FDIC Insurance Fund May Run Dry This Year

As dramatic as the supposed revelation that the FDIC may need to go hat in hand to Congress for more dough, this is hardly a surprise. The FDIC also needed to appeal for additional funds in the savings and loan crisis, and our current mess dwarfs that one.

From Bloomberg:

Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency.

“Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.

“A large number” of bank failures may occur through 2010 because of “rapidly deteriorating economic conditions,” Bair said in the letter. “Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative.”

The FDIC last week approved a one-time “emergency” fee and other assessment increases on the industry to rebuild a fund to repay customers for deposits of as much as $250,000 when a bank fails. The fees, opposed by the industry, may generate $27 billion this year after the fund fell to $18.9 billion in the fourth quarter from $34.6 billion in the previous period, the FDIC said.

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  1. Cat

    I read somewhere that the smaller and regional banks are complaining that, while they kept their own lending in check and passed over easy profits because they saw the risk to depositors, they are being required now to pay premiums to underwrite the failures of larger or less well managed banks who were destined to fail for a decade due to known risky practices, regulatory capture and lax oversight.

    They have a point.

    The FDIC is a joke right now, like someone selling insurance to a block of lowland homes while a flood water is rising, as if everything is equal. Everything ai’nt. Better to forget “prudent investment in insurance” during a flood and just wait for the bailout after the flood takes you if it takes you, is what most must be thinking about now.

    We can go back to “prudent” 20 years from now, when all there are left are local banks. Assuming we still have FDIC in 20 years.

  2. Anonymous

    Will the banks even show a profit this year? If not where is that $27billion to come from?

  3. Mara

    I’m impressed the FDIC’s not broke already. The margin for error is so slim in our financial system, anything above a gnat’s fart will bring the house of cards down.

  4. Anonymous

    Aligned with Cat’s comment, also from the Bloomberg article…

    “….Smaller banks are outraged over the one-time fee, which could wipe out 50 percent to 100 percent of a bank’s 2009 earnings, Camden Fine, president of the Independent Community Bankers of America, said yesterday in a telephone interview….”

    …..the prudent get punished for being prudent, which the taxpayer will backstop in the end.

    The only reason the FDIC and the banks (in fact inslovent) can’t be broken is because of the electronic printing press. It follows Zimbabwe’s actions.

  5. wintermute

    FDIC will not go broke of course – it will go to the Fed for extra funding. Further, Bernanke will see this as an “opportunity” to do directed “quantative easing” – helicopter drop money right into regional deposit bases. It won’t help but will get done anyway.

  6. Anonymous

    Another reason to not own bank stock.

    Banks are first and foremost responsible to other banks. Next comes bond holders, then equity, if there really is any of that left.

    The smaller and regional banks really should be doing a lot more to educate people on these matters. They are not. They know who Daddy is.

  7. Boss Tweed

    So all of you financial wizards, where do you keep your money? Wampum? Barter system? How do you buy milk and eggs?

    The FDIC is the only government entity that actually modified derivatives (see IndyMax) which is more than Hanky Panky or Tiny Tim did.

    To hell with TALF and securitization. Hedge funds and private equity firms will not lend with the Treasury’s cheap money. Why should they? Why not buy up potential good companies at fire-sale prices?

  8. Anonymous

    I believe the FDIC has a line of credit at the U.S. Treasury if they ever fully exhaust their funds. In other words, a $0 account balance only means that Bair and her cohorts will end up knocking on Geithner (and possibly Bernanke’s) door.

  9. Anonymous

    The FSLIC recapitalization during the run-up to the S&L crisis was hotly contested by criminal bank management who wanted to suppress the regulatory function of the Bank Board. Keating applied unprecedented political power to keep the recap from happening, since until it occurred his bank Lincoln Savings could not be shut down safely (meaning insured depositors made whole).

    At that time both the criminal and less-or-non-criminal banks were opposed to the recap. This was a complex and uneasy truce, but the public face appeared united.

    Then, as now, the longer we go without shutting down the insolvent institutions, the worse the problem will become. Unfortunately, the corruption/regulatory capture that was then merely insidious and damaging appears now to have completely overwhelmed the host, with our highest officials enabling and expanding the fraud.

    Insert outrage here.

  10. Gentlemutt

    I sit on a small-bank board, and we are scratching our heads about the new surcharge on top of the recent huge increase in running FDIC costs. So, TARP in, mostly just to demonstrate eligibility for same, and then 25% of TARP right back to FDIC.

    My only hopeful guess is the FDIC’s Ms. Bair is actually taking such a hard line in order to make a point, and will stand down when the solons do the math as their small-bank constituents (and your readers) have already done. If this hunch is correct she is doing the country a favor and illustrating the Wonderland most of our leadership are operating in. If not, well…

    It is not often I agree with much on the WSJ op-ed pages, but today (Mar 4th), aside from the usual and wholly unnecessary smarminess, they had it right.

