The Real Reason FDIC Is Going Broke

The following excerpts are from a piece written today in Boston Globe. Reading through a well-written article one cannot help but notice and recognize the unfortunate and rather shocking facts of our government’s level of negligence, incompetence and shortsightedness.

Last week the Federal Deposit Insurance Corporation [FDIC], the insurer of our nation’s bank deposits, asked for emergency powers to temporarily borrow as much as $500 billion until the end of 2010 to take over failed banks if the Federal Reserve, Treasury Secretary and White House agree such money is warranted. However, the FDIC is now facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006.

The FDIC… tried for years to get congressional authority to collect the premiums in case of a looming crisis. But Congress believed that the fund was so well-capitalized - and that bank failures were so infrequent - that there was no need to collect the premiums for a decade.
….
FDIC chairwoman Sheila Bair said yesterday that the agency’s failure to collect premiums from most banks “was surprising to me and of concern.” As a Treasury Department official in 2001, she said, she testified on Capitol Hill about the need to impose the fees, but nothing happened. Congress did not grant the authority for the fees until 2006, just weeks before Bair took over the FDIC. She then used that authority to impose the fees over the objections of some within the banking industry.

“That is five years of very healthy good times in banking that could have been used to build up the reserve,”… said Bair in an interview. “That is how we find ourselves where we are today.”

Cornelius Hurley, director of the Boston University law school’s Morin Center for Banking and Financial Law, called the decision to stop collecting most premiums “a political one that was pushed by banks and not based on strict accounting principles.”

With a total of 42 bank failures since last year, and many more expected in the coming months, the FDIC has proposed large insurance premium increases for banks. The agency, notes the Globe, collected $3 billion in premium fees last year versus a proposed collection of up to $27 billion this year. The new hike in fees comes at the very time when many banks can least afford to pay, and some say will be forced to raise consumer fees and curtail lending.

What’s most disturbing from this latest release is that professionals like James Chessen, chief economist of the American Bankers Association, approach the issue almost nonchalantly by saying that it made sense at the time to stop collecting premiums because “the fund became so large that interest income on the fund was covering the premiums for almost a decade.” House Financial Services Committee chairman Barney Frank agreed that officials believed that the good times would last and that bank failures would not pose a problem. My question is: What’s wrong with the idea of building up capital and reinforcing reserves in prosperous times so you can draw down upon them in bad times?!?! This is not even basic economics. It’s common sense. Being naive is one thing, but reading statements like these it's hard not to include mediocrity as part of the discussion.

Today’s report is more compelling evidence demonstrating the utter and complete failure and irresponsibility of deregulative practices and laissez-faire type methodologies that prompted our economy to reach such weak and disturbing conditions. Let’s hope we have learned our lesson.

Comments

[phaf:]

Another example of money-bought political influence trumping common sense. Another example of the need to clean House in Congress. Term limits, crystal clear transparency, and above all, a tuned-in citizenry would go a long way to a fix. (I know, more wishful thinking).

Mar 12 02:42 PM

[old boat guy:]

Shocking but not surprising. And,no, we will not learn from this, human nature being what it is.

Mar 12 02:45 PM

[waf76:]

par for the course when it comes to the US Gov

Mar 12 02:46 PM

[Steve M:]

God bless Sheila Bair.

Mar 12 02:47 PM

[Mike Hydes:]

Funny thing is Congress spent 700 billion on tarp legislation whe they could have spent lets say 700 hundred and legislated away mark to market and we would have been miles ahead of where we are today!

What does that tell you?

Mar 12 03:12 PM

[wisurvey:]

A good thing that the fund was limited in size. Any bigger and they probably would have just given it to Bernie Madoff, AIG, Citi, BOA, or ????? to "invest and manage it" anyways.

Mar 12 04:03 PM

[J. T. Atkins:]

Thanks, Ron, for the article. Very informative.
I, personally, have mixed feelings about the whole thing.

Sitting here at this date and time, At first I was very angry. I then clicked on the link and read the entire article published by the Boston Globe.
After reading the article I am still upset, but not as angry as I was initially was.

The article stated that the government did not see the need to collect the fees from the banks because the interest collected on the amount held in reserves more than paid for the fees that would have been collected.

If that is the case, then the reserves were still growing each year. I can see their reasoning in this case (Which was also probably helped by input from the banks.)

