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

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.

http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=alsJZqIFuN3k

is, "why is Blair talking about this publicly?"

edited to add:

K & R. n/t

This subject MUST be discussed.

We now have Bair admitting, and nearly predicting, that funds in banks may not be completely insured--if there are multiple banks failures.
And multiple bank failures ARE expected throughout 2009 and 2010.

I remember when Washington Mutual failed. Every article about the failure contained a few sentences about this event causing
the FDIC's resources to be "stretched". These sentences were buried deep within the articles, but they were there.

That was one bank failure, and the FDIC's "resources were stretched." That's...alarming, to say the least.

People assume that FDIC insurance is a panacea. That your funds are guaranteed and there is nothing to worry about.

That simply is not so. Bair all-but lays out a potential horror story here.

I hope other DUers will chime in. When this issue has been discussed--a couple DUers have related their stories. How it
took SIX MONTHS to recoup their money, from the FDIC. If your bank fails, and closes up shop without notice--do you have
enough money from other sources--to survive for six months?

If you're not asking yourself that question...you're living in a fool's paradise.

This is incredibly serious. I don't know why Bair is stating this stuff publicly, but her remarks need to stimulate discussion--because
we need to protect ourselves! The economy is not getting better. If the FDIC may not be able to insure all deposits, then people
must protect themselves and their families and make it an imperative to have some cash out of the banking system--in a safe at home, etc.

Something else that is important. In early-April the report about the solvency (or insolvency) of America's largest banks will
be revealed. Does anyone really believe that most of our large banks are solvent--given the credit and toxic asset crisis????

We need to really think about what will happen after that report is issued. My guess is a total bank run as America learns the
harsh truth. Combine the potential bad news from this banking report WITH the possibility that the FDIC may not cover your
deposits---and we've got fodder for a very, very SERIOUS discussion. This discussion needs to happen so people make be prepared
and make decisions that protect them if the worst happens.

I think this OP is one of the most important on DU--since the financial crisis started unraveling.

Credit Unions Angry Over Surprise 'Bailout Tax'

Federal credit unions, including those serving millions of military patrons, are fighting to keep off their books nearly $5 billion in charges that regulators have assessed to bail out their largest "corporate" credit union.

The U.S. Central Federal Credit Union was in danger of insolvency due to losses on mortgage-backed securities until regulators adopted a bailout plan Jan. 28 that would be financed by 7900 member-based credit unions.

"If we were to allow something to happen to U.S. Central, the impact on the industry would have been devastating," said Michael E. Fryzel, board chairman of the National Credit Union Administration (NCUA).

But Fred Becker, chief executive for National Association of Federal Credit Unions in Arlington, Va., said NCUA's "premiums" on member credit unions, unless lowered by September when scheduled to take effect, "would drive most of the industry's income into the red" for calendar 2009.

Fryzel conceded that some smaller credit unions have warned that their part of the "bailout tax," as some call it, would leave them undercapitalized, threatening their viability. Fryzel said none of these credit unions serve military populations. In any case, NCUA will "work with them," he said, to ensure the special assessment doesn't have such a dire effect.

Credit union officials say there is no reason for members to fear for their deposits. Individual accounts are insured by the government for up to $250,000. Military credit unions contacted for this column said they don't even expect the bailout tax to force them to lower member interest rates paid on savings accounts or to raise interest charges for loans or mortgages.

However, other customer services could be affected. That might include, said one official, a smaller workforce to run customer call centers or delays in opening new branches or renovating old ones. Some credit union officers clearly were upset at the NCUA board for deciding on a bailout plan for U.S. Central before discussing alternatives with them.

"We do not believe that the federal agency has a moral and ethical right to steal our members' capital," said Frank Pollock, chief executive of the Pentagon Federal Credit Union. This credit union expects to take a $44 million hit, losing a third of earnings this year, if the bailout plan stands.

http://www.military.com/features/0,15240,184923,00.html

Has anyone here seen this story reported on by the main stream media?

I watch cnbc and the news most every day, and I haven't seen a thing about this
seems like the continued solvency of the FDIC, and any potential risks to depositors, would be considered 'news worthy'

good thing we have the internet

the lack of reporting is to prevent a run on all FDIC-insured banks. remember what happened after IndyMac went under?

Regardless, I appreciate you posting this and will be making the move I've been considering for a long time to get my $$$ out of BoA and into a credit union.

...didn't begin calling our current economic disaster a "recession" until late last
Fall. During the summer, when everything was going to hell, they talked about the word
"recession" and clearly stated that we weren't in a recession.

I remember the talking heads telling us that it was a great time to buy stocks--last summer!

Now, in EVERY article that analyzes our current economic situation, it is stated as fact
that the recession began in Dec 07.

They're not going to tell us the truth. They have corporate masters who are worried that
the truth might lead us to make decisions that ARE IN OUR BEST INTEREST AND NOT THEIRS.

We have got to the read the handwriting on the wall and accept that we are in the shitter and
that corporations don't care if we are prepared or if we live or die. The care about making
more dollars off of us.

They don't want us to know the truth about the FDIC being unable to cover massive losses
if there are many bank failures. They want to hide our vulnerable position, because if
we knew how bad it was---we would be stuffing our money into the mattress. Then, the
banks and the major corporations would lose money.

Well, anyone that doesn't at least have an emergency stash of cash somewhere other than
a bank--mattress, buried in the backyard, etc), then you are leaving yourself vulnerable
for disaster.

