The truly scary number

Times are tough all around.  It's not just commercial banks, and investment banks, and Fannie and Freddie lining up for a handout.   According to the Wall Street Journal, "Federal Deposit Insurance Corp. Chairman Sheila Bair said Tuesday her agency might have to borrow money from the Treasury Department to see it through an expected wave of bank failures."

The last time the FDIC did this was during the savings-and-loan crisis of the early 90s — when it was first granted the authority to do so. 

"I would not rule out the possibility that at some point we may need to tap into [short-term] lines of credit with the Treasury for working capital, not to cover our losses, but just for short-term liquidity purposes," Ms. Bair said in an interview…

The FDIC's deposit insurance fund reimburses depositors who lost money in a bank failure, typically up to $100,000. The fund's balance fell in the second quarter to $45.2 billion. That is just 1.01% of all insured deposits, low by historical standards.

That's a scary enough figure.  But the really scary number is one the Journal's reporters overlook — and it should have occurred to them to ask someone.  Fortunately, Bloomberg did earlier this month.  "The failure of IndyMac Bancorp Inc. and seven other banks this year may erase as much as 17 percent of a government insurance fund."

Yup, 17% of the FDIC's fund is already spoken for.  No wonder the FDIC's looking at raising the premiums its member banks kick into the fund — assuming the increase doesn't crater the banks' finances any more than they've already been by bad loans, of course.

How sure is Ms. Bair that the purpose of this handout is just to keep enough cash in the drawer day-to-day and not to actually keep the FDIC afloat?  Oh, excuse me, I'd better watch myself posing such an impertinent question.  "We're very mindful of the media coverage and blogs in controlling misinformation. All I can say is were going to continue to stay on top of it," Ms. Bair remarked last month.  I'm assuming by "misinformation" she doesn't mean false statements — but rather true statements that might undermine confidence in the system.

You do keep your accounts under $100,000, don't you?  Good.  Here are some other things you can do to keep your head above water.

The Daily Reckoning