FDIC Admits It Is Broke

Zero Hedge's Tyler Durden reports that FDIC now admits its DIF (deposit insurance fund) is negative as of September 30. FDIC is insolvent.

FDIC Discloses Deposit Insurance Fund Is Now Negative
(9/29/09 Zero Hedge)

"In an unprecedented disclosure, the FDIC has highlighted that it expects the DIF reserve ratio to be negative as of September 30. As there are a whopping 48 hours before that deadline, one can safely assume that the DIF is now well into negative territory: as of today depositors have no insurance courtesy of a banking system that has leeched out all the capital of the Federal Deposit Insurance Corporation. Let's pray there is no run on the bank soon."

For FDIC to announce something like that is indeed extremely unusual. They are not known for timely disclosure. Their Quarterly Banking Profile Report, for example, is not filed until after nearly 2 months after a quarter ends.

In this case, it is also highly deceptive. It was just last month, August, when the chairman Sheila Bair said in the press conference when FDIC (finally) released the Quarterly Banking Profile for the 2nd quarter that she was not planning on doing anything about DIF anytime soon, and that FDIC had enough money. "Our resources are strong. Your insured deposits are safe," she repeated. Uh-huh.

Zero Hedge has the FDIC document discussing the negative DIF embedded in the article, and also has this choice words for the situation:

"First Mary Schapiro [SEC chairman] has failed at her task of "regulating" anything on Wall Street, and now Sheila Bair presides over a newly insolvent institution. Chalk one up to Washington's success at "containing" the crisis. Zero Hedge wishes Ms. Bair all the luck in the world in returning the DIF to its statutory minimum requirement of 1.15% of all insured deposits (a shortfall of a mere hundred billion or so). Maybe she can convert the FDIC to a REIT and have Merrill Lynch do a concurrent IPO and follow-on offering (while Goldman raises it to a Conviction Buy which incorporates the firm's expectations for 10% GDP growth in 2010 coupled with projections for $1,000 per barrel of crude)?"

Haha. One more thing: Goldman Sachs will short the hell out while putting it on their Conviction Buy list and recommending it to their clients (not the ones in the 'huddle', who will short alongside Goldman's trading desk).

DIF reserve ratio dropped below the statutory minimum in the 2nd quarter of 2008 (see my post). Sheila Bair was appointed the chairman at FDIC in June 2006 for a five-year term. She could have raised the fund to replenish DIP, well before the financial crisis hit in full force in September 2008. She either decided to sit on her hands or was told to; I don't know which. Incompetency (or appearance of it) is highly rewarded in Washington D.C., it seems. She is still the head of FDIC.

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