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FDIC needs BANK BAILOUT - This Insanity never ends, Throw them all out now!

Banks may lend money to FDIC

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Filed under: Economy, Investing



In a reversal of fortunes, the FDIC may need to turn to healthy banks for money to help bail out the FDIC's insurance fund, which is running out of money as it tries to rescue all the failed banks, the New York Times reported Tuesday. Banks like this deal because they can lend money to the FDIC with government guarantees rather than pay additional fees to help prop up the deposit insurance fund.

If the FDIC decides instead to ask for a special assessment, then all banks must pony up to replenish the insurance fund, even those in trouble. This loan solution may therefore be a better choice to help the shakiest banks. The FDIC has already tapped the banks for one special assessment this year.

The FDIC insures deposits at 8,195 banks and savings associations and promotes the safety and soundness of the financial system. All its funding comes from the insured institutions, not from taxpayers. But taxpayers could be on the hook if the FDIC runs out of money.

The rising number of bank failures over the last two years has drained the FDIC's insurance fund to just $10.4 billion to cover the potential losses on almost $5 trillion in FDIC insured deposits. Also, the number of banks on the FDIC Problem Bank List continues to grow. It grew to 416 financial institutions as of June 30, up from 305 as of the end of March. This is the largest number of problem banks since June 30, 1994 at the height of the savings and loan crisis.

The Treasury Department increased the FDIC's credit line from $100 billion to $500 billion earlier this year, but FDIC Chairman Sheila Bair wants to avoid going to Treasury Secretary Timothy Geithner for funds. She wants to solve the problem by working with the banks instead.

So far, 81 banks failed this year, 25 banks failed last year and two failed in 2007. Experts expect another 150 to 200 banks failures. To shore up its fund quickly, the FDIC can charge banks higher fees or it can borrow from the Treasury. This third option of borrowing from the banks was not under discussion publicly until this week. If the FDIC decides to announce a special assessment it must do so by Sept. 30 so banks can put the money aside for the next quarter. There isn't much time left to make a decision.

Banks already faced a special assessment in May as the FDIC charged them an emergency fee of 5 cents for every $100 of assets, excluding Tier 1 capital, to raise $11 billion in the second quarter. Obviously, the money raised from that special assessment is gone. In an interview with Bloomberg TV on August 5, FDIC Chairman Sheila Bair said there will likely be another assessment in the fourth quarter.

In the long term, the FDIC is expected to turn to foreign banks for help, as well as to private-equity funds. In August, the FDIC board voted 4 to 1 to actually reduce the cash that private-equity funds must maintain if they acquire a bank. Previously, private-equity funds had to maintain a capital reserves equal to 15 percent of a failed bank's assets. Under the new rules, they only must maintain 10 percent, but that's still higher than the 5 percent banks must maintain when they buy a failed bank.

The FDIC also decided it wanted to guard against private equity funds that might want to quickly buy and sell at a profit, so it added that a private-equity fund must maintain a bank's minimum capital levels for three years. John Bowman, acting director of the Office of Thrift Supervision voted 'no' because he thought the reserve policy was too strict and could deter investors.

Private-equity funds tend to buy distressed companies, slash their costs quickly and resell them a few years later. But the FDIC was forced to soften to their presence because it's running out of options. The Private Equity Council estimates that the 2,000 private-equity firms in the United States have around $450 billion to spend.

So now, with three options under consideration -- loans from banks, a special assessment from all banks, or loan from the Treasury Department -- which do you think Sheila Bair should pick?

Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies.