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The Federal Deposit Insurance Corporation was created after the bank runs and collapses of the Great Depression. The goal was to create consumer trust in the banking system. The Savings and Loan Crisis of the 1980s was the first major challenge to the system.
"The savings and loan crisis of the 1980s and 1990s (commonly dubbed the S&L crisis) was the failure of about 747 out of the 3,234 savings and loan associations in the United States. A savings and loan or "thrift" is a financial institution that accepts savings deposits and makes mortgage, car and other personal loans to individual members..." (Source)
The S&L crisis forced the FSLIC into insolvency and ultimately cost taxpayers 150 billion dollars. The Federal Budget in 1980 was 517 billion dollars. The S&L crisis was a leading cause of budget deficits thereafter. The crisis was caused by the following:
1. Tax Reform Act of 1986: This took away many of the tax shelter advantages of owning non-performing real-estate.
2. Deregulation and FSLIC: S&L's made even riskier loans, knowing that that risk would be covered by FSLIC.
3. Real Estate Collapse: This was caused by the Fed raising interest rates and the loss of tax shelters.
Interestingly enough these same factors came into play in 2008. The next major crisis of FDIC. Prior to the 2008 collapse and crisis, the FDIC had over 50 billion dollars on hand to cover a little over 4.29 trillion in deposits.
"As of June 2008, the DIF (Deposit Insurance Fund) had a balance of $45.2 billion. However, 9 months later, in March, 2009, the DIF fell to $13 billion. That was the lowest total since September, 1993 and represented a reserve ratio of 0.27% of its exposure to insured deposits totaling about $4.83 trillion. In the second quarter of 2009, the FDIC imposed an emergency fee aimed at raising $5.6 billion to replenish the DIF. However, Saxo Bank Research reported that, after Aug 7, further bank failures had reduced the DIF balance to $648.1 million." (Source)
The "crisis" was caused by the Federal Reserve raising interest rates and tightening credit guidelines. This caused the real-estate market to collapse and resulted in bank assets tied to real estate, turning into liabilities. Higher rates led to Variable rate mortgages readjusting and subprime mortgages turned to virtual junk bonds. It was the S&L crisis on steroids.
Hedge Funds, like Romney's Bain Capital fueled the subprime crisis by making high risk loans and profitted in the futures market by betting against the dollar and on higher interest rates when those loans turned to junk. They also created the derivatives market, by selling futures and options against the very risks they created. Hedge funds have no regulatory requirements.
"Initially the companies affected were those directly involved in home construction and mortgage lending such as Northern Rock and Countrywide Financial, as they could no longer obtain financing through the credit markets. Over 100 mortgage lenders went bankrupt during 2007 and 2008. Concerns that investment bank Bear Stearns would collapse in March 2008 resulted in its fire-sale to JP Morgan Chase. The financial institution crisis hit its peak in September and October 2008. Several major institutions either failed, were acquired under duress, or were subject to government takeover. These included Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual, Wachovia, Citigroup, and AIG." (Source)
The 2008 mortgage and housing collapse has cost US taxpayers trillions of dollars, with no end in sight. Banks still haven't cleared their books of many non-performing loans because they fear taking the write-down. This means that the biggest wave of foreclosures is yet to come. It also means the collapse of many major and minor banking institutions. Perhaps, the entire banking system. Including FDIC.
"To receive this benefit (Fed Deposit Insurance), member banks must follow certain liquidity and reserve requirements. Banks are classified into five groups according to their risk-based capital ratio:
Well capitalized: 10% or higher
Adequately capitalized: 8% or higher
Undercapitalized: less than 8%
Significantly undercapitalized: less than 6%
Critically undercapitalized: less than 2%
When a bank becomes undercapitalized the FDIC issues a warning to the bank. When the number drops below 6% the FDIC can change management and force the bank to take other corrective action. When the bank becomes critically undercapitalized the FDIC declares the bank insolvent and can take over management of the bank." (Source)
In other words, it won't take much to push the entire system over the edge. A simple 5% reduction in a banks capitalization ratio, brought about by a stock market correction, derivatives exposure or non-performing mortgages will push it into the abyss.
