Indy Mac Bank is the most recent on a long list of banks that did not make it. The FDIC has shut down 6 failed banks in the past seven months. That is the same number that they closed down in 2007 and 2006 combined.

Indy Mac was one of the power movers in the industry. If they could not mange to stay afloat during the mortgage bust, how can the regular ole’ banks survive?

When the big ball starts rolling… it is sure to knock down quite a few little balls along the way. Can the FDIC keep up at this pace? Will the insurance money run out?

This FDIC has been around since 1933. Its sole purpose is to encourage consumer faith in the banking system. When thousand of banks failed in the 20′s, many people lost their life’s savings. Consumer confidence in banks was shot. No one would dare put a penny in a bank for fear it would not be there tomorrow. So the FDIC was created to assure people that is was safe to bank. The government, by way of the FDIC, promised that even if the banks lost, consumers would not lose.

Eventually, people began to believe in the banking system again. Well some people… I still know many elderly Americans who do not trust banks, FDIC insured or not… they would rather stick their cash in a mattress where it’s safe. But for the most part the FDIC has served its purpose of building people’s comfort and trust in knowing that their money is A Ok.

Over the years the FDIC has had to come true on its promise many times over. As it now stands, the FDIC insurances bank deposit up to $100,000 for checking and savings accounts and $250,000 for retirement accounts. Although the FDIC is a federal agency, they are managed by a 5 person board and operate like a corporation. (The C in the name is for Corporation.) And unlike most other federal agencies, it operates solely on revenues it earns, i.e. our tax dollars does not support them.

So where does the money come from? Well, just like every other insurance company, they make their money off of insurance premiums. Nearly every bank in the US, which there’s more than 8,000 of them, pays a hefty price to put up that FDIC-insured sticker in their window.

At last count the FDIC had about 50 billion dollars set aside to insure more than 3 trillion in deposits. So that takes me back to my original question… with the increasing pace of bank failures, will the FDIC run out of money?

It has been estimated that this Indy Mac thing will cost the FDIC up to 8 billion dollars. In just one day… more than 15% of their insurance fund is gone. And rumor has it that there are more banks slated for closure. At this rate, I don’t see how $50 billion, now $42 billion, will carry them very far.

The FDIC is infamous for bragging about how in 75 years no one has every lost a dime that was FDIC insured. Well I say they oughta stop bragging. With only $42 billion left in their stash and banks collapsing all around us, the end of their winning streak may be near.

So what will happen if the FDIC has no money to back up its promises?

Luckily for me this is not something I have to worry about, I don’t have any money. But for those PFA’ers who are fortunate enough to have money in the bank… keep a eye out to make sure your bank ain’t next.