CAUTION: Zombie banks ahead!!!!

The FDIC (Federal Deposit Insurance Corporation) was created after the Great Depression, primarily as a confidence builder so that people would feel that it was okay to start using banks again.  One of the biggest problems during the Great Depression was that when a bank would fail, any money on deposit would go with it.  Then, when it came time to pay off debts (which were historically high at that point, but nothing compared to today), there was no money to pay the debts.  Loss of jobs also meant no new money coming in.  Debt collectors would be able to take homes and other assets.  If people had their money on hand instead of in a bank that failed, things wouldn’t have been nearly as bad.

Originally, it was set to insure up to $100,000, which was an unimaginable amount to most people in the post-depression age.  Recently, it was increased to $250,000, again to make people feel comfortable leaving their money in the hands of others.

Since the beginning of 2008, 62 banks have failed in the US, 37 of which have happened since the beginning of 2009.  We are averaging between 2 and 3 per week.  The FDIC has been moving in and dividing up the banks that have failed, selling them off to other banks.

There was a report that 2 more failed just last week. While there have been other banks willing to take on the accounts, there will come a point where they will be swamped.

There have been so many, in fact, that the FDIC has been overwhelmed in their efforts to facilitate the takeovers. They are now looking at hiring private firms to help them out.

“FDIC is overwhelmed. So many banks are failing, and they expect that number to grow,” says Chris Terilli, VP of professional services at ADS Financial Services Solutions in Quincy, Mass., one of the companies bidding on the contract.

“I’ve been amazed at how many banks that are the walking dead have not been taken down,” adds consultant Anita Newcomb of A.G. Newcomb & Co. in Columbia, Md.

Just yesterday, it was reported that hundreds, if not thousands, of banks are considered “walking dead”. Over 300 banks were added to the “in-danger” list just in the first quarter of this year, but the FDIC isn’t releasing the names. Could it be they are worried that there will be a mass exodus of funds by depositors?

And then there’s the problem of actually insuring all that money on deposit. According to this article above:

The assets of those troubled banks total $220 billion, while the FDIC’s deposit-insurance fund has fallen to $13 billion. Not to fear: the Treasury Department tripled the FDIC’s line of credit to $100 billion in preparation for more losses. So, including the line of credit from taxpayers, the FDIC has just over two cents of reserves to cover each dollar it is insuring.

Not very reassuring.

Earlier in the year, some were calling for the nationalization of all troubled banks. This is also not very confidence inspiring.