Taxpayer Trading Strategy: Short FDIC Long TARP
The FDIC insurance fund that's intended to protect over $6 trillion of depositor assets, has dropped to the lowest level since the savings and loan crisis in 1993. That's not actually surprising or all that scary. Any of us could have done the math: the fund was worth over $45B last year at this time and since then, the financial world nearly melted down. This year alone, 81 banks have failed, requiring the FDIC to pony up money from its coffers and cover the losses for depositors.
FDIC Chairman Sheila Bair is probably not happy to go from $45 billion to $10.4 billion, but as she reminded us yesterday–the FDIC is backed by the US government and has access to up to $100 billion from the Treasury. The other point that Bair makes when speaking in public or before the media is that no depositor who has banked with an FDIC-insured institution has every lost a penny of his or her money since FDIC was created in 1933. That's a pretty good track record!
I'm a bit more concerned about the second part of the report: there were 416 banks on the FDIC "problem" list at the end of last quarter. These black sheep banks accounts for nearly $300 billion worth of assets. That's a number that can take your breath away if you ponder it for too long.
Unlike the TARP program, which was intended for larger banks, money that is wiped out from these smaller institutions is not likely to be recouped by the FDIC. So if the FDIC has to go to the well of the Treasury to replenish funds, the taxpayer will share in the permeating small banks.
Contrast that investment with the much-criticized and maligned TARP: so far, taxpayers have made money from TARP! Yup, we've collected a nifty 10.16% total rate of return from those firms that have repaid TARP funds, compared to the Dow Jones Industrial Average's total return of 4.82% in the same time frame. It's a bit too early to declare victory, but a long term investor might be interested in putting on this trade: short FDIC, long TARP.
