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You’ll Never Believe Who’s Lending to the FDIC
September 22, 2009 by Neil · 4 Comments
According to the New York Times, the nation’s healthy banks will probably lend billions of dollars to rescue the FDIC, 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 Federal Deposit Insurance Corporation, which oversees the fund that bails out collapsed banks, is said to be reluctant to use its authority to borrow from the Treasury. Under the law, the FDIC would not need permission from the Treasury Department 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.
If the healthy banks do not step up to assist, the alternatives, according to the article, are limited to another across-the-board emergency assessment on them, or tapping an existing $100 billion credit line to the Treasury.
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.
Where are banks getting this largesse when so many of them were teetering on death’s door only a year ago? The Times is silent on that little detail. Here’s the answer: The banks are making tens of billions of dollars in fees on mortgage loans that are backed by the government (read: we taxpayers). Three big banks, Wells Fargo, Bank of America, and Chase, earned $14 billion in the first half of the year, up more than threefold from $4.1 billion in the year-earlier period from these fees alone.
Here’s an idea: Let’s cut out the middleman. Get the government aggressively involved in modifying the toxic residential loans. Force the banks to mark their toxic residential and commercial loans to market. By one measure, almost 1 in 10 residential loans are currently delinquent. Marking these toxic assets to market is a lot like bombing Iran: it is a horrible scenario, but waiting for things to somehow get better is a fool’s errand.
The FDIC is an insurance fund that is paid into by all bank that are insured by the FDIC. THe problem here is that the the well managed banks are contributing to help there competitors who just couldnt cut it.