Which brings us back to precious metals as the safest investment at this time. Silver will respond positively to crisis, inflation and correction. Unlike stocks, bonds, 401Ks, savings accounts and insurance policies. It remains the best place for mid-term and long-term savings.
Here are the March, 2012 Bank Closings and their cost to the Federal Deposit Insurance Fund:
Premier Bank, Wilmette, Illinois: $64.1 million.
Covenant Bank & Trust, Rock Spring, Georgia: $31.5 million
New City Bank, Chicago, Illinois: $17.4 million
Metro City Bank, Doraville, Georgia: $17.9 million
Total Cost to FDIC: $131 million
How Much Money Is in The Fund?
"The unaudited DIF balance — the net worth of the fund — rose to $9.2 billion at December 31 from $7.8 billion at September 30... The contingent loss reserve, which covers the costs of expected failures, fell from $7.2 billion to $6.5 billion during the quarter. Estimated insured deposits grew 3.1 percent in the fourth quarter." (Source)
Banks pay into the fund based on assets. American taxpayers will cover the rest. The above list of banks are small players, yet, 12 months of similar failures would cost 1.5 billion dollars. This is why the FDIC contingent loss reserve fell from 7.2 billion to 6.5 billion in the last quarter of 2011 alone. They spent over a billion in January 2012.
Big Banks Cost Big Money:
FDIC spent almost a billion dollars on failed banks in January of 2012 alone. One of the bigger hits came from Tennessee Commerce Bank. This bank could cost FDIC up to 1.3 billion dollars:
"Tennessee Commerce had $1.2 billion in assets and is the largest bank failure of 2012. The loss to the FDIC Deposit Insurance Fund was $416.8 million.
"The quality of assets at Tennessee Commerce Bank was so poor that the acquiring institution purchased only $203.9 million (17%) of the failed Bank’s assets. The FDIC, which is already holding $30 billion of failed bank assets, got stuck with the balance of $854 million of junk loans to be disposed of later." (Source)
The Elephant in the Room:
Global Derivatives exposure is estimated at 1,000 trillion dollars. It could be double that. No one really knows. Bank of America and JP Morgan transferred 70 trillion dollars of derivative exposure to their FDIC insured accounts. This is a move towards insolvency that cannot be ignored.
Ron Paul's audit of the Fed disclosed an additional 34 trillion dollars in Federal Debt, add this to the 15 trillion currently being reported. Then add this to the liabilities we will incur when JP Morgan and Bank of America go under. The total will exceed 119 trillion dollars.
The United States Gross Domestic Product is only 14.5 trillion dollars. This means if every penny from what we produce as a nation was applied to the national debt and FDIC future liabilities with just two major banks, it would take us 8.2 yearsto pay it off.
Hyper-Inflation is Coming:
Like the Weimar Republic, the Federal Reserve will start printing massive amounts of paper Federal Reserve Notes (dollar bills). Printing enough to cover 119 trillion dollars. The Federal Reserve states there are 1.1 trillion dollars currently in circulation. (Source) An additional printing of 70 trillion dollars to handle FDIC obligations would bury the dollar and trigger hyperinflation. Image a dollar cut in half 70 seperate times and you will get the picture.
It will happen. The only question is when.
Precious Metals the Answer:
Once again we are forced to conclude that it is time to convert those dollar-denominated assets, like stocks, bonds and CDs, into precious metals. I had the foresight to see this coming years ago, and established Drockton Bullion to meet the needs of my clients. Savings and Checking accounts will also be hyper-inflated away when these bank failures hit the system. It could happen after the November elections. By then, all precious metals reserves will be exhausted and prices will rise exponentially.
I don't exactly when, but the day of judgment for the dollar is close at hand.