover bank losses:
Bloomberg reporter David Evans’ piece (“FDIC May Need $150 Billion Bailout as Local Bank Failures Mount,” Sept. 25) does a serious disservice to your organization and your readers by painting a skewed picture of the FDIC insurance fund. Let me be clear: The insurance fund is in a strong financial position to weather a significant upsurge in bank failures. The FDIC has all the tools and resources necessary to meet our commitment to insured depositors, which we view as sacred. I do not foresee – as Mr. Evans suggests – that taxpayers may have to foot the bill for a “bailout.”
So six months ago the FDIC was crying yellow journalism over a report they might need $150 billion in taxpayer money. Two days ago the FDIC said they might be insolvent this year without more money. Yesterday there were calls in Congress to give $500 billion in taxpayer money to the FDIC to cover failed banks. How things change. Nervous yet?