Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Why a Broke FDIC Matters


The prepayment plan is only a quick fix for a longer-term problem.

The FDIC has been forced to borrow from tomorrow to pay for today. Suze Orman wouldn't be proud.

Created during the Great Depression, the FDIC is the agency that provides insurance for up to $250,000 of your bank deposits. When your bank says it's an FDIC member (which you better hope it does), that means your bank is paying the FDIC a fee, or an insurance premium, in order to guarantee your deposits in the event it fails.

The FDIC is also charged with unwinding failed banks, which is a costly process. While it guarantees the deposits of the failed bank, the FDIC also must liquidate its assets, often at a loss. So far this year, nearly 100 banks have failed and many more are at risk. The FDIC expects the total cost of bank failures through 2013 to be $100 billion, and about $25 billion has been spent so far.

So it's not surprising to learn that the FDIC finds itself with some of the very same liquidity issues as the institutions it backs have had in recent months. In an unprecedented move on Tuesday, the board of the insurance fund voted to require its member banks to prepay their insurance premiums for 2010, 2011, and 2012. The move is expected to bring in $45 billion.

It's a quick fix for a big problem. The insurance fund is running at a deficit, which FDIC Chair Sheila Bair said is expected to be erased by 2012 with the early fees.

The move is an alternative -- for now, anyway -- to a special assessment fee for the banks, which they lobbied hard against. The banks can use favorable accounting treatment for their prepayments, which will theoretically help protect earnings and please shareholders. That's good news for the big guys like JP Morgan (JPM), Bank of America (BAC), and Citigroup (C), but even better news for the smaller ones.

But there's too much trouble remaining in the banking sector to call this a smart long-term fix. The FDIC sees this as a way to avoid turning to the Treasury Department for funds, a move that would clearly offend taxpayers.

"There's some recognition in the industry that everybody's got bailout fatigue, and the goal should be extricating themselves from government support," Bair said. She also added that the FDIC has "tons of money."

But this line of thought is beginning to sound uncomfortably familiar. We have plenty of capital. We don't need government support. We have enough access to liquidity to survive anything.

We all know how that script ends. Who's to say it will end any differently when it's played out by the FDIC than it was by the banking sector? As Minyan Peter said yesterday, it feels like the summer of 2007 all over again.
< Previous
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos