Posted On: Monday, July 28, 2008, 3:10:00 PM EST

FDIC Severely Undercapitalized To Handle Coming Bank Failures

Author: Jim Sinclair

Dear CIGAs,

Because all of us here at JSMineset care, here is the FDIC and SIPC missive from this weekend.

Have you protected yourself?

FDIC Insurance quoted by all banks to calm the fear of depositors is another exercise in smoke and mirrors. This can be seen in the recent commentary from FDIC on last week?s takeover of the insolvent banks, First National and First Heritage.

The FDIC notes that this bailout cost only $862 million dollars, or 0.30 percent of the $13.4 trillion dollars insured at approximately 8500 insured institutions.

We know the FDIC had net assets of $53 billion before IndyMac, which according to the FDIC will cost them between $4 billion and $8 billion. Taking the lower estimate and last week?s double-header, the FDIC?s available assets would have been reduced from $53 billion to $48 billion. We therefore have $48 billion in available funds guaranteeing $13.4 trillion in deposits. By rounding out the total FDIC assets, they represent 0.35% of what is insured.

This amounts to a vastly undercapitalized insurance company that makes outrageous claims, guaranteeing all US depositors up to $100,000 through 8,500 institutions.

I estimate that with the failure of one more major bank and ten reasonably sized regional banks the FDIC will be screaming for additional capital. That is monetizing bankrupt banks. This is true because the funds will come from public money.

Are you still in a freeze frame about protecting yourself?

Think about the other smoke and mirror game called SIPC that your broker assures you will take care of any loss in client assets, which is capitalized at $1.5 billion. Any of the big 6 has more than that in customer assets. It is possible that just one account at one of the big six has that amount alone.

You might consider all the calming brokers speaking about the additional insurance they carry for their clients, written to the firm for the benefit of their clients, even though your name is not on it. Now we all trust our brokers to do right by us, don?t we?

I wonder how long a bankruptcy judge would take to distribute the secondary funds to clients. I am sure it would take at least a few years.

If such an event were to occur, I imagine the dollar would be confetti by the time of distribution.

Respectfully yours,

Jim