FDIC Insurance Fund to Turn Negative in 1 1/2 HRS

According to a recent FDIC memo, its Deposit Insurance Fund (DIF) will be negative as of September 30th 2009:

Fund Balance/Reserve Ratio Projections

Pursuant to these requirements, staff estimates that both the Fund balance and the reserve ratio as of September 30, 2009, will be negative. This reflects, in part, an increase in provisioning for anticipated failures. In contrast, cash and marketable securities available to resolve failed institutions remain positive.

Staff has also projected the Fund balance and reserve ratio for each quarter over the next several years using the most recently available information on expected failures and loss rates and statistical analyses of trends in CAMELS downgrades, failure rates and loss rates. Staff projects that, over the period 2009 through 2013, the Fund could incur approximately $100 billion in failure costs. Staff projects that most of these costs will occur in 2009 and 2010. Approximately $25 billion of the $100 billion amount has already been incurred in failure costs so far in 2009. Staff projects that most of these costs will occur in 2009 and 2010.

(…and of course the $100 billion in anticipated failure cost will at some point also turn out to be too low and will be adjusted upwards again.)

This is explosive material. This whole thing has been sizzling hot since August 14th. Let’s see how much longer they can patch it up until it blows up in our faces …

Related Posts:

FDIC Looking to Borrow Money From Banks to Save Banks

As was long expected, the FDIC’s insurance fund is sooner or later going to be out of funds…

Geithner will ask Congress for more. Either the Treasury will do it directly, or the underfunded FDIC will collapse under the obligations of Geithner’s Public Private Investment Program and ask Congress for more funding.

Now the FDIC is considering all alternatives to avoid such a public relations disaster, even borrowing from banks, the institutions it insures:

Tired of the government bailing out banks? Get ready for this: officials may soon ask banks to bail out the government.

Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.

The plan, strongly supported by bankers and their lobbyists, would be a major reversal of fortune.

A hallmark of the financial crisis has been the decision by successive administrations over the last year to lend hundreds of billions of taxpayer dollars to large and small banks.

“It’s a nice irony,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company. “Like so much of this crisis, this is an issue that involves the least worst options.”

Bankers and their lobbyists like the idea because it is more attractive than the alternatives: yet another across-the-board emergency assessment on them, or tapping an existing $100 billion credit line to the Treasury.

The Federal Deposit Insurance Corporation, which oversees the fund, is said to be reluctant to use its authority to borrow from the Treasury.

Under the law, the F.D.I.C. would not need permission from the Treasury to tap into a credit line of up to $100 billion. But such a step is said to be unpalatable to Sheila C. Bair, the agency chairwoman whose relations with the Treasury secretary, Timothy F. Geithner, have been strained.

“Sheila Bair would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help,” said Camden R. Fine, president of the Independent Community Bankers. “She’d do just about anything before going there.”

Bankers worry that a special assessment of $5 billion to $10 billion over the next six months would crimp their profits and could push a handful of banks into deeper financial trouble or even receivership. And any new borrowing from the Treasury would be construed as a taxpayer bailout that could open the industry to a political reaction, resulting in a wave of restrictions like fresh limits on executive pay.

Any populist furor could be avoided, the thinking goes, if the government borrows instead from the banks.

“Borrowing from healthy banks, instead of the Treasury, has the advantage of keeping this in the family,” said Karen M. Thomas, executive vice president of government relations at the Independent Community Bankers of America, a trade group representing about 5,000 banks. “It is much better for perceptions than having the fund borrow from somewhere else.”

Ultimately, officials say, the deposit insurance corporation could settle on a plan that replenishes the insurance fund by doing some of both: borrowing from healthy banks to shore up the shorter-term liquidity needs of the fund, and imposing a special fee on banks to increase the longer-term capital level of the fund.

Since January the F.D.I.C. has seized 94 failing banks, causing a rapid decline in the deposit insurance fund. Despite a special assessment imposed on banks a few months ago to keep the fund afloat, its cash balance now stands at about $10 billion, a third of its size at the start of the year. (Another $32 billion has been set aside for failures that officials expect to occur in the coming months.)

The fund, which stands behind $4.8 trillion in insured deposits, could be wiped out by the failure of a single large bank, although the deposit insurance corporation could always seek a taxpayer bailout by borrowing from the Treasury to stay afloat.

