Tuesday, September 22, 2009

FDIC Wants to Be Bailed Out

by banks, not by Treasury.

FDIC, whose DIF (deposit insurance fund) was meager $10 billion (see my post) at the end of June to cover close to $5 trillion deposits (and remember that was before the record bank closures in July and very costly closures in August. The fund must be very close to zero, if not negative already), wants to borrow money from the banks from which it collects deposit insurance fees.

FDIC could seek bailout from banks (9/22/09 AP via Yahoo Finance)

"WASHINGTON (AP) -- Regulators have approached big banks about borrowing billions to shore up the dwindling fund that insures regular deposit accounts.

"The loans would go to the fund maintained by the Federal Deposit Insurance Corp. that insure depositors when banks fail, said two industry officials familiar with the conversations, who requested anonymity because the plans are still evolving.

"Regulators also are considering levying a special emergency fee on all banks, charging regular fees early or tapping a $100 billion credit line with the U.S. Treasury, the officials said."

Let's say I am an insurance company. I insure your home, but times have been good and we are all prosperous so I will not collect insurance premiums from you for a decade. Don't worry nothing will happen. Then, Santa Ana wind blows and lightening strikes, and voila there's a massive fire in your area. Your home burns down. But I'll say, sorry, no money to give to you. In fact, I am broke. So I am going to borrow from you so that I can pay you and others. I'll pay you good interest on it, how about 25 basis points above the Fed funds rate? While I'm at it, I'll assess one-time emergency fee to replenish my insurance fund quickly. What do you say?

You would take me to court.

But wait, there is a possibility that this may be another disguised "rescue", actually, of big, national banks. There is also a possibility that this is a coordinated move with the Federal Reserve. Without the details known at this point, it is my pure conjecture. But here's what I see may be happening:

1st possibility: disguised "rescue" plan

FDIC would accept "loan" in the form of any type of asset from the big banks. Instead of cash or cash equivalent, the banks would give loans (of dubious quality) on their books as "loans" to FDIC, and FDIC would accept at face value and pay interest on the "loans" on top of it. (Where would that interest payment money come from?)

2nd possibility: coordination with the Fed to control excess reserves

The banks will create new loans to FDIC out of the excess reserves at the Federal Reserve. The Fed would be happy that the excess reserves are not escaping into the real economy to cause inflation. Banks would be happy that it would earn (probably) better interest than at the Fed, and their balance sheet get stronger with very safe loan to FDIC (ultimately backed by taxpayers). FDIC would be happy to have freshly minted money knowing it actually didn't cause much distress to the big banks anyway.

Just last month when FDIC issued the quarterly banking profile for the 2nd quarter (it is linked in my post), FDIC chairman Sheila Bair didn't sound much worried about the dwindling DIF, and kept repeating the mantra of "Our resources are strong. Your insured deposits are safe."


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