Friday, August 21, 2009

When the FDIC Goes Broke (If It Hasn't Already)

Bloomberg reports (August 20) that the FDIC is running out of money:

Colonial BancGroup Inc.’s collapse and the prospect of mounting failures among regional lenders may prompt the Federal Deposit Insurance Corp. to impose a special fee as soon as next month to boost reserves by $5.6 billion.

The FDIC board might act sooner than expected after the Aug. 14 failure of Alabama-based Colonial cost the agency’s insurance fund $2.8 billion, and as banks such as Chicago-based Corus Bankshares Inc. report dwindling capital and Guaranty Financial Group Inc. of Austin, Texas, says it may fail. The fund fell to the lowest level since 1992 in the first quarter.

“With the failure of Colonial Bank and the possible near- term failures of one or two more large banks, the FDIC may be forced to levy a special assessment on the industry sooner than it had planned,” said Camden Fine, president of the Independent Community Bankers of America, an industry group.

The failure of 77 banks this year is draining the fund, prompting the agency in May to set an emergency fee of 5 cents for every $100 of assets, excluding Tier 1 capital, to raise $5.6 billion in the second quarter. The agency has authority to set fees in the third and fourth quarters, if needed, to prevent a decline in the fund from undermining public confidence.

Here is the extent of the decline since the end of March:

The fund had $13 billion on March 31, the lowest since 1992 when it was $178.4 million, the FDIC said. The 56 bank collapses since March 31 cost an estimated $16 billion. First-quarter failures cost the fund $2.2 billion, the agency said.

The agency is required by law to shore up the fund when the reserve ratio, or balance divided by insured deposits, falls below 1.15 percent. It was at 0.27 percent as of March 31.

The FDIC can replenish its reserves by borrowing from the US Treasury. This would reveal its bankruptcy. How would bank depositors react to the news? Bill Sardi believes it could trigger a bank run of epic proportions:

Now if just a small portion of American bank depositors hear that the FDIC had to tap into the US Treasury for funds, and these depositors feel their banked money is at risk and want to withdraw some of it, the mother of all bank runs could ensue. This could create the day of reckoning that many have predicted. A short banking holiday would have to be declared and who knows what happens from there – troops in the streets, issuance of new currency, martial law? Don’t think those in the Federal government haven’t made plans for such an occurrence.

They can plan all they like. No government rules effectively without general obedience, and that obedience depends on a modicum of legitimacy and social stability. The former is fading, as evidenced by the Town Hall protests and the retail ammunition shortages. The latter will quickly erode in a banking or monetary collapse.


Vox Day declares flatly that the FDIC is broke:

Given recent history, it would appear to be most unwise to assume that the federal government will do much more than permit the FDIC to borrow the additional $70 billion by which its credit line was increased in May, especially should depositors become aware of the increasingly fragile state of the banking system and begin to withdraw their funds from it. Banking holidays and other restrictions on the public's ability to access its money are probably more likely than an outright bailout, especially since a bailout will cost around $225 billion merely to maintain the status quo if Meredith Whitney's calculation of 300 bank failures is correct. In any case, the ability to ask permission to borrow from an unpredictable institution already $11.7 trillion in debt and expecting a further $9 trillion in deficits is not insurance nor can it reasonably be described as a guarantee of any kind.

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