Officials say that the F.D.I.C. will issue a proposed plan next week to begin to restore the financial health of the ailing fund.

There is no consensus among the five board members, consisting of Ms. Bair, two other F.D.I.C. officials, and the heads of the Office of Thrift Supervision and the Office of the Comptroller of the Currency. Others may propose novel ways to replenish the fund, for example, by asking the banks to prepay the premiums that they were planning to make next year.

Borrowing from the industry is allowed under an obscure provision of a 1991 law adopted during the savings and loan crisis. The lending banks would receive bonds from the government at an interest rate that would be set by the Treasury secretary and ultimately would be paid by the rest of the industry. The bonds would be listed as an asset on the books of the banks.

On a related note, please consider Federal Housing Administration & FDIC – The Next Bailouts to Come?

Related Posts:

Federal Housing Administration & FDIC – The Next Bailouts to Come?

In August referenced and wrote the following about the Federal Housing Administration (FHA) in US Government Happily Continues Subprime Lending:

The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.

On June 18, HUD’s Inspector General issued a scathing report on the FHA’s lax insurance practices. It found that the FHA’s default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days. The FHA’s reserve fund was found to have fallen in half, to 3% from 6.4% in 2007—meaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory.

(…)

Where this will lead is predictable: Taxpayers will be on the hook to cover more losses than our dear bureaucrats are currently capable of expecting.

Today the Washington Post reports Housing Agency’s Cash Reserves Will Drop Below Requirement:

The Federal Housing Administration has been hit so hard by the mortgage crisis that for the first time, the agency’s cash reserves will drop below the minimum level set by Congress, FHA officials said.

(…)

‘Not Going to Congress’

Earlier this year, HUD Inspector General Kenneth Donohue told a Senate panel that falling below the reserve’s minimum threshold would require an “increase in premiums or congressional appropriation intervention to make up the shortfall.

But Stevens, who became FHA commissioner in July, said these options are not on the table. “We are absolutely not going to Congress and asking for money for FHA,” he said. “We’re not going to need a special subsidy or special funding of any kind.”

He stressed that the agency plans to take other steps that will help beef up the reserves. Some of these measures address fraudulent loans that can contribute to FHA’s losses.

For one, he will propose that banks and other lenders that do business with the FHA have at least $1 million in capital they can use to repay the agency for losses if they were involved in fraud. Now, they are required only to hold $250,000. Second, he will propose that lenders also take responsibility for any losses due to fraud committed by the mortgage brokers with whom they work.

You’re So Going to Congress!

OK, let’s back up for a second: I have my doubts that relieving the FHA from the responsibility to cover fraudulent loans even remotely fixes their problems. The problem is not one of fraudulent loans. The problem is that loans were made to lots and lots of people who simply can’t pay them back. This is what started the sub-prime mess in 2006. Note that “the FHA’s default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days”.

Folks, this is subprime lending at its best. They will find out at some point in the future that none of the solutions proposed above will help. And then they will need money or close shop. And if they need money they will need to go to Congress. If they don’t deem it politically palatable to go to Congress directly, then what?

Here is an idea that Sheila Bair with the FDIC is now toying with. Please note that the FDIC is essentially for bank deposits what the FHA is for mortgages:

The FDIC has several options to consider as it looks to replenish the insurance fund after nearly 100 bank failures this year. There has been a general shift of mindset that the FDIC should consider taking government funds, Bair said at a question-and-answer session following the speech Friday.

“We are considering all options, including borrowing from Treasury,” Bair said, adding the board will meet before the end of the month and should soon issue some requests for comment on the subject.

Senator Carl Levin (D-Mich.) this week urged FDIC to take advantage of borrowing authority included a provision in the Helping Families Save Their Homes Act. He noted the Act authorizes the FDIC to borrow up to $100bn from the Treasury if additional funds are needed to replenish the insurance fund. He urged the FDIC to choose borrowing from the Treasury over increasing fees charged to all banking firms.

But the FDIC has these $100 billion essentially pre approved. I don’t see any such option for the FHA. At some point they will either hike up premiums for performing banks, or ask for money from Congress, or do a combination of both … of they could also do the right thing for a change and close down their miserable operation.

Related Posts:

August 14th 2009: Federal Deposit Insurance Corporation is Bankrupt

Back in April I noted that it was obviously Geithner’s objective to bankrupt the FDIC and in doing so avoid having to go to Congress directly for more money:

Geithner will ask Congress for more. Either the Treasury will do it directly, or the underfunded FDIC will collapse under the obligations of Geithner’s Public Private Investment Program and ask Congress for more funding.

