FDIC Passes Around Collection Plate
Regulator braces for bank failures by scrounging up money.
The latter gets to smack the former around like a badminton birdie because the FDIC's primary responsibility is to clean up the Treasury's messes. And these days, there are messes aplenty.
It goes like this: The Treasury oversees a regulatory body called the Office of Thrift Supervision, or OTS, that's tasked with keeping tabs on federal thrifts (which are just mortgage companies moonlighting as federally chartered banks).
Until recently, the OTS was responsible for monitoring IndyMac Bancorp, which collapsed last month under the weight of misplaced mortgage bets. The FDIC is now sorting out the mess. The OTS also oversees such thriving institutions as Washington Mutual (WM), BankUnited (BKUNA) and Downey Savings (DSL).
Since the OTS's idea of regulation is apparently to wake up late, sip a latte and spend the day diligently ignoring the wildly unsafe lending practices of its member banks, the FDIC is up to its ears in barely solvent financial institutions.
The FDIC charges deposit-taking institutions fees about $0.05 per $100 in deposits to display the group's goofy logo (which dates to its Depression-era roots). This is meant to assure customers their money's safe, even if the bank's risk management policies aren't.
When banks go belly up, the FDIC steps in and covers depositors up to $100,000. In the case of IndyMac, this could cost up to $8 billion. The FDIC's insurance fund stood at just $53 billion pre-IndyMac, and is now so low it's been forced to come up with an action plan to raise more money.
The options aren't exactly palatable.
It could jack up the fees it charges member banks, but with so many teetering on the edge of insolvency, they don't exactly have a lot of cash to spare. The FDIC also has a $30 billion line of credit from the Treasury Department, but it's loath to tap into it, lest it appear desperate.
Finally, it could borrow from the Federal Reserve, and join other flailing institutions like Lehman Brothers (LEH) and Merrill Lynch (MER), both of which have submerged themselves the warm bath of cheap Federal money.
As the credit crunch migrates outward from its epicenter on Wall Street and infects Main Street, local banks and thrifts are becoming ensnared in troubles previously reserved for complex securities firms. Small banks are often heavily levered to construction firms, small businesses and individuals in their surrounding communities, and are particularly vulnerable to regionalized economic slowdowns.
Downey Savings (in Orange County) and BankUnited (in South Florida), for example, are at the heart of the housing bust. Their local economies are sagging under the weight of job losses in both the construction and mortgage industries, as well as fallout from plummeting home prices. Both banks bet heavily on ill-fated Option ARMs during the boom, and neither is likely to survive the current crisis.
Now, the FDIC's challenge is to raise sufficient funds to cover the coming wave of bank failures - without putting undue stress on the already shaky banking system or igniting fears that it would need to tap taxpayers' money to protect, well, taxpayers' money.
The information on this website solely reflects the analysis of or opin=
=3D =3D3D ion about the performance of securities and financial markets by =
the wr=3D iter=3D3D s whose articles appear on the site. The views expresse=
d by the wri=3D ters are=3D3D not necessarily the views of Minyanville Medi=
a, Inc. or members=3D of its man=3D3D agement. Nothing contained on the web=
site is intended to con=3D stitute a recom=3D3D mendation or advice address=
ed to an individual investor =3D or category of inve=3D3D stors to purchase=
, sell or hold any security, or to =3D take any action with re=3D3D spect t=
o the prospective movement of the securit=3D ies markets or to solicit t=3D=
3D he purchase or sale of any security. Any inv=3D estment decisions must b=
e made =3D3D by the reader either individually or in =3D consultation with =
his or her invest=3D3D ment professional. Minyanville write=3D rs and staff=
may trade or hold position=3D3D s in securities that are discuss=3D ed in =
articles appearing on the website. Wr=3D3D iters of articles are requir=3D =
ed to disclose whether they have a position in =3D3D any stock or fund disc=
us=3D sed in an article, but are not permitted to disclos=3D3D e the size o=
r direct=3D ion of the position. Nothing on this website is intende=3D3D d =
to solicit bus=3D iness of any kind for a writer's business or fund. Mi=
ny=3D3D anville mana=3D gement and staff as well as contributing writers wi=
ll not respo=3D3D nd to em=3D ails or other communications requesting inves=
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter