Hank Paulson said that "the American people can be very, very confident about their accounts in our banking system," according to AP. This means you should be very, very skeptical about the truth of that statement. And that's because there is a good chance that Washington Mutual (NYSE: WM) will fail and take the Federal Deposit Insurance Company (FDIC's) reserve fund down with it.

How so? WaMu's failure could cost $20 billion or more, and the FDIC's fund has $45.2 billion in it, according to AP. If that WaMu cost is right, no problem. Unless, as Wilbur Ross predicted, there are 1,000 bank failures before this is all over. If so the FDIC would need to raise more money to pay off all the deposits in the failed banks. But there's plenty of money available, right? Just this morning, the Treasury sold securities -- dubbed a Supplementary Financing Program -- to pay for its little $85 billion loan to buy American International Group (NYSE: AIG).

And with WaMu getting its credit rating downgraded to junk, who will want to do business with it? Will another firm want to step in and buy it before it files for bankruptcy? That would be nice because if it costs much more than $20 billion for the FDIC to rescue it, we are going to see inflation spiking as our government prints more and more money to bail out all these failed financial institutions. And that won't make Americans feel confident about their banking system at all.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns AIG securities and has no financial interest in the other securities mentioned.

Could WaMu failure wipe out FDIC reserve fund? originally appeared on BloggingStocks on Wed, 17 Sep 2008 12:55:00 EST. Please see our terms for use of feeds.