A public law colleague writes: “Ok, what does this mean (from the NYT)? ‘Experts estimate that a government bailout of Washington Mutual could cut in half the size of the federal deposit insurance fund, which protects bank depositors at thousands of banks and savings and loan institutions.’ Because it sounds like it means that half of the fund that insures my pathetic little savings is going to this company. Don't tell me my $$ shouldn't be under my mattress...although it won't be worth anything anyway once they print a bunch more in order to back this up.”

I’m not a banking lawyer, but I guess I play one on the UGA faculty. My short answer to my colleague is, hey, at least there’s already a statutory framework in place for this. In fact, as quoted by the WSJ’s Crisis on Wall Street Blog, FDIC Chairman Sheila Bair has called it “ironic” that that, while banks have paid for the backstop of federal intervention, nonbanks are getting credit support from the government without having paid for the privilege.

The catch is that the framework, such as it is, is straining a bit. The federal deposit insurance fund that the NYT referred to, the FDIC, is an independent federal agency that insures your humble bank account to the tune of $100,000 per account. From its website: “Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure. The FDIC receives no Congressional appropriations – it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities….With an insurance fund totaling more than $49 billion, the FDIC insures more than $3 trillion of deposits in U.S. banks and thrifts – deposits in virtually every bank and thrift in the country.” Hmm, sounds reassuring, except that part about $49 billion insuring $3 trillion of deposits. Even those who went to law school because they were told there would be no math might find some cause for alarm there.

But we all know banks don’t actually keep the money that we deposit with them—they loan it out so it can go make more money. As long as they have enough on hand— and as long as there’s no run on the Bailey Building & Loan Association—everything works just fine. According to the AP, 98 percent of U.S. banks still meet regulators' standards for adequate capital. Even the FDIC has to pay WaMu’s depositors (estimated exposure: $20 billion), it will still have $29 billion. Furthermore, Bair is proposing an increase in the bank-paid premiums to replenish the fund. True, if there were too many bank failures, it might have to go to the Treasure for a short-tem loan or take the more drastic and unprecedented action of using a separate $30 billion credit line with Treasury. But at least we know what it can and will do.

The short answer, dear colleague, is that most banks are ok, the FDIC has money to support the ones that don’t, has plans to get more money from the banks themselves, and can ask the Treasury for a loan if need be. Your bank deposit is as safe as houses.

I have to quote this gem of understated irony from the AP story: “The fund, which is marking its 75th anniversary this year with a "Face Your Finances" campaign, is at $45.2 billion — the lowest level since 2003.”

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