FDIC: The Bair (And Frightening) Truth

We all should be painfully aware by now that there is nothing held inside the Social Security and Medicare trust funds but a bunch of IOUs. Monies collected from payroll taxes are treated as general revenues and used in the “unified budget.” But how many of us are aware that the FDIC’s Deposit Insurance Fund works in a similar fashion?

On March 2^nd, FDIC Chairman Sheila Bair made some remarkable statements in defense of the Insurance Corporation’s decision to raise fees and increase revenues. She said in a letter sent to the over 8,300 insured banks that, “Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative.”

After talking with an Information Specialist at the FDIC, I learned some important facts about the agency that all taxpayers should find interesting. Exactly how quickly is the insurance fund being depleted you ask? At the start of 2008 the fund held $52.4 billion, which fell to just $34.6 billion by the end of the third quarter. And at the end of Q4 there was a mere $18.9 billion left in the coffers, so there seems to be good reason for Ms. Bair to worry. Even more troublesome is the projections for further drain on fund reserves. The FDIC itself predicts there will be an additional $65 billion in losses through the year 2013.

The most interesting part of my conversation with the FDIC came when I heard confirmation of my worst fear about where the assets held in the insurance fund are kept: the vast majority of the Deposit Fund’s assets are held in U.S. Treasuries. This is extra puzzling when you see the next quote from the Chairman, “Some have suggested that we should turn to the taxpayers for funding. But banks not taxpayers are expected to fund the system…” Now I’m really confused. She doesn’t want the taxpayer stuck with funding the FDIC, yet nearly all of the reserves are held in Treasuries?

Since the insurance which backstops all eligible bank deposits are primarily invested in Treasuries, is there much difference between the FDIC insurance fund and the Social Security and Medicare funds? No. In fact, they are essentially the same. It would be far less egregious if the fund bought Treasuries in the secondary or even primary market. But, according to a Senior Consumer Affairs specialist at the FDIC, U.S. debt purchases are transacted solely and directly with the Treasury Department and not done at auction—directly funding the expenditures of the government so Ms. Bair should understand that taxpayers are already on the hook for bailing out the insurance fund. Any drain on FDIC reserves starting from dollar number one is met by sales of Treasuries, which are a direct obligation upon the U.S. taxpayer.

That impugns the very existence of the FDIC Deposit Insurance “trust fund.” The Bair truth is: there is no fund, only the system of IOUs which backs the entitlement programs. It turns out Congress, via the Treasury, has found yet another “unused” pool of money to pour into the budget each year. Collecting more fees to feed another wealth redistribution arm of government bureaucracy won’t solve anything.

Comments

[honestdevil]

So if China, Japan and other exporters should stop buying Treasuries and the US Government will get less play money to waste?

2009 Mar 17 05:02 AM

[MichaelJ007]

This reminds me of the end of Dumb and Dumber movie when Harry and Lloyd open up the briefcase that's supposed to be full of money and it's nothing but IOUs... "And this one's a Ferrari, it's a big one and we're gonna pay you back"

2009 Mar 17 08:37 AM

[kelm]

I'm not following your logic. My understanding was that the FDIC charged the banks a fee for the insurance. That fee is then invested in Treasuries until needed just as any institution might invest in them. Nothing you have said contradicts that. What exists in the Social Security "Trust" fund is IOUs for Treasuries not actual bonds.

2009 Mar 17 09:46 AM

[MGA_1]

I recently came across an article saying the govt was going to back the FDIC with guarantees of 500 billion. I can't imagine the govt not backing the FDIC. If the govt decided not to back US savings then truly there is trouble ahead - people would probably panic and put their money under a mattress (technically called a run on the bank).

Truly a mess. This is beginning the raise the question where is a safe place to keep your money.

2009 Mar 17 10:09 AM

[@TexasER]

This is only frightening if you have not been living in the real world all along.

The FDIC has always been backed by the "full faith and credit" of the taxpayers. Normal people always assume that should bank failures rise, the US Government would cover any shortfalls. It's only for political expediency that banks pay premiums in the first place.

Believe me, there is plenty to be outraged about, but this doesn't make the cut.

2009 Mar 17 11:30 AM

[linderman]

what a bizar take on the "trust fund." I see what the author is writing, but he totally misses the point that US debt funding is through "printing money" while the fdic fund capital is raised by fees to private corporations. not exactly an iou.

2009 Mar 17 01:37 PM

[Fred Voetsch]

This story alone means little but when considered along with all the funding shortfalls that exist in our government and put it in context using demographic projections, you begin to see that the next couple of decades are going to mean much, MUCH higher taxes for taxpayers.

2009 Mar 17 02:48 PM

[PainfullyAware]

I fear your supposition is correct.

No one in government is talking about reduction. The only thing I hear is "Budget Shortfall" and "Creative Taxes and Tariffs" being postulated.

We already have a society where two income families are not optional anymore and even these are strained. There is no more room to rob the populous.

I fear that those who do not allow peaceful revolt make violent revolt inevitable. Shays' Rebellion and the Tax Revolts of the Great depression merit study. Governments are preparing for similar events of greater magnitude.

Safety Is A Function Of Awareness.


On Mar 17 02:48 PM freddyv wrote:

> This story alone means little but when considered along with all
> the funding shortfalls that exist in our government and put it in
> context using demographic projections, you begin to see that the
> next couple of decades are going to mean much, MUCH higher taxes
> for taxpayers.

2009 Mar 17 05:05 PM