Why Does FDIC Need Help from Treasury?

The Federal Deposit Insurance Corporation (FDIC) might be broke.

Created in 1933, the FDIC is the federal guarantor in charge of insuring that bank deposits of up to $100,000 are returned should a bank go under. Historically, the FDIC has had a fairly easy job—on average only six banks go bust a year.

However, during times of financial crisis such as the Savings and Loan Crisis of the early ‘90s and today, the FDIC can quickly find itself overwhelmed by the number of bank failures. Which is why I was extremely concerned to hear that FDIC Chairman Sheila Blair has hinted that the FDIC may need to borrow from the US Treasury.

It’s clear the FDIC has been bracing for trouble for some time now. It’s already increased its bank failures staff by 60% in the last year, including bringing 69 retirees back to work. And it’s planning on leasing a 125,000 square feet of office space in Dallas to house its ever-growing number of new hires.

That’s pretty worrisome, but not nearly as disturbing as the prospect of the FDIC borrowing money from the US Treasury. I’ll explain…

The last time the FDIC borrowed from the Treasury was during the S&L Crisis in the late ‘80s / early ‘90s. At that time, some 2,100 banks went under. Similarly, the FDIC’s list of problem banks at the time included 1,500 banks. And yet, the FDIC didn’t need to borrow money until the tail end of the crisis.

So to see rumors circulating that the FDIC may need to borrow from the Treasury this early in the current financial crisis is truly worrisome. Consider the following…

• Thus far we've only seen nine banks go under.
• The FDIC's list of "problem" banks contains only 117 banks.

Something doesn’t add up here. There are nearly 9,000 banks in the US. One tenth of one percent of them have gone under and only 1.3% of them are allegedly problematic and yet the FDIC is already hinting at needing the Treasury’s help.

My guess is that the real number of troubled banks is a heck of a lot bigger than 117. Chris Whalen agrees with me. Whalen is Co-Founder and Managing Director of Institutional Risk Analytics, one of the shrewdest firms to analyze the financial sector.

Whalen believes the real number of problem banks is closer to 900, or 10% of US banks. He also believes that the FDIC will need to raise as much as half a trillion dollars to cover bank failures in the coming years. And he doesn’t rule out a major bank going under.

I’ve said it numerous times this year… and I’m saying again now. This financial crisis is nowhere near over. There are going to be more write-downs, more losses, and more bankruptcies in the coming months. Financial firms have yet to come clean about the junk on their books. Instead they choose to dribble out losses quarter by quarter. And despite all of the Federal Reserve’s interventions — the Bear Stearns deal, opening the discount window to investment banks, etc. — things haven’t really improved.

I’m NOT buying financials now. I sure hope you aren’t either.

Comments

[Financial C...:]

I absolutely agree that this credit crisis is not close to being over. Things will not improve until the housing market bottoms which I believe will occur some time in 2011! The number of banks that will fail between now and then will make the S&L crisis look like a cake walk. We will soon hear about an FDIC bailout itself! It's simply not possible to bail out so many banks to come without printing more money or borrow from the Treasury. This country is spiraling down slowly but surely and we are going to take down the whole world with us. It's sad and I think we'll live to see another Great Depression.

2008 Sep 02 02:19 PM

[msgtb:]

She has information that we are not able to access. Why shouldn't we (the people, taxpayers) be able to have information on banks problems so we can make informed decisions? Write your congressman and senator. This whole mess is a crime and people should be going to jail, not getting access to the Fed window. We the people are (through or government) rewarding the people who caused this mess. Remember to vote this is an election year!

2008 Sep 03 12:27 PM