Monday, October 5, 2009

The FDIC: Fuzzy Math?

Like clockwork each Friday since January 16, save three, the FDIC has released a list of banks it has closed. This Friday there were three.(1) The mounting closures now total 98 and are taking a toll on another government run insurance company, the Federal Deposit Insurance Corporation. The fund within the FDIC that insures deposits is called the Deposit Insurance Fund (DIF). For 2008 the DIF’s loss totaled $35.1 billion compared to income of $2.2 billion for the previous year. As a result, the DIF balance declined from $52.4 billion to $17.3 billion as of December 31, 2008.(2)

2009 has not been kinder. Despite the strength in financial stocks since the end of March, the FDIC issued another grim quarterly report Thursday on the health of the nation’s banks. In the second quarter of 2009 the banking industry lost $3.7 billion amid a surge in bad loans made to home builders, commercial real estate developers and small and midsize businesses. Meanwhile the FDIC’s deposit insurance fund dropped to $10.4 billion, its lowest level in nearly 16 years. And the number of “problem banks” increased to 416, from 305 in the first quarter, and is expected to remain high.(3)

Without action to replenish it, the DIF will have a negative balance as of September 30, while its longer-term liquidity will dry up in the first quarter of 2010.(4) On September 30 Federal regulators said the likely cost of failed banks to the FDIC over the next 4 years will be $100 billion up from $70 billion forecast in March, an increase of almost 50%.(5)

The FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Like the FHA it has never cost the taxpayer anything since its founding and has only had a negative balance one year. Now it too is staring into the abyss.

So what’s the plan? Sheila Bair wants to accelerate the annual fees collected from insured institutions taking the next three years of fees into current income. Let’s forget that this is in fact an accounting trick that depletes bank cash but doesn’t deplete their book capital. It amounts to only $45 billion. So to plug a $100 billion gap the FDIC is going to forgo all its fee income for the next three years. And by the way since when does 0+45=100? One might also ask why the assessment revenue, which in 2008 was $4.42 billion will average $15 billion over the next three years? Part of that might be from the larger account balances insured, up to $250,000 from $100,000, and part will be from an increase in the insurance premium of .03%. But that doesn’t add up either. Non assessment revenue from 2007 to 2008 was roughly flat at $2.5 billion so once again where does all the revenue growth come from? And this is all predicated on a loss estimate that has increased almost 50% in the last 6 months.

Will the FDIC be dipping into its credit line from the US Treasury (aka taxpayer) for the first time in its 75 year history? Today that credit line stands at a staggering $500 billion.
Comic courtesy of Oak Norton
(4) in-advance-to-restore-deposit-insurance-fund/

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