Despite the FDIC “Bailing” as fast as it can, closing 3-6 banks every Friday, the number of banks ready to fail is increasing. The FDIC has a $15 billion deficit in its insurance account. It has been fending off insolvency by issuing “off balance sheet” guarantees without any capital behind it – that acquring banks who take bad loans will be paid back when they can no longer hide that the loans are worthless. And Bernie Madoff is in jail?
I’m repeating myself, but the situation is not getting better and the stakes are getting higher. The FDIC system of incentivizing banks to acquire other banks by offering cash and “loss sharing” rewards failure. It delays banks from “giving up” and declaring bankruptcy and allows the bank to keep on losing equity. It encourages troubled banks to sell their good loans (probably to friends at a discount) and increase the damage when they reach the top of the FDIC priority list. It’s the same mistake the FSLIC made in the 1980s, creating a “moral hazard” incentive for failure.
This backlog will never be reduced using this method. When the Savings and Loan business model failed (any connection to government subsidized competition from Freddie Mac (1970) and Fannie Mae(1968)?), most of the failed S&Ls were dumped into one big entity named the Resolution Trust Corporation whose job it was to immediately close and liquidate the failed businesses. The loans held by the S&Ls were then sold and it took $160 billion of tax money to bring the problem to a close.
The price tag for the failure of the FDIC is going to be much larger than that. At the end of 2009, the amount being held in FDIC insured accounts was about $5.5 trillion. The banks making it to the top of the FDIC list have assets of only about half the amount owed to depositors. It’s not unreasonable to think the size of the FDIC’s real problem is at least a trillion dollars.
This is setting the foundation for an ugly intergenerational war – where taxpaying young people are paying for the insurance proceeds of the retirees with the CDs in the bank. This on top of the impending outflows necessary to keep funding Social Security benefits.
No matter how you want to look at it, the FDIC is going to cost a lot of taxpayer money if we honor the insurance. It’s an amount that never can be repaid by deposit insurance, especially not with interest rates near zero percent. The fact that we raised the limits on accounts who had never paid premiums into the fund was a horrible mistake, which I pointed out at the time. Everyone knew that you don’t park more than $100k in one bank.
Barney Frank has found religion and thinks Freddie Mac and Fannie Mae should be dissolved. S&L industry is long gone. Many retail banks are dead but hooked up to heart lung machines for no reason. Who is left to lend money?
If you pay attention, you’ll notice that non-US banks are making substantial progress in displacing U.S. owned banks. TD bank is the Toronto-Dominion Bank, a Canada based bank. HSBC is a Hong Kong bank (see: China) although it is now headquartered in London.
