WSJ:

Americans are about to re-learn that bank deposit insurance isn’t free, even as Washington is doing its best to delay the coming bailout. The banking system and the federal fisc would both be better off in the long run if the political class owned up to the reality.

We’re referring to the federal deposit insurance fund, which has been shrinking faster than reservoirs in the California drought. The Federal Deposit Insurance Corp. reported late last week that the fund that insures some $4.5 trillion in U.S. bank deposits fell to $10.4 billion at the end of June, as the list of failing banks continues to grow. The fund was $45.2 billion a year ago, when regulators told us all was well and there was no need to take precautions to shore up the fund.

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But this subterfuge can’t last. Eighty-four banks have already failed this year, and many more are headed in that direction. (My Comment: Yeah something like 1000 banks) The FDIC said it had 416 banks on its problem list at the end of June, up from 305 only three months earlier. The total assets of banks on the problem list was nearly $300 billion, and more of these assets are turning bad faster than banks can put aside reserves to account for them. The commercial real-estate debacle is still playing out at thousands of banks, even as the overall economy bottoms out and begins to recover.

Meantime, even as it "resolves" and then sells failed banks, the FDIC is also guaranteeing the buyers against losses on tens of billions of acquired assets. This is known in the trade as "loss sharing," which is another form of taxpayer guarantee that taxpayers aren’t supposed to know about. Most of the losses won’t be realized if the economy recovers. (My comment: What happens if the economy has another leg down. The taxpayer could end up bailing out the same assets twice.)

My Comment: This article begs the question of is there a limit to how many bailouts the government can finance? If we have another leg down in the economy, which is my view of what happens after the sugar rush wears off then what happens to the banks that took over the failed assets of busted banks. If the acquiring bank fails then you got a double bailout. To clarify I have no doubt that the FDIC will backstop all deposits. How much the returned money will buy is entirely different question.

John Polomny
The Real Deal