This week, FDIC chair Sheila Blair said the insurance fund might have to borrow to cover the nation’s bank failures.

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%. A big number of failures could send these options up 79%…

This from Adam…

Aren’t you even a little curious? I know I am.I am speaking of the Federal Deposit Insurance Corporation’s list of 117 “problem banks.” According to its latest press release, the number of banks that may have squandered away their depositors’ cash is up 30%, quarter over quarter, the highest it’s been in more than five years.

What’s more, the FDIC anticipates that this list will surely grow over the next few months or maybe even weeks, as profits are down some 87% compared to the same quarter last year. Back then, the guys who should know more about money than anyone besides the folks who print it made some $36.8 billion.

Now they are down to less than $5 billion in profits. And even that paltry gain is hardly secure, for, as we have seen lately, a single American bank can lose $5 billion in the blink of an eye.

How did they make so much money then, and how have they arrived at such dire straits? As most folks know by now, bankers are suffering from the pains of their own excess. Some 20% of the loans they made to anybody who could tie their own shoes are now overdue 90 days or more.

A curious soul might be tempted to wander by the FDIC’s Web site to determine whether or not their very own bank is teetering on the brink. Unfortunately, they would be stymied in this effort.

Big Oil is set to make “Reimbursement Payments” that could help fund your retirement.Thanks to the help of this unique situation, you could make 50% in less than a month… and 400% by the end of this year. And you could begin receiving your payouts as early as tomorrow.

You see, the very last thing the FDIC wants you to know is which bank might go under next. If you knew that, you and a couple of million of your friends and neighbors might be tempted to ask for your cash now. And that would get ugly indeed.

You could easily find out the names of the nine banks that have already done so in 2008, compared to three the year before and none for two years prior to that.

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%.

Ah, sweet revenge!

Sincerely yours,

Adam Lass

Source: 15 American Banks Are About to Go Under… and the FDIC May Not Have the Cash to Cover Them!