FDIC may go insolvent this year

[aerius]

Bloomberg link

FDIC’s Bair Says Insurance Fund Could Be Insolvent This Year

By Alison Vekshin
Enlarge Image/Details

March 4 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair said the deposit insurance fund could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency.

“Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.

“A large number” of bank failures may occur through 2010 because of “rapidly deteriorating economic conditions,” Bair said in the letter. “Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative.”

The FDIC last week approved a one-time “emergency” fee and other assessment increases on the industry to rebuild a fund to repay customers for deposits of as much as $250,000 when a bank fails. The fees, opposed by the industry, may generate $27 billion this year after the fund fell to $18.9 billion in the fourth quarter from $34.6 billion in the previous period, the FDIC said. The fund was drained by 25 bank failures last year.

Smaller banks are outraged over the one-time fee, which could wipe out 50 percent to 100 percent of a bank’s 2009 earnings, Camden Fine, president of the Independent Community Bankers of America, said yesterday in a telephone interview.

“I’ve never seen emotions like this,” said Fine, adding that he’s received more than 1,000 e-mails and telephone messages from angry bankers.

‘Significant Expense’

“The FDIC realizes that these assessments are a significant expense, particularly during a financial crisis and recession when bank earnings are under pressure,” Bair wrote. “We did not want to impose large assessments when the industry and economy are struggling. We searched for alternatives but found none better.”

The agency, which has released the change for 30 days of public comment, could modify the assessment to shift the burden to the large banks “that caused this train wreck,” Fine said. “Community bankers are feeling like they are paying for the incompetence and greed of Wall Street,” he said.

Bair dismissed that suggestion.

“For risk-based assessments, our statute restricts us from discriminating against an institution because of size,’’ Bair wrote.

Bair rejected arguments that the agency should use government aid to rebuild the fund. The FDIC has authority to tap a $30 billion line of credit at the Treasury Department.

“Banks, not taxpayers, are expected to fund the system,” Bair said. Asking for taxpayer support “could paint all banks with the ‘bailout’ brush.”

The FDIC “will revise the interim rule, if appropriate, in light of the comments received,” the agency said in a Federal Register notice.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net .

So the FDIC has already blown through over 60% of its funds in the last year, they started 2008 with a bit over $50 billion and were down to under $20 billion by the end of the year. Better hope ShittyCitigroup doesn't go down cause if they do, the FDIC is fucked. I'm pretty sure the government will authorize a bailout for the FDIC so that everyone's money stays insured, problem is that could take a bit of time, and if your bank fails at the same time as the FDIC, it could take a while for you to access your money while Congress sorts out the funding.

[Kanastrous]

Basic consumer question: time to cash out my accounts and stash greenbacks under the mattress?

[Vaporous]

Basic consumer answer: If you'd like to destroy the banks, go for it. And then tell your friends.

[Kanastrous]

If it's a question of the banks/FDIC going under before I can recover my money, and waiting until afterwards, when I probably can't it seems pretty clear what the responsible course of action regarding my own household is.

Or are depositors supposed to shoulder a responsibility to leave their money in a risky place, for the sake of propping up banks as some sort of public service?

[aerius]

I can't answer the question, because inciting a bank run is a federal offence.

I wouldn't go as far as closing out all accounts and transferring everything to the Bank of Sealy, but it would be a good idea to keep enough cash around to tide you over for a month or whatever in case your accounts are temporarily locked out.

[Mr Bean]

Basic consumer question: time to cash out my accounts and stash greenbacks under the mattress?

Better, close your account and move your money to one of those non-risking taking banks or a local bank. Credit Unions for example are mostly safe since they don't do the same kind of gambling the big banks did.

However since things are insured your money safe, just prehaps not accesable in a crisis. I suggest putting enough aside to live on for a month as mass money migrations will cause a bank run and this is one of those times where you need to think globally not locally.

*Edit and as pointed out, inciting a bank panic is a offense. Yeah don't want to go to jail for that one now.

[Surlethe]

It's a good idea anyway to keep cash on hand to tide you over in case of emergency. This isn't such a big deal - the key purpose of the FDIC is to ensure confidence and prevent bank runs. Even if people are locked out of their accounts for a month or three, as long as they expect the FDIC to return things won't get out of hand. It'll become a problem if they expect the FDIC to be unable to insure their accounts; then we have Great Depression II, with bank runs, deflation, the whole nine yards.

[aerius]

The problem is it's quite easy for a panic to get started if people can't access their accounts, it's going to take a lot of smooth talking to keep people calm when they have bills & rent to pay and they can't pay them cause their money's locked out. With mass internet connectivity these things spread fast, if there's a huge lineup outside of say, a Citigroup branch in San Fran trying to pull out their cash, I will know about it within 3-5 hours at most. It'll be all over the financial & investing message boards and likely spread all over Myspace & Facebook as well, not to mention a ton of blogs. For example, look at how fast Northern Rock in the UK got out of hand a while back, within days they'd been completely emptied out by a bank run and nationalized. Now imagine that happening to say, Bank of America or Shittygroup when word gets out that the FDIC is broke.

[J]

Even if people are locked out of their accounts for a month or three, as long as they expect the FDIC to return things won't get out of hand. It'll become a problem if they expect the FDIC to be unable to insure their accounts; then we have Great Depression II, with bank runs, deflation, the whole nine yards.

I'd argue it's a huge problem since most people don't have sufficient cash on hand to tide them over for even a week, let alone a month or more. Credit cards won't work for long either since monthly payments have to be made which almost always comes out of one's bank account. Since many people carry balances on their cards, one or two missed payments could be enough to put it into default or lock out the card. Most people can't pay their rent, bills, and other living expenses without fast regular access to the bank accounts & credit cards, in the event of a bank failure & FDIC insolvency they're reduced to whatever cash they have in their pockets (not much) and the remaining limit on their credit cards. That's not going to pay the rent & bills for long, certainly not three months for the average person. I think their best choice would be to max out the cash advance on their credit cards and hope that's enough to tide them over, use the cash to cover expenses and pay the minimum payment on the cards until their bank accounts unfreeze.

So basically, panicked people and high risk of bank runs. If I heard that half my co-workers were frozen out of their bank accounts and facing eviction or other bad things, I'd be motivated to empty out my own accounts and fill a few pillowcases with bills.

[TrailerParkJawa]

I'd argue it's a huge problem since most people don't have sufficient cash on hand to tide them over for even a week, let alone a month or more. Credit cards won't work for long either since monthly payments have to be made which almost always comes out of one's bank account. Since many people carry balances on their cards, one or two missed payments could be enough to put it into default or lock out the card. Most people can't pay their rent, bills, and other living expenses without fast regular access to the bank accounts & credit cards, in the event of a bank failure & FDIC insolvency they're reduced to whatever cash they have in their pockets (not much) and the remaining limit on their credit cards. That's not going to pay the rent & bills for long, certainly not three months for the average person.

I agree. I keep $250 in cash and $1000 in EE savings bonds in the house just in case there was some short term emergency, like an earthquake, where power was widely unavailable for a few days. Keeping even a month of emergency cash would end up being 2-3 thousand dollars and that just makes me way too nervous from a burglery point of view.

I have all my funds in a single bank but do have a company credit card and a little bit of cash in E*trade so I suppose i could make do but I doubt my situation is much different than the average person. A run on my bank would be difficult to endure and cause lot of stress. Imagine the stress if this happens to tens of thousands of account holders for a large bank.

[Broomstick]

I can't answer the question, because inciting a bank run is a federal offence.

I wouldn't go as far as closing out all accounts and transferring everything to the Bank of Sealy, but it would be a good idea to keep enough cash around to tide you over for a month or whatever in case your accounts are temporarily locked out.

You do realize that some of us don't have a months worth of money ANYWHERE, don't you?

It's a good idea to have enough cash on hand any time to see you through three days to a week without bank access. At least enough for food and true essentials - if you're up to date on your rent/mortgage and bills those can slide a month or two without becoming a disaster.

I can't imagine that FDIC wouldn't be bailed out. I don't expect it would take a month for people to get their money, either. IF the FDIC goes under and bank runs start (which is a possibility) the government will either have to act or deal with panic and riots.

[General Zod]

Basic consumer question: time to cash out my accounts and stash greenbacks under the mattress?

Somebody didn't pay attention to the history of the last great depression too closely, I see.

[Darth Wong]

I agree. I keep $250 in cash and $1000 in EE savings bonds in the house just in case there was some short term emergency, like an earthquake, where power was widely unavailable for a few days. Keeping even a month of emergency cash would end up being 2-3 thousand dollars and that just makes me way too nervous from a burglery point of view.

If there's a power failure for a few days, you need food and water and basic survival supplies, not money. Most businesses shut down when there's a total power failure; they can't even run their fancy electronic cashier machines.

[TrailerParkJawa]

I agree. I keep $250 in cash and $1000 in EE savings bonds in the house just in case there was some short term emergency, like an earthquake, where power was widely unavailable for a few days. Keeping even a month of emergency cash would end up being 2-3 thousand dollars and that just makes me way too nervous from a burglery point of view.

If there's a power failure for a few days, you need food and water and basic survival supplies, not money. Most businesses shut down when there's a total power failure; they can't even run their fancy electronic cashier machines.

I don't disagree with you. I have a few weeks of water and food for such an emergency. The cash is intended for use with business that still might be open or running on a generator or if I simply decided to drive out of the area (assuming thats possible). I just feel that its prudent to have a few hundred in cash as a part of any emergency kit.

[The Duchess of Zeon]

If, say, 20% of Americans don't have money for food due to a massive slew of bank failures, let's be blunt. People would simply systematically loot supermarkets for it. Police officers coming to evict people from homes would be fired at or pelted with rocks, and people would just break back into the home when kicked out; and then what, arrest 20% of the country's population? An immediate response would be required, which means the feds would just have to seize the bank branches and hand out all the money there to meet short term needs of individuals ; in short, we'd see the total collapse and universal nationalization of the banking system.

[Big Phil]

Even if people are locked out of their accounts for a month or three, as long as they expect the FDIC to return things won't get out of hand. It'll become a problem if they expect the FDIC to be unable to insure their accounts; then we have Great Depression II, with bank runs, deflation, the whole nine yards.

I'd argue it's a huge problem since most people don't have sufficient cash on hand to tide them over for even a week, let alone a month or more. Credit cards won't work for long either since monthly payments have to be made which almost always comes out of one's bank account. Since many people carry balances on their cards, one or two missed payments could be enough to put it into default or lock out the card. Most people can't pay their rent, bills, and other living expenses without fast regular access to the bank accounts & credit cards, in the event of a bank failure & FDIC insolvency they're reduced to whatever cash they have in their pockets (not much) and the remaining limit on their credit cards. That's not going to pay the rent & bills for long, certainly not three months for the average person. I think their best choice would be to max out the cash advance on their credit cards and hope that's enough to tide them over, use the cash to cover expenses and pay the minimum payment on the cards until their bank accounts unfreeze.

So basically, panicked people and high risk of bank runs. If I heard that half my co-workers were frozen out of their bank accounts and facing eviction or other bad things, I'd be motivated to empty out my own accounts and fill a few pillowcases with bills.

What makes you think cash would have any value in such a system? The problem you're describing - lack of access to money for MONTHS - would lead to a collapse of the American dollar, possibly society itself. That mattress you and Aerius are filling with cash won't be worth much except as kindling in such a scenario. Rather than worry about how much cash you have on hand, it would be smarter, as Mike points out, to stockpile food and water, not money.

EDIT - To Duchess' point, in the event of a run on banks, go and spend your cash on guns, food, and water ASAP.

[Illuminatus Primus]

Yeah, beyond a certain point from a financial point of view one might as well bank on things being fixed or worked out because if they're not "financial points of view" will be meaningless: all bets are off. So its really quite meaningless to worry or approach those eventualities from this kind of reasoning.

[fgalkin]

Yes, because America turned into Mad Max Land in the 30s, or Russia did in the 90s (well, it sorta DID, but not to "collapse of society" levels).

Besides, it's never going to come to that. The Government bails out crap like AIG, why wouldn't they bail out the FDIC?

Have a very nice day.
-fgalkin

[Uraniun235]

Better hope ShittyCitigroup doesn't go down cause if they do, the FDIC is fucked.

Do they have that many insured accounts, with that much money in them?

Also:

I can't answer the question, because inciting a bank run is a federal offence.

What law is that under? Googling "inciting a bank run" doesn't turn up anything except other people saying roughly the same thing - "it's a crime".

Also what's the definition of "inciting a bank run"? I mean yeah there's the obvious, but if I post a 100% factual article which ultimately results in a bank run, does that still count as a criminal act, even if I had zero intent?

[aerius]

Better hope Citigroup doesn't go down cause if they do, the FDIC is fucked.

Do they have that many insured accounts, with that much money in them?

Yup, going by the old $100k limit they have around $105 billion in insured accounts, under the new $250k limit that goes up to $125 billion or so. Even the lower number is more than 5x as much money as the FDIC has in cash, and if we count the FDIC's credit line it's still more than twice as much as the FDIC's total assets.

What law is that under? Googling "inciting a bank run" doesn't turn up anything except other people saying roughly the same thing - "it's a crime".

I'll have to find the specific passage again, but IIRC it's under one of the SEC's laws on starting/spreading rumours and price manipulation.

Also what's the definition of "inciting a bank run"? I mean yeah there's the obvious, but if I post a 100% factual article which ultimately results in a bank run, does that still count as a criminal act, even if I had zero intent?

That would be legal. If you said something like "according to Shittygroup's quarterly report, they are insolvent. Make what you will of that", it's perfectly Ok. If you put this on your blog for information purposes and it causes a bank run on Shittygroup you're fine, though I wouldn't be surprised if you get some "cease & desist" notices or they threaten lawsuits against you.

Basically, you can't spread unsubstantiated info or post something like "Crappybank is toast, pull out all your money now!" For example if I did some research and came to the conclusion that Crappybank is toast and wrote a 100% factual report on it, then you read my report and send emails to all your friends saying "holy shit Crappybank is in shit, pull out all your money!", you'd get nailed for starting a bank run while I get nothing. But if you sent an email to all your friends saying "hey guys, check out this report on Crappybank, this doesn't look good", then we'd both be in the clear.

But I'm not a lawyer, so take it with a grain of salt.

[J]

Besides, it's never going to come to that. The Government bails out crap like AIG, why wouldn't they bail out the FDIC?

Have a very nice day.
-fgalkin

Well, money doesn't grow on trees, even the government doesn't have an infinite amount of money for bailouts, well, ok, there is the Zimbabwe model but that one really sucks.

The short version is the government has to sell debt via Treasury auctions to raise funds for bailouts and other deficit spending needs, if there aren't enough buyers the Treasury has to fire up the presses and print which is regarded as a bad thing. The FDIC gets its funding but in the meantime there may be a Treasury market crash which drives interest rates through the roof and slams the lid shut on our debt based economy. The government may decide that the risk of the latter is more damaging than the FDIC going insolvent (I'd disagree with that opinion) in which case other government programs will have to be cut to provide funding for the FDIC.

So far the government has done everything wrong in handling the economic crisis so forgive me if I don't have faith they'll make the right decisions in the future.

[ray245]

Besides, it's never going to come to that. The Government bails out crap like AIG, why wouldn't they bail out the FDIC?

Have a very nice day.
-fgalkin

Well, money doesn't grow on trees, even the government doesn't have an infinite amount of money for bailouts, well, ok, there is the Zimbabwe model but that one really sucks.

The short version is the government has to sell debt via Treasury auctions to raise funds for bailouts and other deficit spending needs, if there aren't enough buyers the Treasury has to fire up the presses and print which is regarded as a bad thing. The FDIC gets its funding but in the meantime there may be a Treasury market crash which drives interest rates through the roof and slams the lid shut on our debt based economy. The government may decide that the risk of the latter is more damaging than the FDIC going insolvent (I'd disagree with that opinion) in which case other government programs will have to be cut to provide funding for the FDIC.

So far the government has done everything wrong in handling the economic crisis so forgive me if I don't have faith they'll make the right decisions in the future.

However, your proposed solution doesn't help the economy as a whole as well, which means you have to tell us why doing your proposed solution will actually cause less harm than letting the FDIC go burst.

There is one viable short term solution that can resolve the whole equity mess we are experiencing right now, which is nationalising the financial industry. Sure, you will lose many investors but the problem is, those investor is not going to invest much in the current economic crisis. Let the government give out loans to ensure liquidity in the economy, and to earn interest rates as a national bank.

I mean, with this solution, the government don't have throw money into a black hole, and the government may actually earn back money. When the economy rebounds and becomes relatively stable, the government can privatise the financial industry.

The downside is, with idiots thinking that a bail out is a form of socialism (because they don't even understand that you wil always have government intervention in a market system, even if it is 'free' ) in Singapore, I won't be surprised if people in the US screams 'communism' when you nationalise the financial industry.

[Surlethe]

Yes, because America turned into Mad Max Land in the 30s, or Russia did in the 90s (well, it sorta DID, but not to "collapse of society" levels).

Big difference: 20% of the workforce was agrarian in 1930, while closer to 2% was in 2000. That means 1 in 5 Americans were right off-the-bat capable of subsistence living in the 1930s, while only 1 in 50 is now. It's still a non-sequitur to jump to the conclusion that if the money supply declines drastically, we'll have widespread social panic, but you can't make the case against largely based on the 1930s.

[J]

However, your proposed solution doesn't help the economy as a whole as well, which means you have to tell us why doing your proposed solution will actually cause less harm than letting the FDIC go burst.

This is my solution. Note that fully funding the FDIC is part of my plan.

There is one viable short term solution that can resolve the whole equity mess we are experiencing right now, which is nationalising the financial industry. Sure, you will lose many investors but the problem is, those investor is not going to invest much in the current economic crisis. Let the government give out loans to ensure liquidity in the economy, and to earn interest rates as a national bank.

I mean, with this solution, the government don't have throw money into a black hole, and the government may actually earn back money. When the economy rebounds and becomes relatively stable, the government can privatise the financial industry.

Nationalization is not a magic unicorn, when the government takes over the banks it assumes all the bad debts on their balance sheets along with assets. Would you like to know what happens in the Treasury markets when several trillion dollars of worthless toilet paper gets dumped onto the government's back? We have estimates that the EU banks have around $23 trillion in bad debts sitting around on their balance sheets, if the US banks have even half that amount it'll sink the government if they try to nationalize them. You will double the national debt in one fell swoop and triple the public float on the debt. This is why we need to carry out cramdowns to default & liquidate the bad debts.

With regards to earning back money. Impossible. Unless you can blow another bubble and push everything back to 2005-2007 levels. And that's not happening from here.

[CmdrWilkens]

So the FDIC has already blown through over 60% of its funds in the last year, they started 2008 with a bit over $50 billion and were down to under $20 billion by the end of the year. Better hope ShittyCitigroup doesn't go down cause if they do, the FDIC is fucked. I'm pretty sure the government will authorize a bailout for the FDIC so that everyone's money stays insured, problem is that could take a bit of time, and if your bank fails at the same time as the FDIC, it could take a while for you to access your money while Congress sorts out the funding.

They already mentioned the untapped $30bn credit line even before the money from the one-time assessment starts rolling in another couple months from now. If their projections are close to accurate about the $27bn line then the fund would have the current ~$19bn, the one-time $27bn and the credit line of $30bn to see it through the end of the year. Now yes that's only $76bn against the number you brought up elsewhere of total insured accounts amounting to $125bn but the $50bn gap is much easier to bridge than a lesser number. Moreover that would be for the failure of all insured accounts...which isn't going to happen without something else dramatic enough to make FDIC woes seem small beans by comparison.