FDIC Failed Banks in 2009: 140

Sorry for the tardy posting.

January 2010 already started with a robust number: 15 banks failed.

And remember, FDIC is broke. As of September 2009, its DIF (Deposit Insurance Fund) was negative $8.243 billion. When FDIC releases its Quarterly Banking Profile for the 4th Quarter 2009 sometime this month, it's safe to assume it is in the hole for over $10 billion, guaranteeing $5.3 trillion (or more) deposits.

These days, numbers in billions fail to surprise anyone, don't they? If this is not inflation, I don't know what is.

For this inflated perception, we can thank Henry M. Paulson for throwing $700 billion number for the bank bailout - any number that's big enough to scare people into passing the bill. Up till then, George Bush's stimulus of over $100 billion was considered extravagant spending.

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FDIC's DIF Is Minus $8.2 Billion to Cover $5.3 Trillion

DIF-insured deposits. How?

The government institution that I love to hate, FDIC, has released its Quarterly Banking Profile report for the 3rd quarter that ended on September 30.

They already admitted that the DIF (Deposit Insurance Fund) went negative at the end of September, which was highly unusual as FDIC is not known for timely disclosure of their own problems. Sure enough, DIF is in the hole for $8.243 billion as of September 30. Since then, FDIC has closed 29 banks.

What has caught my attention though, is the sudden jump in DIF-insured deposits in the 3rd quarter. It went from $4.817 trillion in the 2nd quarter to $5.308 trillion in the 3rd quarter, a 10.2% jump. This additional $491 billion, I believe, is roughly the same amount that has been yanked out of money market funds this year. The Treasury Department stopped the guarantee on money market funds in mid September.

FDIC Chairman Bair already mandated that the banks, from "too big to fail" to "too small to bother", prepay 3-year worth of DIF premiums to fill the hole, unduly punishing the more prudent, small banks. All the extra burden on the banks will be passed on to the depositors in increased fees and other inconveniences (such as having their accounts shut down).

Why is Sheila Bair still keeping her job remains a mystery to me. But then, it's a mystery to me that Geithner is still heading the Treasury Department...

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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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FDIC Update: August Bank Failures 15, DIF $10 Billion (Do They Have A Plan?)

So FDIC closed three banks on Friday, bringing the August bank closure numbers to 15. "What an impressive improvement from July, when 24 banks failed!" would be the "green shooters" remark.


On Thursday FDIC finally released its Quarterly Banking Profile for the 2nd Quarter. It must have been a much-awaited event, because I couldn't get on to the FDIC's website for quite a while after the release of the report at 10:00 AM EST. All I was interested in was to find out what happened to the DIF (Depositors Insurance Fund), which was barely $13 billion or 0.27 reserve ratio at the end of March 31, 2009.

At the end of 2nd quarter that ended June 30, the FDIC's DIF, O miracle of all miracles, decreased by only $3 billion from the 1st quarter because, according to Sheila Bair, her institution managed to collect $6 billion from the member banks as additional assessment fees. Still, FDIC has only $10 billion of DIF, or 0.22 reserve ratio, and this is before the massive (so far) bank failures in July and very costly ones (Colonial Bank and Guaranty Bank, $6 billion) in August. FDIC estimates that bank failures will cost them $70 billion through 2013. But the chairwoman had this to say on Thursday's news conference:

"The FDIC was created specifically for times such as these," Sheila C. Bair said. "Our resources are strong. Your insured deposits are safe."

She also said this:

Asked about a possibility of tapping the Treasury, FDIC Chairman Sheila Bair said: "Not at this point in time. I never say 'never,' but not at this point in time, no."

Now, the congressionally mandated minimum reserve ratio for FDIC is 1.15%.

With that in mind, please take a look at this table. It shows the DIF balance and DIF-insured deposits over the 3 years, and the reserve ratio calculated from the two numbers. The reserve ratio dipped below the mandated minimum in the 2nd quarter of 2008, well before the banking crisis hit in earnest in September.

Why didn't the chairwoman act then? Why didn't Congress require that FDIC raise the assessment to the banks or force it to take the line of credit to replenish the fund? Why isn't Congress demanding that FDIC replenish the fund now? And why does Bair still refuse even now to recognize this 0.22% reserve ratio as danger beyond critical stage and refuse to use the line of credit?

She just keeps repeating the mantra "No one has lost the money with us."

Meanwhile, the emergency assessment fee imposed on smaller banks are taking the toll on their bottom line. FDIC has a line of credit of up to $500 billion with the Treasury Department, yet she refuses to draw from it. The only way to raise additional funds for DIF then is to assess another emergency fee, that will further penalize small banks disproportionately.

If I become more cynical than I already am, I would say Ms. Bair is doing it on purpose - to kill off as many small banks as possible to feed the big banks, even the foreign ones, as cheaply as possible. I can easily think of worse possibilities but those are not the good ones to contemplate right before going to bed...

OK, I found more details about DIF and the congressionally mandated minimum reserve ratio. I couldn't believe my eyes.. This is from March 2009 Journal of Accountancy Highlights:

"With the DIF reserve ratio at 1.01% at the start of the third quarter, the FDIC is required by the Federal Deposit Insurance Reform Act of 2005 to establish a restoration plan to raise the ratio to 1.15% no later than five years after establishing the plan. The plan to restore the ratio includes a combination of uniform higher assessment rates and other risk-based adjustments that place a greater burden of increased assessments on riskier institutions."

All the law requires is that FDIC devise a plan, and raise the ratio to 1.15% within 5 years after they devise the plan. So, by law, the chairwoman can simply sit on her hands doing nothing as long as she has a plan. And she doesn't even seem to have a plan, but she assures us "No one has lost money with us."

This is getting surreal.

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