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News Link • Federal Reserve

The FDIC is Out of Money – Now What?

• American Banking News

This is what the FDIC is doing in reference to getting the banks to prepay three years of fees into the fund, in hopes of not having to admit the need to tap into the credit line offered by the Treasury Department, which would be an admission the FDIC has run out of money; which it already has.

What is this all about? Why not tap the Treasury credit line? Other than the admission mentioned above, there is a battle between FDIC head Sheila Bair and the Treasury’s Timothy Geithner. Bair wants the FDIC to be delegated more authority to handle the financial crisis, while Geithner wants to invest even more authority into the Federal Reserve (that has really worked well).

This doesn’t even take into account the Federal Reserve and the seemingly worthless paper it owns after trading liquid assets for worthless bank assets in order to shore up the system. And it also doesn’t take into account the commercial loans out there which are going to come back to haunt the banks which are so vulnerable in this regard too. 

Almost every mistake by the Obama administration and the Federal Reserve has been made while attempting to keep some short term pain from happening because of the many government and banking mistakes that have led us to where we are now. Other than changing interest rates and continuing to print more money, we’re pretty much at the end of what can be done without completely destroying the American economy.

No amount of rhetoric or ongoing assertions by the U.S. government will be able to cover up the disaster they’ve created on the American people, and by extension – the world. All we can do now is sit back and continue to save up, pay down our debts, and hope no other stupid politician tries to save us, while with their unintended consequences, end up hurting us more.

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Well here is something they never seem to tell you I posted this story a while back and I think it is worth showing you the highlights...
I thought the FDIC has full faith and credit backing by the US treasury?

Actually, no, it does not. The language in Section 14 of the FDIC Act is clear and unambiguous (emphasis mine): 
How long does the FDIC have to repay me if things go bad?
Here things get murky. We turn to Section 11 of the act and find this (emphasis mine):
(f) PAYMENT OF INSURED DEPOSITS.-- (1) IN GENERAL.--In case of the liquidation of, or other closing or winding up of the affairs of, any insured depository institution, payment of the insured deposits in such institution shall be made by the Corporation as soon as possible, subject to the provisions of subsection (g), either by cash or by making available to each depositor a transferred deposit in a new insured depository institution in the same community or in another insured depository institution in an amount equal to the insured deposit of such depositor.
That only says “as soon as possible” and sets absolutely no time limit or maximum. Taken to the extreme, it might be impossible for the FDIC to ever make depositors whole again, and this is one of dozens of such “outs” that exist in the document. Remember, this act was written in 1933 when money was gold, times were uncertain, and government lawyers were exceedingly careful to avoid locking the government into any possible financial black holes. 

And the FDIC Act is very clear to spell out that the only insurance funds available to depositors are those that exist within the fund itself:

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