All Eyez on FDIC

Everyone’s a-titter today about Lehman going bankrupt and Merrill being bought by Bank of America. These are not minor events to be sure, but in many ways they don’t directly affect the day-to-day lives of your average citizen.*

A failure of Washington Mutual, the sixth largest commercial bank in the United States, is another matter altogether. On the ropes for a while now, WaMu’s failure would severely test the ability of the FDIC to insure deposits up to $100,000. Quoth the FT:

Washington Mutual had $143bn in insured deposits on June 30 – about three times the size of the deposit insurance fund, but less than half of its $307bn assets.

You read that right. If WaMu goes belly-up, the FDIC has to pay $143 billion. It has $45 billion in its coffers right now, and could draw on $70 billion more from the Treasury. The difference would have to be made up by going to Congress. By that point, nervousness among savers will probably have caused several more smaller banks to fail, and Congress will be forced to write an increasingly enormous check.

Naked Capitalism offers some more context:

Many readers might think there is no reason for anyone to be so exposed. It’s easy to divide one’s deposits across many banks to remain below the $100,000 limit, right?

Not if you are a business. Many firms carry more than $100,000 in balances over the course of a month, particularly if they have a healthy payroll. And the requirements of payroll processing in particularly make it prohibitively expensive to operate multiple accounts.

Yeah, I’ve already cleared out some space under my mattress.

*This is not to say, of course, that the ripple effects of these failures and restructurings won’t impact people’s day-to-day lives.