Tuesday, July 15, 2008

Will The FDIC Need to be Bailed Out?

Recently, the Federal Reserve came up with a list of 150 banks that were candidates for failure. From the IStockAnalyst:

Also, of the $53 billion the FDIC has to reimburse consumers of failed banks, IndyMac is estimated to need between $4-8 billion, putting more pressure on existing banks

One medium sized failed bank, IndyMac, needs between 7.5% and 15% of total FDIC funds dedicated to reimbursing customers of failed banks.

Given that there are 150 banks on the list and that this list is missing many potential bank failures as evidenced by the fact that IndyMac was not on this secret list, it is very likely that there are double or triple that amount of banks which are candidates for failure. The FDIC currently does not have sufficient funds to reimburse consumers for future bank failures.

The FDIC will either need a whole bunch of federal money to deal with bank failures or will need to dramatically raise the fees FDIC member banks (for FDIC privileges). By raising fees this puts extra strain on banks, many of whom have shaky financial underpinnings.

In the main, the financial leadership CANNOT be trusted. It is damn scary!

1 comment:

  1. In short, yes, the FDIC will almost certainly need a bailout; they have nowhere near the amount of money they will need to handle all the losses they will need to absorb. Unfortunately, their lack of oversight and appropriate regulation has put them in this mess. Even more unfortunately, Bair is going to increase the losses by going on her own personal fail crusade to write down mortgages instead of foreclosing, delaying getting people out of the houses they had no means to afford, and reducing the amount the FDIC will get for them when they need to eventually sell them. Not to mention being probably illegal and certainly grossly irresponsible, it's morally reprehensible that she would gamble with taxpayer money, but nobody is really accusing her of being upstanding, ethical, or competent.

    On the upside, the FDIC has an explicit government guarantee, so depositors under the insurance limits should eventually be reimbursed with their currency, minus the depletion of value from all the bailouts between now and then. On the downside, unless Bair gets hit by a bus or something, the more banks the FDIC takes over the more losses taxpayers will incur, the more prolonged the housing correction will be, and the less your currency will be worth in the future.