As many of you have probably figured out, this is a picture of a run on the American Union Bank in New York City during the Great Depression. A run on the bank occurs when depositors lose faith in the bank’s ability to repay the money that rightfully belongs to its customers.

As a direct result of bank runs during the great depression, the Federal Deposit Insurance Corporation (FDIC) was created by the Glass-Steagall act. The FDIC’s insures up to $100k worth of deposits per person. The idea is to simply back the U.S. banking system so we can prevent instances like the one in the picture above.

Bank Runs Today

With the creation of the FDIC, besides a few blurps in history, bank runs were thought to be a thing of the past…thing again. This past summer the first major bank failure resulting from the credit crunch hit home. I’m referring to England based Northern Rock. Although Northern Rock does not have the FDIC backing it, it does have a similar entity. In fact, the end result of Northern Rock’s failure ended with the Bank of England guaranteeing all deposits on domestic banks.

We have had several bank failures already here in the United States as well. There have already been ten bank failures this year including the most recent and most notable, IndyMac. By the way, I’m talking specifically about banks. If we looked at lending institutions as a whole, we’ve had in excess of 270 failures.

More Failures To Come

Interestingly enough, the FDIC recently released an alarming report that should tell us that IndyMac will not only be the last failure, but it also won’t be the biggest bank to falter.

The FDIC reports that the number of banks on its endangered list it now at 117. That number is up from 90 the prior quarter marking a 30% increase. Historically, 13% of the banks on the danger list have failed. That means that about 15 more banks on that list should fail. I would also like to note that IndyMac wasn’t even on the endangered banks list.

The report also stated that assets on the balance sheets of these troubled banks have nearly tripled to $78 billion since the first quarter. Also, loan loss provisions of all FDIC insured banks increased fourfold on a year over year basis to $50 billion.

FDIC Looking For Help

So what does this all mean going forward? First of all, credit conditions have not gotten any better, and don’t expect to see the light at the end of the tunnel any time soon. The banks are preparing their balance sheets for hard times going forward, and so should we.

More specifically, and probably more appropriately, we should look at what this means for the FDIC. Well, it looks like the FDIC will have to do something that it hasn’t done since the early 1990s during the saving-and-loan crisis: borrow money from the U.S. Treasury in order to ensure capital ratios amidst the ever growing number of bank failures.

FDIC Chairman Sheila Bair made a statement that they might need to borrow money from the U.S. Treasury. Analysts’ predictions of the amount of money the FDIC will need to borrow vary drastically. I’ve been reading numbers anywhere from $30 billion to $500 billion. My honest opinion is that the FDIC will need a minimum of $500 billion.

My reason for this view point is very simple. When the FDIC needed a credit line during the S&L crisis in the 1990s, it came at the very end of the issue. Now the FDIC is looking for a loan and we’re probably only in the second or third inning of the credit crisis. Remember we still have some major shoes to drop; such as: auto loan, commercial debt, and the big daddy of them all, the multitrillion dollar unregulated credit derivatives market. It’s also worth noting that just over 4k banks failed in the Great Depression. I’m not saying we are entering another great depression, but I’m not saying that we won’t either. In actuality the following decade or so will probably carry many similarities and many differences to the early 1930s

What I’m trying to tell you is that we have a long way to go, and the FDIC will get dragged through the muck just like the rest of the insurers in different aspects of the credit market have. The advantage that the FDIC has is that the government will give them as much money as they need in order to prevent an immediate collapse in our joke of a fractional banking system.
Given that, guess who gets to foot the bill. You got it: the taxpayers.

Nicholas Jones
Analyst, Bourbon & Bayonets