  11. mmdonner

    Somewhere above, anony..asks, where will the 27B in fees come from if banks don’t make a profit? how about from dividend payouts?
    otherwise, the 27B needed (and more of course) will come from the taxpayers..AGAIN.
    to complain that well managed banks have to pay for misbehaved banks is certainly true..but isn’t the same for taxpayers??
    and, will the idea ever come that banks, insurance companies and pension funds for example should put away even MORE during good times for such rainy days as now?? strange idea i know when the perspective is from quarter to quarter shareholder returns
    where are all the private enterprise folks demanding that the banks stand or fall on there own merit within the ‘free capitalistic system’??

  12. AJK

    I manage a CD portfolio for a mutual fund company, and we’re having a hard time finding enough banks and credit unions who are willing to take the deposits as customers continue to flock to the safety of CDs. My understandings is that banks/CUs don’t want the deposits for 2 reasons – 1) They aren’t lending/people aren’t borrowing and 2)rumor is the FDIC is going to start charging banks 20bps for certain deposits. Clearly the FDIC is desperate to replenish its coffers…

  13. Anonymous

    The FDIC surcharge on a particular bank should be proportional to their measured risk, even simply based on traditional metrics. Hit BoA, Citi, etc. with the consequences of their indiscretions and get some of that Tarp money back.

  14. Anonymous

    Re: Hyperinflation. It might not be the case. I cannot do it total justice, but if you have a lot of time, look at the battle between Mike Shedlock “Mish” v. Peter Schiff. They have been back and forth on the deflation v. inflation battle.

    Right now we are in a deflationary death spiral. Think real estate, Dow, US Treasuries. Ben Bernanke’s worst enemy is deflation. The Fed and the US Tres Dept are at wits end trying to “re-flate” the system, but it is not taking. Look at their complaint that the banks are not using TARP money to create new loans. Look at the spike in US savings rate. The consumer is toast and is hunkering down. Yet, the banks are tight fisted with the bailout money. Why? Because they are insolvant! The bailout money is sitting in the case that the consumer/depositors go deep underground demanding their cash back.

    The Fed and Tres don’t get it. They want another asset bubble to lift consumer spending and the GDP. Not going happen for a long time. Money has been flying out the risky stocks into safe US Tres notes. However, there is a bubble forming there now. If the money freaks out (don’t ask me how or why) and pulls out of the Tres notes it will not be going back to the stock market, it will go to cold hard cash in hand.

    This flight to the safety of cold cash will cause depositors to demand their money out of the banks. Bec the banks were leveraged 30:1 during the housing bubble, they don’t have it. That is where your bail out tax money went to. The banks stopped loaning and are hoarding the baliout dough just waiting for the runs to begin. And they will. The first few depositors that ask for their cash will just be getting their tax dollars back!

    The Johnny-come-latelies will get nothing. The FDIC is so poorly funded, they will not get their $100,000. This will cause MASSIVE civil unrest, to say the least. This is The Event Horizon. This is when deflation will shift to inflation. The Fed and Tres will try to correct by printing $100g’s for every stiffed depositor to try to make right. Those who never even had a deposit will flip out screaming discrimination and demand $100g’s also or else. The Fed will cave due to further civil unrest, and will print $100g’s for every American, legal or not.

    There are two very large problems at this point. Number one, how long has the deflationary death spiral lasted? If it goes on for too long the GDP will be greatly reduced and American production will be minimal. Imagine nearly every factory shut down and moth-balled. The issue is the length of time our production ability needs to ramp up.

    The Second major issue will be how long the athorities allow the civil unrest to persist. The longer it persists, the longer it takes for the angry populace to become docile consumers again. The printing of money directly to the populace and the reduced production abiliies of this country will be the hyperinfaltion rocket ship. And it will only cause a further civl unrest spiral.

    IMHO, this or something like this is the senario that Bush’s Tres Sec Hank Paulson spelled out to Nancy Pelosi on his knees. Pelosi obviously did not take him seriously.

    Hope ya’all have a good day!

  15. cent21

    It would be instruction to see something like Krugman’s diagram of common equity, preferred equity, debt, and liabilities, which also includes bank deposits and FDIC insurance obligations, bank by bank.

    That is to say, do any bonds, preferred equity, common equity remain anywhere before FDIC pays out a penny? If so, why, and what banks?

  16. Chris

    Yeh I have heard the smaller banks complaining as well but I think they should be able to make plenty of profit with the target rate at virtually 0%. I am assumming that their eventually is a limit to how much money can go all different areas of the financial system, but maybe not……

    ..the fdic will be doing their part to get credit flowing again with they go to treasury for a loan…LOLLOLOLOL

  17. Anonymous

    “So all of you financial wizards, where do you keep your money? Wampum? Barter system? How do you buy milk and eggs?”

