The bailout of IndyMac’s depositors will probably deplete 10% of the FDIC’s reserves.
Congress will back up the FDIC if the FDIC ever (1) runs out of T-bills to sell (2) to raise money (3) to pay off depositors of insolvent banks. But where will Congress get this money? From the Federal Reserve System, if lenders will not fork over the money.
The Federal Reserve System backs up Congress. This is the heart of the threat to the solvency of the dollar.
The $4 billion that the FDIC will pay to a handful of depositors at IndyMac is hush money. It is paid to them to silence every other depositor in the country. "Don’t spread rumors about any insolvent bank." Why not? "Because, in a fractionally reserved system, all of them are technically insolvent." They are all borrowed short and lent long.
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So, we face a recession. We also face bankruptcies of overleveraged small banks like IndyMac. But the large banks are far more leveraged than the public understands. They have lent huge chunks of their capital to hedge funds that are leveraged 100 to one. A 1% move opposite to what a hedge fund has expected can wipe out 100% of a 100-to-one fund’s equity. It can be insolvent faster than you can say Carlyle Capital Corporation.
Warren Buffett says that the stages of the investment cycle is managed by three successive groups: first, the innovators; second, the imitators; third, the idiots. We are well into stage three.
Great article on the smoke and mirrors economy..the link is in the title.
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