I am not sure right now as to whether or not it is PPIP, or just the mounting bank failures alone, but as of tonight Mish notes that the FDIC has finally depleted its funds:

Bank Failure Friday is in full swing. Tonight there were 5 more failures, numbers 73 through 77 on the year. In the biggest failure since WaMu, BB&T Takes Over Colonial.

Colonial BancGroup Inc., the Alabama lender facing a criminal probe, had its banking operations closed by regulators and taken over by BB&T Corp. in the biggest bank failure since Washington Mutual Inc. collapsed last year.

Branches and deposits of Colonial, Alabama’s second-largest bank, were turned over to Winston-Salem, North Carolina-based BB&T in a deal brokered by the Federal Deposit Insurance Corp., the regulator said today. The failure of Montgomery-based Colonial followed a Florida expansion that saddled the lender with more than $1.7 billion in soured real-estate loans.

Colonial’s failure will deplete the FDIC’s deposit insurance fund by $2.8 billion, the agency said. The fund, which the agency uses to pay customers of a failed bank for deposit losses up to a $250,000 limit and is generated by fees paid by banks, stood at $13 billion at the end of the first quarter, according to the FDIC. The agency has set aside an additional $25 billion for bank failures, agency spokesman David Barr said.

Is There Any Money Left In The Fund?

Tonight, inquiring minds are asking “Is There Any Money Left In The Fund?”

For clues, please consider Saxo Bank Research FDIC’s Shrinking Deposit Insurance Fund – A Testimony of Current Accounting Standards.

As late as in the end of April just before the release of the bank stress tests, Ms. Bair Chairman of the FDIC said they would not need any additional bailouts from the U.S Treasury within the immediate future according to The Bulletin. After three new bank failures last Friday, the FDIC’s Deposit Insurance Fund (DIF) diminished by another $185 million for a total remaining balance of $648.1 million.

Below is a graph showing the DIF capital as a percentage of total bank deposits insured by the FDIC. Note that this graph is based on the old insurance limit with a maximum coverage of $100.000/account. This limit has been changed to cover up to $250.000/account until January 1st 2014. Estimates say that the change increases the deposits covered under FDIC insurance to approximately $6 trillion in total.

FDIC Reserve Ratios & Insured Deposits

click on chart for sharper image

The current reserve ratio of 0.014%1 strongly indicates how bad this crisis has affected U.S financial institutions. However, this is not the entire story. If we take a closer look at non-current loans and charge-offs from banks one realizes that the FDIC still has a lot of work to be done. Combined non-current loans and charge-offs amounted to nearly $100 billion in Q109 compared to $15 billion/quarter pre-crisis. Moreover, according to analysts at the Royal Bank of Canada the U.S still has banking failures in the thousands to face before the crisis is over. In turn that should result in the FDIC requesting the pre-approved funding signed by the Congress in May 2009, including $100 billion from the U.S Treasury Department.

Tonight’s Bank Failures

Dwelling House Savings and Loan Association, Pittsburgh, Pennsylvania

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $6.8 million. PNC Bank, National Association’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to alternatives. Dwelling House Savings and Loan Association is the 73rd FDIC-insured institution to fail in the nation this year, and the first in Pennsylvania. The last FDIC-insured institution to be closed in the state was Metropolitan Savings Bank, Pittsburgh, on February 2, 2007.

Colonial Bank, Montgomery, Alabama

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $2.8 billion. BB&T’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to alternatives. Colonial Bank is the 74th FDIC-insured institution to fail in the nation this year, and the first in Alabama. The last FDIC-insured institution to be closed in the state was Birmingham FSB, Birmingham, on August 21, 1992.

Union Bank, National Association, Gilbert, Arizona

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $61 million. MidFirst Bank’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to alternatives. Union Bank, N.A. is the 75th FDIC-insured institution to fail in the nation this year, and the second in Arizona. The last FDIC-insured institution to be closed in the state was Community Bank of Arizona, Phoenix, also today.

Community Bank of Arizona, Phoenix, Arizona

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $25.5 million. MidFirst Bank’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to alternatives. Community Bank of Arizona is the 76th FDIC-insured institution to fail in the nation this year, and the first in Arizona. The last FDIC-insured institution to be closed in the state was NextBank, Phoenix, on February 7, 2002.

