FDIC Insurance Fund - It Doesn't Actually Exist

When FDIC head Shelia Bair says her agency might have to bolster the FDIC's insurance fund with Treasury borrowings to pay for the new spate of bank failures, a lot of us, this 40-year banking veteran included, assumed there's an actual FDIC fund in need of bolstering.

We were wrong. As a former FDIC chairman, Bill Isaac, points out here, the FDIC Insurance Fund is an accounting fiction. It takes in premiums from banks, then turns those premiums over to the Treasury, which adds the money to the government's general coffers for "spending . . . on missiles, school lunches, water projects, and the like."

The insurance premiums aren't really premiums at all, therefore. They're a tax by another name.

Actually, it's worse than that. The FDIC, persisting in the myth that its fund really is an insurance pool, now proposes to raise the "premiums" it charges banks to make up for the "fund's" coming shortfall. The financially weakest banks will be hit with the biggest tax hikes.

Which makes absolutely no sense. You don't need me to tell you the banking industry is on the ropes. The last thing it needs (or the economy needs, for that matter) is an expense hike that will inhibit banks' ability to rebuild capital, extend new loans, or both. If the FDIC wants to raise its bank tax once the industry has recovered, I suppose that's fine. But to raise taxes on the industry now is perhaps the dumbest thing the agency can possibly do. At the margin, the FDIC will be helping bring about more of the failures it says it wants to prevent.

But this is the government we're talking about, so logic goes out the window. First, the FDIC insists its mythical bank insurance fund exists, when it really doesn't. Then the agency does what it can to run the imaginary fund's finances straight into the ground. Your tax dollars (sorry, "premiums") at work. . . .

Comments

[Fiat:]

The politicians are cover for the private bankers who run this bankrupt fascist fraud we still call the "free" United States of America. We are rearranging deck chairs on the titanic with all this talk of stimulus and bailouts. It's over for this country because we let the banks and corporations destroy us. Face it now. It will at least be easier to understand when the food riots start and UN troops are in our streets.

Jul 09 10:48 AM

[liam mateer:]

so what this means if you have a lot of cash put your money in something tangible ie keep 6-9 months money in the bank at any one time but thats the max, load up on gold and silver coins and bars, what i would like to know is how this will effect mining shares in general

Jul 09 11:12 AM

[User 444024:]

Well, the big derivatives monsters didn't pay while the small ones basically paid for the gov.

Now-needy FDIC collected little in premiums
With fund going strong, banks didn't pay for decade
www.boston.com/news/na...

Jul 09 11:45 AM

[doublethink:]

Absolutely! It's all the Republicans fault! They spent all the money while the Democrats tried so hard to stop them. It's the damn tax cuts that caused the banks to implode! ........ Seriously though, here's the rub: The Fed is a For-Profit Private bank. If you try to say it's not, then please explain why there has been no audit of the Fed since it's inception in 1913 (and I don't mean the audit they do of the pencils and desks, I mean the money.) The ability to control the issuance of currency has been used by the banksters to control governments for hundreds if not thousands of years, and is used today to control Washington, London, Brussels, Bejing, you name it. The new banking crisis is yet another in a long string of banking crises invented by the banksters to consolidate more power into the hands of a few. These are monopoly men. They talk of free markets but want nothing of the sort. They have never in their history entered into any deal in which they didn't have a deciding edge. Nothing will change until We The People stop falling for the false left-right paradigm and come to realize that BOTH parties are bought and paid for by those who have hijacked our government. Ask yourself why on so many occasions are a huge majority of Americans on one side an issue, yet the will of the people is overruled by Washington? Why do our newly elected leaders always turn out to be just as bad as the old leaders? Do your research. Prove me wrong.

On 2008 Sep 12 04:29 AM dlaw wrote:

> This is more laissez-faire silliness.
>
> The difference between the government as an insurer/credit enhancer
> and any such actor in the private sector is that the government can
> print money and issue debt at the risk-free rate whenever it wants
> - and Republicans generally want it to do that a whole lot.
>
> So, just as the government does to pay for Republican "tax cuts"
> (aka - "increasing borrowing on our spending"), they will issue debt
> to back FDIC, since, of course, our entire system is based on debt.
>
>
> Banking relies on deposit insurance. Diamond and Dybvig proved that
> long ago. If the spending-mad Republicans spent-and-borrowed away
> the FDIC's reserves the way they spent-and-borrowed away the Medicare
> and Social Security trust funds, the nation will do what it has done
> since the New Deal - issue debt and invest to add value.

Jul 09 11:49 AM

[robertsgt40:]

Wake up folks. There is no tooth fairy either. We've been scammed by the best(sic) in the business. There is no Social Security either. Just goes into the general funds pile. Madoff could only dream of these numbers. Our nation has been hocked to the hilt. The banksters are in control..always have been. We either default on the national debt and/or fire up the printing presses. Either way we're toast. Massive tranfer of wealth(all of it plus what's left of our credit). They picked us clean. Pissed yet?

Jul 09 03:53 PM

[Swmorgan77:]

Nope, its not a Banana Republic. That would imply that we had at least one productive export of value.


On 2008 Sep 15 06:20 AM Confuser wrote:

> Anybody who have learned a bit more than accounting knows that all
> mega transactions don't involve physical movement of cash but are
> paper adjustments. Once it is in the treasury they do not and cannot
> separate them into each department physically. Only that they should
> make sure amount allocated to each department is not debited or credited
> the wrong way. So the allegation that FDIC fund does not exist is
> not right. Yes, our country has some shortcomings but that doesn't
> mean it is a banana republic.

Jul 09 08:32 PM

[bonderman:]

WOW! I almost hate to add to these comments....but. The flag waving, 'hang em high', 'kill everybody I decide should die', folks need to get on Prozac ASAP. Folks, you are raising your blood pressure to very serious levels. Try to relax. Repeat. Try to relax. Then seriously consider how you would feel if an administration took your "ideas" to heart and applied them against you. There, you don't want to loose a hand or be hanged for your thoughts.

There are solutions to a lot of the problems raised but, unfortunately they take time and the Congress you elected will be in a hurry so it probably won't be a very pretty solution but it can be changed in time.

You CAN be part of that change but not with the 'blow off' rhetoric so often seen here. Write your Congressperson. Be polite. Reference a bill number if possible and describe both your objection and offer a solution. Letters that are well framed do count whereas "blow off' diatribes don't.

Good luck!

Jul 09 08:50 PM

[Mark54:]

like social security, its a ponzi setup. Hope that incoming cash covers outgoing cash. Historically the "fund's" unofficial target has been 125% of insurable deposits. Once they reached that level FDIC premiums virtually disappeared, and now they are back with a vengance.

Here are some preliminary numbers for the FDIC Q2 assessment:
Susquehanna Bancshares Inc. $6,200,000 (13.0 billion in assets)
Westamerica Bancorp. $2,300,000 (5.5 billion in assets)
Pacific Continental Corp. $500,000 (1.1 billion in assets)
Indiana Community Bancorp $475,000 (1.7 billion in assets)

Jul 09 09:35 PM

[Keithdt:]

The FDIC is one of the worst ideas in human history. It allows banks to prosper by acting recklessly because there is no concern by depositors for safety of capital. In fact it forces banks to act more recklessly because they conservative banks can't compete with less prudent banks. Therefore it inevitably stimulated the banking crisis that happened last fall (it just took awhile). There are almost no banks in the US with truly old-fashioned conservative financial policies (look for A rated banks at street.com rankings for example). Unsound money is a great decayer of civilization. This country will be on much sounder footing once the Federal Reserve & the FDIC are banished to the trashheap of history. Unfortunately, there will be a lot of upcoming hurt to get through until we get there.

Jul 10 08:28 AM

[OldFordTruck:]

To those of us that want a return to a true gold (or other metal) backed currency this is not news. The FDIC is a device used to help calm the public about the safety of their money and prevent a run on the bank. Back in the day when a gold standard existed, if the bank made more loans on the gold than were actually in the vault and there was a run, the bank went bust and people lost their money. With a currency backed by nothing, the FDIC is simply the printing press of the Federal Reserve. With this system, the FDIC takes over a failed bank; all the holders of US dollars pay the price through inflation of the currency. The FDIC does nothing but makes the public feel better and increase the amount of risk a bank will take on knowing their depositors will be bailed out by the printing press.

Jul 10 12:02 PM

[OldFordTruck:]

Hey tdp2020! I recently flew in and out of Louiville KY a few weeks ago and met a militiary person at the airport. As I was talking with him, he mentioned he had been stationed at Ft. Knox. I asked him the quesiton.."Have you ever actually seen the gold in the vault?" To my surprise he told me he was one of the guards and "saw it with his own eyes"! He did say it was a smaller pile than in the past but at least it is good to hear we still have something left to guard in the vault instead of some IOUs.

Jul 10 12:13 PM

[Proper Logi...:]

I wonder which Republicans "generally" are wanting "the government to print money and issue debt at the risk-free rate whenever it wants
> - and Republicans generally want it to do that a whole lot."

I don't and suspect that other conservatives don't either. That leaves the RINO's, those that are most like the Democrats.
But the writer didn't list the Democrats as wanting the government "to do that a whole lot" so they are clean and pure as snow. The trouble I see is that we shouldn't touch that pure Democratic snow, it's actually yellow.

Generals accept battle because they think they will cheaply win or are forced to.
Liberals can't win an honest debate? To quote Worf, "It will be glorious."





On 2008 Sep 12 04:29 AM dlaw wrote:

> This is more laissez-faire silliness.
>
> The difference between the government as an insurer/credit enhancer
> and any such actor in the private sector is that the government can
> print money and issue debt at the risk-free rate whenever it wants
> - and Republicans generally want it to do that a whole lot.
>
> So, just as the government does to pay for Republican "tax cuts"
> (aka - "increasing borrowing on our spending"), they will issue debt
> to back FDIC, since, of course, our entire system is based on debt.
>
>
> Banking relies on deposit insurance. Diamond and Dybvig proved that
> long ago. If the spending-mad Republicans spent-and-borrowed away
> the FDIC's reserves the way they spent-and-borrowed away the Medicare
> and Social Security trust funds, the nation will do what it has done
> since the New Deal - issue debt and invest to add value.

Jul 10 04:26 PM

[WWRD:]

'The very idea of "deposit insurance" is a swindle; how does one insure an institution (fractional reserve banking) that is inherently insolvent, and which will fall apart whenever the public finally understands the swindle? Suppose that, tomorrow, the American public suddenly became aware of the banking swindle, and went to the banks tomorrow morning, and, in unison, demanded cash. What would happen? The banks would be instantly insolvent, since they could only muster 10 percent of the cash they owe their befuddled customers. Neither would the enormous tax increase needed to bail everyone out be at all palatable. No: the only thing the Fed could do, and this would be in their power, would be to print enough money to pay off all the bank depositors. Unfortunately, in the present state of the banking system, the result would be an immediate plunge into the horrors of hyperinflation.

Let us suppose that total insured bank deposits are $1,600 billion. Technically, in the case of a run on the banks, the Fed could exercise emergency powers and print $1,600 billion in cash to give to the FDIC to pay off the bank depositors. The problem is that, emboldened at this massive bailout, the depositors would promptly redeposit the new $1,600 billion into the banks, increasing the total bank reserves by $1,600 billion, thus permitting an immediate expansion of the money supply by the banks by tenfold, increasing the total stock of bank money by $16 trillion. Runaway inflation and total destruction of the currency would quickly follow.' - Murray Rothbard

Jul 10 11:30 PM

[Landrew:]

You mean FDIC is used to offset additional purchases of U.S. debt!
FDIC is not building reserves if the money is simply placed in the budget as the Vernon Hill in the article states "The insurance premiums aren't really premiums at all, therefore. They're a tax by another name".



On 2008 Sep 13 05:56 PM Zachary Pruckowski wrote:

> So the FDIC is an insurance company that invests entirely in T-Bills?
> I don't see the problem. Actually, this is smarter than diversification.
> As I see it, most other investments (stocks and mutual funds, primarily)
> suffer in at least the short term with bank failures, making them
> a bad FDIC investment (you lose money in your investments right when
> you need to use it to cover your insurance obligations).
>
> Notably, the FDIC is itself insured by the federal government.<br/>
>
> I agree that now is not a great time to raise premiums on banks,
> but the banks have done risky things themselves. Noone can argue
> that a bank isn't more likely to fail in 2008-2009 than in 2005-2006.
> As the risk in insuring banks rises, the premiums need also rise.

Jul 11 11:18 AM

[ds29_2000:]

The article makes two points -
1. FDIC not maintaining an insurance fund but paying it into treasury which is used for other purposes. I really have nothing against that as I see it like an insurance company that is responsible to cover the payments to the insured. And insurance is definitely a hidden tax that the banks obviously lowers the interest it pays you. If it were a fund - then as it grows the politicians would fight for lowering the insurance premium and when time comes and the banks fail we would be in the same state we are now. Isn't that happening right now - a depleted fund with many bank accounts to insure?
2. How does the author propose we grow the FDIC fund other than "taxing" the banks. The insurance premium has to come from the ones being insured. The author seems to be blaming the current way of funding the FDIC without specifying any clear alternatives.

Jul 11 12:39 PM

[McLIeberman:]

I assume a Democrat? Boy are you eating your words now... CBO latest deficit #'s for 09... $2 TRILLION. CHANGE BABY! That's all we're left with and the Socialist/Fascist regime Duopoly has trillions more in deficits coming.

When are you people going to learn about the puppets in DC? same for other TOOLS like Paul Krugman, MSM, and the Dept. of Propaganda.

Ignorance is Bliss.... please wakeup


On 2008 Sep 12 04:29 AM dlaw wrote:

> This is more laissez-faire silliness.
>
> The difference between the government as an insurer/credit enhancer
> and any such actor in the private sector is that the government can
> print money and issue debt at the risk-free rate whenever it wants
> - and Republicans generally want it to do that a whole lot.
>
> So, just as the government does to pay for Republican "tax cuts"
> (aka - "increasing borrowing on our spending"), they will issue debt
> to back FDIC, since, of course, our entire system is based on debt.
>
>
> Banking relies on deposit insurance. Diamond and Dybvig proved that
> long ago. If the spending-mad Republicans spent-and-borrowed away
> the FDIC's reserves the way they spent-and-borrowed away the Medicare
> and Social Security trust funds, the nation will do what it has done
> since the New Deal - issue debt and invest to add value.

Jul 11 05:24 PM

[Bukantis:]

A return to a sound monetary system is a start. Rid this country and the rest of the world of fiat, or papermoney debt notes.
Econ 101 teaches that it is impossible to discharge a debt with another instrument of debt.
When this country prints more money, they are printing more debt. And any country that employs more people than they do in the manufacturing sector will remain very sick.
Rid the Fed, No more bailouts, return to a sound money system, stop foolish government spending may put this country on the right path. Get rid of your congressional representatives who don't feel this way...and replace them with sensible people who do...like Congressmen Ron Paul.

Jul 11 05:37 PM

[mousidd:]

It's really sad to see this happing in the present day conditions. It really makes one wonder what the real intent of the government is. It's basically double crossing the public. Sounds like a total scam to me. We should really be taking real and sincere efforts to rebuild this economy, rather then letting it eat on itself, again.

Nov 12 03:36 AM

[Rick Krass:]

Anything that the government does seems to be to manipulate growth and the economy. Most of it will be either short-lived or will turn out to be a sort of disadvantage to the people. What really is needed is a strong and bolstering effort to build a foundation that can withstand the changes.

Nov 23 07:54 AM

[ngan hang:]

FDIC Insurance Fund Goes Into The Red; Number Of Problem Banks ...
24 Nov 2009 ... WASHINGTON — The Federal Reserve doesn't expect the recovery will be strong .... FDIC Deposit Insurance Fund Sinks To Negative Territory .... The banks that are failing are the ones which were actually lending to small ...
huffingtonpost.com/......
______________
nganhangonline.com/

Dec 04 03:53 AM