Mainstream pundits would like you to believe that the worst of the credit crisis is over. But if it were over why would the FDIC, the US government insurance agency for bank deposits, be expanding it’s operations? From Bloomberg:

The Federal Deposit Insurance Corp. is preparing to sign a five-year lease to add five floors of space at its Dallas regional office as the agency prepares to increase scrutiny of failing and troubled U.S. banks.

The federal agency, which insures deposits and disposes of failed banks and their assets, will add 125,000 square feet to the 185,000 square feet it rented last year at 1601 Bryan St., a 49- story tower in downtown Dallas. That agency will add about 300 staff at the building, including some of the 69 retirees it is bringing back to help handle the increased workload, said spokesman Andrew Gray.

The FDIC will soon have 5 more more floors of office space to conduct it’s business of backing up failed banks… but it doesn’t have the money…

The FDIC’s $53 billion simply isn’t enough to cover the assets held by the growing number of “problem” banks. The FDIC’s list has increased from 90 at the end of March to 117 in June. Total assets affected now stand at $78 billion.

If even a portion of the these banks go under, says Adam Lass in Taipan Daily, the XLF December 20 puts (XLF XT), which track the S&P 500’s Financial Select Sector, could gain of some 52%.  He says:

You might, if you searched long enough, find the buried memo the FDIC has sent off to the Treasury Department, complaining that its funds are now so depleted that it would be unable to cover this expected wave of failure with out delving deeply into the public till.

Yes, that’s right: The semi-independent insurance corporation whose sole job is to bail out banks is in need of a public bailout itself. In fact, it is right in line behind those other semi-private giants, Fannie Mae and Freddie Mac.

Wait — wasn’t their job to assure the public of our economic stability, too? None of this sounds too terribly stable to me. I am not assured one bit.

I am told that in a good year, some 13% of the banks that appear on the FDIC’s list go under. That means that some 15 more banks are virtually guaranteed to go bankrupt in the near future. Even if the Feds do manage to gin up enough cash to cover depositors (and how they will manage that feat is a worrisome thought worthy of an entirely separate column), a fair number of investors will get screwed out of every penny.

These are not wild-eyed speculators plunking down play money on pie-in-the-sky tech dreams. These are not shifty Florida real estate flippers. The sober upstanding folks who bought into these banks and into the mammoth Washington outfits that insured them are retirees, orphans and widows who were told that these investments were veritable “Rocks of Gibraltar.”

Unbeatable, and indeed untouchable. Sound as an American dollar. Good as gold.

So I am more than a little curious. And perhaps a little angry.

In fact, I am in the mood for a little revenge.

And since living well is always the best revenge, I propose the following: When the next wave of defaults hits the newswires, the S&P Financial SPDR (XLF:AMEX) — the ETF that bundles together the biggest players like Bank of America (BAC:NYSE), Citigroup (C:NYSE) and Wells Fargo (WFC:NYSE) with regional outfits like Wachovia (WB:NYSE), SunTrust (STI:NYSE) and Fifth Third Bancorp (FITB:NASDAQ) — ought to fall at least two or three bucks.

A drop from current levels ($20.37 as I sit to write) to, say, $18 would push the XLF December 20 puts (XLF XT) from $179 to $272 per contract, for a gain of some 52%.

A real rout, you know, the sort that brings on bank holidays, would drop the XLF below its August low of $16.77, rounding your put gains over 79%.