Today news hit regarding the FDIC and its almost bankrupt fund. From the AP Bank Insurance Fund Down 20% in 2Q:
"With bank failures rising, the government's deposit insurance fund fell 20 percent to $10.4 billion in the second quarter as U.S. banks lost $3.7 billion.
The Federal Deposit Insurance Corp. says surging levels of soured loans at banks dragged down profits in the April-June period. The $3.7 billion loss compared with profits of $7.6 billion in the first quarter, and $4.7 billion a year ago.
The FDIC says the number of banks deemed to be in trouble jumped to 416 from 305 at the end of the first quarter.
Eighty-one banks have failed so far this year, and hundreds more are expected to fall because of souring loans for commercial real estate. That threatens to deplete the FDIC's fund, which guarantees deposits of up to $250,000 per account.
The agency figures it will need $70 billion to cover bank failures through 2013, more than five times the $13 billion that was in the fund in March. The last time it was that low was during the S&L crisis in 1992, when the fund was down to $178 million.
Bair has not ruled out hiking premiums on banks for the second time this year or asking the Treasury for a short-term loan. She has said taking the longer-term step of drawing on the Treasury credit line is only for emergencies.
FDIC spokesman Andrew Gray said the agency seeks to strike a balance between helping troubled banks work through their problems "so there's zero cost to the deposit fund," and intervening quickly if there are no other options."
Anyone who has followed me since I left the original Economic Bibb knows how I feel about the FDIC. If not you should review all of my material here. I said it before and I'll say it now, the cost of the FDIC to America is staggering. The entire program should be banished along with the Federal Reserve as both create moral hazard and distort economic reality. As we will continue to see the FDIC is a tremendous burden to tax payers and on the whole we all pay for its existence. I wrote this in March, and addressed the same Andrew Gray referenced above:
"We need to get rid of the FDIC along with the moral hazard it creates and we need to do it fast. Yes I said it, the FDIC needs to be abolished, it creates a moral hazard in our system, and in its current form intends to penalize solvent profitable banks. Of course it's scary to think that your money in a bank isn't insured, but wouldn't that encourage banks to compete on solvency, make good loans, and remain well capitalized in order to attract more deposits? Wouldn't we all be much more careful about who we decided to bank with and why if we couldn't rely on "required insurance"? If the bailouts hadn't occurred would anyone have left their money in Bank of America or Citi without the FDIC and Suze Orman telling us it will be alright? If not, would the small profitable banks have gotten a larger deposit base, then been able to lend properly and ease our credit situation without the use of more tax payer funds? Would added transparency come to the system because banks would have to compete on their balance sheets rather than on their gimmicks?
Bair, Gray, the Government, and the American people need to look in the mirror and face the facts. Simply put the real cost of keeping the FDIC is staggering to the taxpaying public under the current economic environment."
I also wrote this in late February in response to Gray's comment:
[Gray] "I am confident in the strength of the FDIC's resources to make good on our sacred pledge to insured depositors. And, remember, no depositor has ever lost a penny of insured deposits, and never will."
[Me] "Mr. Gray, Sir, after a statement such as the one you made in September [of 2008], I wish I could say that you may soon be eating your words, but unfortunately at this time I cannot. I say this because we both know that the FDIC alone doesn't have enough capital to stop the fall of our banks and protect depositor assets this time around. You said yourself that the FDIC couldn't do it by itself in the late 1990's and this crisis is much worse. So, if you could, the next time you decide to write an "open letter" to a well respected major news agency could you at the very least not lie? Why was it that you needed to bring in Suze Orman as a spokes person in the first place?
Also, because you said yourself the FDIC would receive "bridge funding between the time a bank fails to when its assets are sold," could you or the FDIC when you read this please tell me what your organization would do if our largest banks, Citi, Bank Of America, or JP Morgan Chase failed to sell their assets? How would you mark all of their assets to market to sell them once you took them over? Who would buy them? I desperately want to know so I can tell everyone else on the planet. All of us have been trying to figure out the answer to those questions since late 2007 and we're glad you have a solution for us! Foolishly, we've all been under the impression that the reason our banks are insolvent is because they can't properly price their assets and sell them. Most of the time when we try to assign them a value, nobody wants them, which then makes them "unmarketable" securities. Mr. Gray what are we doing wrong?
What will the FDIC do assuming it can find a value for these assets anyway? None of us want to buy them for anything near what they were on the books for, so who then will cover the loss on the sale? The FDIC? Before you answer keep in mind that some estimates put our banks under water by as much as a trillion or more dollars; a trillion! Your agency has just over $45 billion as of September 08, what do you have now after four bank collapses per month since then? Mr. Gray, Citi bank alone burned through $300 Billion in less than 3 months; can the FDIC keep up with a burn rate like that? Indy Mac cost you almost $9 Billion, it fell in July of last year, and was nowhere near the size of any of the banks on the verge of collapsing right now.
If we assume that the FDIC can't cover the deficit without the Treasury; I'd bet you guys don't have credit lines exceeding a trillion dollars in this economy to bridge the deficit. Mr. Gray, to cut to the chase and put it bluntly; all the FDIC has at this time is the ability to cheer lead, bring in the common man's finance guru Suze Orman, and then try to make us all believe our deposits are safe. You still exist because your brother and sister agencies spend our money to prop up our banks on the front end, before the FDIC has to get involved and worry about the problem on the back end. So you were correct when you said that your agency doesn't directly cost us as tax payers any money, but since we're paying for the banks survival, who's really paying for the insurance?
Suze Orman wasn't lying when she said we won't lose a penny if our money is 100% FDIC insured, however it's going to cost us a fortune to keep it that way."
Tick...Tock...Tick...Tock...