    Easy. I keep the absolute minimum possible in the banks and put the rest in 4-week U.S. Treasury Bills. If I have to keep my cash in the form of IOUs (which is all that your money in a bank account is, i.e. a claim on the bank’s loans), I want it to be in the soundest, safest debt that’s out there. So my excess cash balances get rolled into T-bill backed money-market funds or direct purchases of T-bills via TreasuryDirect.

    Robert Prechter and James Grant have been warning for years that all the FDIC will accomplish is to spread the weakness in the banking system to the healthy, strong banks, so that depositors have nowhere to hide.

    Federal deposit “insurance” is an incredibly foolhardy idea, one that has already caused immense damage by encouraging depositors to keep their money in high-risk institutions offering high yields, backed, of course, by a government guarantee.

  18. Anonymous

    Why not pass on the expense of FDIC insurance to those banks most likely to default.

    What’s ridiculous about this is that the Fed should be using it’s balance sheet to guarantee FDIC deposits, rather than protecting bond and preferred and common shareholders. Because they are going to have to pony up to depositors, and they haven’t adequately funded that liability yet.

  19. Anonymous

    FDIC is a swindle. Banks should be required to invest deposits in a responsible manner, e.g. in t-bills. Sophisticated investors can buy bank bonds if they want to participate in risky bank lending.

  20. beezer

    During the Great Depression some banks actually closed up because they didn’t have anyone to lend to.

    They just told depositors to come in and get their money.

    As for what to do with your money. Buy some farmland. The last commodity, food, in a resource starved, overpopulated world.

  21. Anonymous

    Let’s see.

    “….Smaller banks are outraged over the one-time fee, which could wipe out 50 percent to 100 percent of a bank’s 2009 earnings, Camden Fine, president of the Independent Community Bankers of America, said yesterday in a telephone interview….”

    Then when their broke we’ll close them down.And give their deposits to bigger fish.I smell a rat.

  22. Anonymous

    Boss Tweev: So all of you financial wizards, where do you keep your money? Wampum? Barter system? How do you buy milk and eggs?

    Because you asked, the Wiz Kid recommends the following diversified portfolio:
    1. Small herd of goats for fresh milk for the kids
    2. About 20 chickens for fresh eggs and fuel for your new SUV
    3. Numerous guns
    4. Lots and lots of ammo
    5. Canned food
    6. Piles and piles of physical gold
    7. Mucho cold, hard cash in hand
    8. Daily fervent prayer

    Regarding point (7) above, the Wiz Kid recommends you pull your cash out of the banks now, not when everybody else wants to do it.

    Regarding the "fuel" in point 2, you convert the chicken sh*t into low octane gasoline using the process depicted in the excellent movie "Road Runner." That will get you enough fuel for your new SUV (a second hand 50 cc moped) to take you to the flea market and back.

    Truly yours,
    Vinny GOLDberg, Wz.K, Mk.E.E. (Wiz Kid & Maverick Economisto Extraordinaire)

  23. wintermute

    Marc Faber is predicting that the gold price and the Dow will converge at the same value. The more I read articles and comments like those above – the more I am agreeing with Faber’s prediction.

    The only question now is the converging value. Anyone for 3000 ?

  24. Anonymous

    Looks to me like gold will converge with the SP500 level in the near term as banks, institutions, and sovereign governments delever. Remember, there are 3000 tons of gold in circulation and 30,000 tons in central banks.

  25. Luke

    When I started looking into the FDIC Insurance Fund for my blog I found that there really is no money in the FDIC Insurance Fund. Instead it’s a bunch of IOUs like the Social Security Trust Fund.

    Here is Bill Isaac’s testimony from 2000:


    Here is the 2nd question asked of him and his reply:

    Please discuss the adequacy of the statutory designated reserve ratio of 1.25%. Is it appropriate in light of subsequent legislative changes such as prompt corrective action, national depositor preference and Gramm-Leach-Bliley?

    It is important to understand that there is no deposit insurance “fund.” The FDIC collects premiums (taxes, to be more precise) from banks and thrifts and turns them over to the Treasury. If the FDIC collects more taxes than it spends, the surplus is counted toward a reduction of the federal deficit (or an increase in the surplus).

    The Treasury computer duly records the payments made by the FDIC. The money itself, being fungible, is spent on welfare, defense, education, and the like. Should the FDIC need money to handle a failure, the Treasury borrows the funds in the market.

    The outlay by the FDIC counts as an increase in the federal deficit. The object in collecting premiums from banks and thrifts is not to build a “fund,” but to ensure that over time the deposit insurance program pays for itself.

    The so-called “fund” is simply a running scorecard to determine whether banks and thrifts have paid in more than they have taken out.

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