We all know that hind sight is 20-20.
What we all need is a good crystal ball..

Mar 12 04:07 PM

[mc2406:]

Franks and Dodd's senate banking committee strikes again. Our professional pols take the bank lobby money, and surprise-- lets stop collecting premiums from the banks!!! Gave the banks more money to invest in Freddie's and Fanny's corrupted loans.

Mar 12 04:09 PM

[Eric in IL:]

So, our govt, just like AIG, wrote insurance without having the money to back it up? Should I still be amazed at the sheer incompetence of our government? They just decided to stop collecting the FDIC fees (yawn-shock).
How is this not a bigger story? Ridiculous.

Mar 12 05:20 PM

[@TexasER:]

Not that I have any love for the government, but they just underestimated the risk. Anyone who bought equities in 2007 should be able to relate.

Mar 12 05:41 PM

[Gardener:]

What's worse is that most everyone who reads this piece and the Boston Globe article will do nothing about their elected leaders. We'll all just show the same short- sighted laziness as our Govt.

Mar 12 05:45 PM

[akapital:]

Yup, I think it's obvious to everyone you can't wait to pay your insurance premiums until after you have an accident.

Thus, the average person understands and rationalize the necessity of insurance premiums...and yet big business and gov't doesn't? I think the only possible reason they would do something this stupid is because they could.

Wait, you mean I can get insurance and I don't have to pay anything? Yeah, sign me up for that.

Mar 12 05:48 PM

[DM226:]

Didn't the Republicans control the Senate until 2006?


On Mar 12 04:09 PM mc2406 wrote:

> Franks and Dodd's senate banking committee strikes again. Our professional
> pols take the bank lobby money, and surprise-- lets stop collecting
> premiums from the banks!!! Gave the banks more money to invest in
> Freddie's and Fanny's corrupted loans.

Mar 12 06:33 PM

[JohnL:]

Enlightening article. And people want to increase governmental authority? They couldn't regulate a lemonade stand without asking for money under the table. However, I disagree slightly with the last paragraph.

"Today’s report is more compelling evidence demonstrating the utter and complete failure and irresponsibility of deregulative practices and laissez-faire type methodologies..."

Please don't confuse laissez-faire economics with failure to enforce the law. If the banks were required to pay premiums and Congress just let them slide, it is "utter and complete failure" of law-enforcement. If you allow fractional-reserve lending, you darn well better collect insurance premiums from the bankers who benefit from that system and put the public at risk.

Laissez-faire does not mean lawbreaking.

Mar 12 06:37 PM

[La Marque:]

This was the same thinking that many government - state, county, city - pension funds did during the good times: increase benefits for retirees. Now most of those same funds are looking for new taxes to keep paying their retirees because the funds never planned for a long down economy.

Mar 12 06:58 PM

[Nick Molnar:]

I fail to see how this is Laissez Faire. We are talking about a multi-billion-dollar government entity with a monopoly on deposit insurance.

In a Laissez Faire system a private company would be insuring those deposits, and you could be damn sure they'd collect their premiums on time and in full.

Mar 12 09:54 PM

[futuresfair...:]

Thanks for all your comments. Very respectfully, in response to JohnL and Nick M -- -- In the article I used the term "laissez-faire methodology" not "laissez-faire policy". The distinction imo is very important.

Laissez-faire as a 'policy' generally dictates, restricts and limits government's intervention in the marketplace. And I absolutely agree with that definition. However, the "laissez-faire methodology" ; while as a concept it still applies to economic liberalism, it recognizes the government's legitimacy to play an active role, if it chose to do so, in the interest of public good. And in this case, referring to article, the gov did what it does best, kept giving raises to themselves and didn't act regardless of Bair's warnings.

Mar 13 12:42 AM

[MGA_1:]

But really, who foresaw the severity of the current problems?

Mar 13 12:45 AM

[Hillsfar:]

Nick Molnar, in a Laissez Faire system, banks wouldn't be required to have their deposits insured. It'd be like back in the days of bank runs and boom-bust economic cycles of the 1800s, when entire banks would be wiped clean on a rumour and people buried gold in their back yards.

Mar 13 04:50 AM

[john s. gordon:]

mike hydes - locking the barn door always works best after the horse has been stolen.
> jack

Mar 13 09:16 AM