Bailing Out the FDIC

Last September, Bloomberg reported that the FDIC's puny, underfunded [my assessment] insurance fund would probably need a big cash injection courtesy of taxpayers. Too many banks would fail for the FDIC to keep up. But the FDIC immediately shot back:

Bloomberg reporter David Evans' piece ("FDIC May Need $150 Billion Bailout as Local Bank Failures Mount," Sept. 25) does a serious disservice to your organization and your readers by painting a skewed picture of the FDIC insurance fund. Let me be clear: The insurance fund is in a strong financial position to weather a significant upsurge in bank failures. The FDIC has all the tools and resources necessary to meet our commitment to insured depositors, which we view as sacred. I do not foresee – as Mr. Evans suggests – that taxpayers may have to foot the bill for a "bailout."

Strong financial position. Ahem.

Last week, the FDIC proposed raising its insurance assessment fee for all insured banks in order to raise dough for the fund. This would of course transfer money from the competent banks to the incompetent banks (or technically, to their depositors and debt holders).

The Independent Community Bankers of America put out a statement Friday saying that its members are disappointed with the decision, and arguing that community banks and regional banks didn’t participate in the high-risk practices of Wall Street, yet they and their customers are being asked to “pay for the sins of Wall Street,” said Camden Fine, president and chief executive officer of the Independent Community Bankers of America, in a prepared statement.

“How ironic that on the same day that Citi is getting its third bailout from the government in six months, community banks are being kicked in the teeth by sharply higher FDIC assessments. The largest financial institutions are the ones that destabilized our economy,” Fine said.

Two days ago, we learned that the FDIC can't keep up with the supply of dying banks and that Sheila "Bair Says Insurance Fund Could Be Insolvent This Year."

And now we find that at the urging of the FDIC and others, Senator Dodd is looking to supply the FDIC with a "loan" courtesy of the taxpayers for up to $500 billion.

Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department.

The Connecticut Democrat's effort -- which comes in response to urging from FDIC Chairman Sheila Bair, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner -- would give the FDIC access to more money to rebuild its fund that insures consumers' deposits, which have been hard hit by a string of bank failures.

Last week, the FDIC proposed raising fees on banks in order to build up its deposit insurance fund, which had just $19 billion at the end of 2008. That idea provoked protests from banks, which said such a burden would worsen their already shaken condition. The Dodd bill, if it becomes law, would represent an alternative source of funding.

Mr. Dodd's bill could also give the FDIC more firepower to help address "systemic risks" in the economy, potentially creating another source of bailout funds in addition to the $700 billion already appropriated by Congress.

[…]

In an interview, she stressed that all insured deposits were already backed by the "full faith and credit of the United States government."

The full credit of the United States government taxpayer. But its only a loan you understand. We'll get all of it back with interest. Sure, the S&L bailout ended up costing the taxpayers $125B. But that was a weird, 6 sigma aberration. Our current situation is nowhere near as dire. Besides, the FDIC is in a strong financial position.

And the bailout (gravy) train rolls on…

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