Really, how vulnerable would credit unions be if the FDIC banks went under? From the military article upthread it sounds like they got through a rough patch. Others on the way? Are they immune to FDIC insolvency?

I HATEHATEHATE the idea of having to stash real cash on my property.

...to the possibility of something going wrong with your money in a bank or a credit union---solely
based on the fact that the money is FDIC insured, is taking risk.

This is my opinion. I know others don't share it, but here is my reasoning.

#1--When Washington Mutual failed, there are many articles discussing the failure that contained a few sentences
from an FDIC spokesperson claiming that WaMu's failure caused the FDIC's resources to be "stretched". That
was one bank failure.

#2 Duers have said that when they relied on the FDIC to insure deposits, it took six months to recoup their losses.

#3. This new article in the OP about Bair pretty much spelling out that the FDIC wouldn't be able to insure all
deposits if many banks go under. The likelihood of many banks going under is high.

#4. In early April, a report on our country's largest banks is being issued. Geithner asked for this report, as
one of the bailout conditions. Many people think this report will contain shocking news that most--if not all--of
these banks are insolvent due to the credit crisis and toxic assets. This could cause chaos, bank runs and ultimately
bank failures. See point #3.

#5. We're dealing with very chaotic, horrible economic times. Anything could happen. Our economy is unstable, and
bad things happening--that we never thought would happen--could become reality.

#6. The FDIC is part of the US government. We're relying on the same clowns who got us into this mess...to be
reliable, timely and responsible and get us our money back? Anyone who trusts the US government with their
family's health, safety and well being--without any contingency or back-up plan--is nuts, in my opinion.

Given all of this--does it really make sense to rely completely on the FDIC for your financial health?

I don't think so. At all. Everyone has to weigh their options and do their own due diligence.

This is all new to me so I'm trying to wrap my head around it.

I'm just wondering if all bets are off if a run goes on FDIC insured banks, and Peter (NCUISF) will be robbed to pay Paul (FDIC). This is wild speculation from an unfortunate novice in how banking works. I've been learning a lot though....

She was quite open that FDIC would not have the funds and would expect backing from the government, so I guess we will be bailing FDIC out too - about the only one I would really support.

2/27/09 Bank Failures Take Toll on Insurance Fund

By Binyamin Appelbaum
Washington Post Staff Writer
Friday, February 27, 2009; Page D02

The federal insurance fund that protects most bank deposits is being drained by a sharp rise in bank failures and has dwindled to its lowest level since 1993, the Federal Deposit Insurance Corp. reported yesterday.

Depositors are not at risk because the fund is backed by the government, but taxpayers could be forced to reach into their wallets if the decline continues.

When a bank fails, the FDIC pays up to $250,000 to each account-holder to replace whatever money does not remain in the vaults. The fund is replenished by assessments on banks, but over the last year, much more money left than arrived. And the pace of bank failures continues to increase.

The fund held $52.4 billion at the beginning of 2008. One year and 25 bank failures later, the fund held $18.9 billion.

So far this year, 14 banks have failed, draining another $1.7 billion from the insurance fund.

The FDIC's board is scheduled to vote this morning on increasing the quarterly assessment that banks must pay. The board also could vote to impose a one-time special assessment to replenish the fund more quickly. FDIC officials declined to say yesterday how large an increase was likely.

If money cannot be collected quickly enough from the industry, the FDIC could be forced to borrow money from taxpayers by taking a loan from the Treasury Department.

more...
http://www.washingtonpost.com/wp-dyn/content/article/2009/02/26/AR2009022603005.html?hpid=topnews

regardless of if the FDIC will be okay it's obvious it's time to move to a credit union with banking practices I can actually stomach.

Happy with it. Backed by NCUA
http://www.ncua.gov/

A few credit unions have failed, but not as many as banks

Power of the Printing Press

---------------------------

WASHINGTON -- Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department.

The Connecticut Democrat's effort -- which comes in response to urging from FDIC Chairman Sheila Bair, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner -- would give the FDIC access to more money to rebuild its fund that insures consumers' deposits, which have been hard hit by a string of bank failures.
Last week, the FDIC proposed raising fees on banks in order to build up its deposit insurance fund, which had just $19 billion at the end of 2008. That idea provoked protests from banks, which said such a burden would worsen their already shaken condition. The Dodd bill, if it becomes law, would represent an alternative source of funding.
Mr. Dodd's bill could also give the FDIC more firepower to help address "systemic risks" in the economy, potentially creating another source of bailout funds in addition to the $700 billion already appropriated by Congress.

Mr. Bernanke said in a Feb. 2 letter to Mr. Dodd that such a "mechanism would allow the FDIC to respond expeditiously to emergency situations that may involve substantial risk to the financial system."

The FDIC would be able to borrow as much as $500 billion until the end of 2010 if the FDIC, Fed, Treasury secretary and White House agree such money is warranted. The bill would allow it to borrow $100 billion absent that approval. Currently, its line of credit with the Treasury is $30 billion.

The FDIC's deposit-insurance fund has fallen precipitously with 25 bank failures in 2008 and 16 so far in 2009. Some bank failures have a bigger impact on the fund than others, as IndyMac's failure cost the fund more than $10 billion, while many others cost the fund less than $100 million.

http://online.wsj.com/article/SB123630125365247061.html