Monday, August 03, 2009

The Runs

I figured I'd note this in case anyone would be interested in such a thing. Karl Denninger points out that:

  1. There are a number of known insolvent banks that are being left to continue in business because....
  2. More than likely the FDIC is nearly insolvent.

Of course the FDIC can get more cash by going to the taxpayer til (you know, taxpayers paying taxes so that the government can pay them back on money they had in a defunct bank). The sticky issue is that there isn't nearly enough revenue coming in to cover the FDIC liabilities so the government would have to issue debt, a lot of it (in addition to the metric tons already being issued). The last treasury auction had one 'soft' fail in that they were barely able to force the debt load down the pipe, what then happens if they go to issue debt to back the FDIC and they are unable to force it? Well things will get interesting then, very interesting; and I wouldn't make any big plans on getting a withdraw from an insolvent bank (or possibly a bank of any sort) as a 'bank holiday' will probably go into effect to prevent a justifiable full fledged run.

I personally wouldn't be surprised if Uncle Sam issued his own IOUs right to the defaulted depositors in such a case.

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