The Bailout of the FDIC

The FDIC under-estimated.

In May of this year the FDIC projected $70 billion in losses associated with the failure of closed banks. This was an increase of $5 billion from earlier in the year. Now the figure has been revised upwards to $100 billion.

And, the FDIC is broke!

According to the New York Times: “Officials said that as of this week, the fund, which began the year at more than $30 billion and had about $10 billion over the summer, would have a negative net worth.”

The plan is to have banks “lend” money to the insurance fund in the form of a prepayment of annual assessments for the next three years. This “lending” would show up as an asset on the balance sheets of banks.

Four things are on my mind this morning.

First, the pace of bank failures has been orderly. That is, the problems are basically “known unknowns.” And, the FDIC is resolving the cases step-by-step.

Second, the concern arises about the pace of actual resolutions: has it been slowed because the FDIC knew that it was running out of money and was hoping that the situation would get better. If so, then the FDIC gets an F for this behavior.

We have had almost 100 bank failures this year and there are over 400 more banks on the problem list. Unemployment is rising, people are dropping out of the job market, there are lots of mortgages still to re-price in the next 18 months or so, foreclosures are still rising, and there still is the overhang of commercial real estate loans that are tenuous, at best. The potential number of problem banks could be even larger.

Has the FDIC under-estimated again?

Third, “it’s not over until it’s over!” The failure of financial institutions is a “lagging indicator”. The economy could be bottoming out, yet we can still experience a rising number of bank failures for another year or so due to the lag effect of the failures. But, the government is going to have to eventually “foot-the-bill”.

Accelerating annual assessments is a gimic! It is estimated that this will wipe out bank earnings for the year. So, with bad assets and zero earnings who believes that banks will begin lending again anytime soon?

And, if the banking system doesn’t get back into the lending game, how will the economy recover?

The only ones doing anything in the banking system seem to be the large bank holding companies and they seem to be putting their funds into “nonbank” subsidiaries. (See my post: http://seekingalpha.com/article/163983-credit-market-debt-a-return-to-pre-crash-practices.)

Fourth, what does this tell us about our leaders in government?

My personal view about the last election is that the public viewed the contest, not as a race between Democrats and Republicans, nor as a race between the liberals and conservatives. The public saw the election as a contest between incompetence and “possible” competence.

As of this date, the polls seem to indicate a rising concern that what seemed to be “possible” is fading away. People, at this time, don’t seem to want to move “left”. Look at Europe. Failing economies generally bring on a move for governments that can be labeled more toward the socialist end of the spectrum. Yet, what has been seen is the election of center-right governments.

I think people, in general, are still of a “centrist” mode. That is one reason the health care bill and other legislation is having trouble.

People want competence and they don’t seem to be getting it! Both the FDIC failure and the weak-kneed response to the situation does not raise my confidence level in those in charge.

I had thought Bair was doing a fair job. Now, she seems right up there with Geithner, Bernanke, and others who are not coming through for us.

Needless to say, I am not comforted by this mornings’ news concerning the FDIC!