Community Bank of Nevada, Las Vegas, Nevada

The cost to the FDIC’s Deposit Insurance Fund is estimated to be $781.5 million. Community Bank of Nevada is the 77th bank to fail this year and the third in Nevada. The last bank to be closed in the state was Great Basin Bank, Elko, on April 17, 2009.

Taxpayers Bailout FDIC

If indeed $641 million was all that remained of the DIF, the FDIC is now bankrupt. Of the $641 million left, Community bank used up 781.5 million and Colonial Bank $2.8 billion

Here is more from the Saxo Report

The real total cost for Q1 09 turned out to be almost twice the amount of the estimates. If that will be even close to reality for Q2 09 the FDIC’s DIF will (very) soon be out of funds completely. [Mish: as of tonight the DIF is bankrupt.]

We believe the main reason for this observation lies in a de facto relaxation of accounting standards, even before the FASB 157 amendment on March 15th earlier this year. Basically the relaxation allows banks to only write-off parts of their losses due to market impairment and they may themselves decide a fair price that the asset could have been sold for during normal market conditions to keep in their books. Allowing banks to control how they mark-to-market their assets, will likely backfire and when they ultimately end up failing, imply greater closure costs for the FDIC. From the graph [below] one can infer that the average yearly DIF costs/bank assets have increased at an alarming rate to almost reach 31% in 2008 and 2009.

Yearly Average DIF Costs / Bank Assets

click on chart for sharper image

So, what does that imply? Basically it means that when valuating any U.S bank, their assets should probably be marked down significantly relative to their book value, much because of how they nowadays are allowed to manipulate their balance sheets in order to appear more solvent than they in fact are.

[smartads]The Moral Hazard of FDIC Insurance

Friday, In reference to Colonial, Shelia Bair made the following galling claim:

“The past 18 months have been a very trying period in the financial services arena, but the FDIC and its staff have performed as Congress envisioned when it created the corporation more than 75 years ago,” said FDIC Chairman Sheila C. Bair. “Today, after protecting almost $300 billion in deposits since the current financial crisis began, the FDIC’s guarantee is as certain as ever. Our industry funded reserves have covered all losses to date. In fact, losses from today’s failures are lower than had been projected. I commend our staff for their excellent work in assuring once again a smooth transition for bank customers with these resolutions. The FDIC continues to stand by the nation’s insured deposits with the full faith and credit of the U.S. government. No depositor has ever lost a penny of their insured deposits.”

The Seen and the Unseen

Nowhere does “Shelia the Fool” state the cost of this insurance. Without FDIC, banks like Colonial, Bank United, Corus Bank, and possibly even banks like Washington Mutual would have failed long before they mattered.

By offering above market rates on CDs, those bank attracted plenty of capital to the detriment of banks lending responsibly. In order to offer high rates on CDs and deposits, the banks had to take high risks.

Bank United and Corus Bank funded all sorts of risky housing projects including condo towers in the biggest bubble cities. Colonial Bank is under investigation for Fraud.

No one in their right minds would have deposited money at those institutions without FDIC. And if they did it should be their problem not yours or mine.

Total Up The Unseen

  • Looming taxpayer bailouts of the FDIC
  • Taxpayer bailouts of failed banks
  • Taxpayer bailouts of mortgage reductions to keep people in their homes
  • Rising property taxes because of increased speculation
  • The FDIC’s role in the housing boom and bust
  • Fraud costs
  • Investigatory costs
  • Stock market crash
  • Cost to pension plans dumb enough to buy debt in failed banks simply because they were “growing”

For more on the Seen and Unseen please see Government Bailouts and the Stock Market – The Seen and the Unseen and Cash For Clunkers For Housing Market Is ‘No Brainer’

FDIC Is Asinine Model

There were no bank failures for a very long time during the credit boom. Thus, FDIC insurance seemed to work very well for a while. The reality is such schemes always produce fat tails.

Instead of spreading a small number of small bank failures out over a large number of years, a large number of big failures are all clustered together.

If this is not an asinine model what is? Note this is a failure caused by regulation. There should not be an FDIC in the first place.

Shelia brags “In fact, losses from today’s failures are lower than had been projected.

She needs a math lesson. The cost of FDIC is staggering, and the benefits are negative.

Related Posts: