Skip to main content

Who's going to bail out the FDIC?

What timing.

Last night, Bear Mountain Bull highlighted Mish's post on the "woefully underfunded" FDIC, whose declining Deposit Insurance Fund (DIF) ratio has left it "ill prepared" to deal with future bank failures.

Here's a chart from Mish's post which illustrates that decline:

As outlined in the post above, this declining reserve ratio has (according to some) left the FDIC ill prepared to deal with the likely raft of upcoming bank failures. As you can see from the chart, the reserve ratio was at 0.40 percent as of December 31, 2008, down from an already low 1.01 percent level and below its legally mandated funding level of 1.15 percent.

And as Mish points out, these figures don't even take into account the FDIC's temporary boost in bank account coverage to $250,000. So, isn't that a bit of a problem, especially since more bank failures are expected throughout the year?

Well, not really, according to Bankrate.com. In an October 16, 2008 article entitled, "How the FDIC pays for bank failures" (which I just happened to be reading the other day while reading up on bank insurance), Bankrate's Laura Bruce explains that the money will just have to come from the US Treasury:

"...Christopher Whalen, co-founder and managing director at Institutional Risk Analytics, as well as a writer and former investment banker, says the FDIC will always be able to reimburse customers for their insured deposits.

"The FDIC is like any federal agency; the government runs on cash. Money comes in and money goes out and each of these little funds gets a piece of paper that says I owe you money plus accrued interest. But really, in most cases, it just evidences legal authority to spend money. In the case of the FDIC, it merely evidences funds paid in by the industry, minus losses. But it's still just a theoretical balance because it doesn't reflect at all the cash available to the agency to fund resolutions."

As long as the FDIC has a positive balance in the fund, the agency is just asking for the industry's money back. If that money is gone, the FDIC runs a tab at the Treasury because, by law, it has borrowing authority.

Traditionally, the FDIC's borrowing authority at the Treasury is limited to $30 billion, but Congress bestowed unlimited borrowing authority temporarily as part of the Emergency Economic Stabilization Act of 2008."

So there you have it. It's all good; if there's not enough money in the till, they'll just get the money from the Treasury. But where does the Treasury get the money from?

In the meantime, small banks are feeling the pinch from special assessment fees that the government wants to levy on them for the purpose of refilling the FDIC coffers. Note the irony: a large percentage of those funds were spent last year dealing with the failure of large banks like IndyMac.

Meanwhile, the FDIC collected no insurance premiums from most banks from 1996-2006.

Given all the recent information about the agency's precarious financial condtion, the question becomes: who will bail out the FDIC if it becomes insolvent?

Popular posts from this blog

Seth Klarman: Margin of Safety (pdf)

Welcome, readers! Signup for free email updates at the Finance Trends Newsletter . Update: PDF links removed due to DMCA notice. Please see our extensive Klarman book notes below. New visitors, please check the Finance Trends home page for all new posts. Here's something for anyone who has been trying to get a look at Seth Klarman's now famous, and out of print, 1991 investment book, Margin of Safety .  My knowledge of value investing is pretty much limited to what I've read in Ben Graham's The Intelligent Investor (the book which originally popularized the investment concept of a "Margin of Safety"), so check out the wisdom from Seth Klarman and other investing greats in our related posts below. You can also go straight to Ronald Redfield's Margin of Safety book notes .    Related posts: 1. Seth Klarman interviews and Margin of Safety notes     2. Seth Klarman: Lessons from 2008 3. Investing Lessons from Sir John Templeton 4.

Slate profiles Victor Niederhoffer

Slate's recent profile of writer/speculator, Vic Niederhoffer has been getting some attention from traders and finance types in recent days. I thought we'd take a look at it here too, to offer up some possible educational value from Vic's experiences with trading and loss. Here's an excerpt from Slate's profile of Victor Niederhoffer : " I've enjoyed getting your e-mails. It sounds like you've thought a lot about being wrong. Well, the reason you contacted me, to call a spade a spade, is that I'm sort of infamous for having made a big, notorious, terrible error not once but twice in my market career. Let's talk about those errors. The first was your investment in the Thai baht, which pretty much wiped you out when the Thai stock market crashed in 1997. I made so many errors there it's pathetic. I made one of my favorite errors: "The mouse with one hole is quickly cornered." That is key. There are certain decisions you make in li

William O'Neil Interview: How to Buy Winning Stocks

Investor's B usiness Daily founder and veteran stock trader, William O'Neil share d his trading methods and insights on buying winning stocks in an in-depth IBD radio interview. Here are some highlights from William O'Neil's interview with IBD: William O'Neil's interest in the stock market began when he started working as a young adult.  "I say many times that I didn't get that much out of college. I didn't have much interest in the stock market until I graduated from college. When I got married, I had to look out into the future and get more serious. The investment world had some appeal and that's when I started studying it. I became a stock broker after I got out of the Air Force."    He moved to Los Angeles and started work in a stock broker's office with twenty other guys. When their phone leads from ads didn't pan out, O'Neil would take the leads and drive down to visit the prospective customers in person.