The Next Big-Gov Bailout

Looks like another government arm will soon be knocking on the Treasury’s door: “We are currently considering all options, including borrowing from the Treasury,” said FDIC chairwoman Sheila Bair. As we’ve forecast many times, the steady collapse of banks around the U.S. has put an irreparable dent in the FDIC deposit insurance fund.

Now likely less than $10 billion strong and with more bank failures sure to come, the FDIC faces two choices: Raise their taxes on banks to bolster the fund or tap the Treasury. Given the health of the U.S. banking system and the tendencies of our government over the last decade, you can probably guess which Bair will chose. Here’s another hint… Barney Frank, leader of the House Financial Services Committee, has already publicly opined on what Bair should do.

The FDIC has the authority to borrow as much as $500 billion through 2010.

“Stock market bulls aren’t concerned about the inevitable acceleration in bank failures — at least for now,” Dan Amoss told his Strategic Short Report readers just before Irwin’s failure. “Even though deposits will be insured against loss, the loss of local banks will still have a depressing effect on hundreds of small communities. These communities are going to lose their only access to business credit when their local zombie banks — loaded with toxic construction or commercial real estate loans — are liquidated or merged into other weak banks.

“Meanwhile, the latest monthly figures show that commercial bank balance sheets are shrinking at a fairly rapid rate, due to a combination of several factors: loan charge-offs, older loans being paid back at a faster rate than new loans are being made and regulators pressuring banks to build larger capital buffers.

“So credit-fueled growth in consumption or investment is not occurring. Combine this with stagnant or declining wages and corporate profit margins and it becomes hard to imagine how GDP will rebound on a sustainable basis.”

The Daily Reckoning