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FDIC Responds to Bloomberg Article Regarding Potential $150 Billion Bailout


The FDIC issued an open letter to Bloomberg News regarding this Bloomberg article titled "FDIC May Need $150 Billion Bailout as Local Banks Failures Mount." The FDIC claimed this article had painted a "skewed picture of the FDIC insurance fund." It's important to note that the Bloomberg article starts off by stating that the FDIC has never failed to honor a claim for insured deposits. According to the article: "The people to worry about are U.S. taxpayers."

The FDIC's open letter tries to debunk the risk to taxpayers. If the cost of future bank failures go over the FDIC fund's current balance of $45 billion, the FDIC can use lines of credit with the Treasury Department. According to the FDIC: "Only once in the FDIC's history have we had to borrow from the Treasury - in the early 1990s - and that money was paid back with interest in less than two years."

Another interesting thing to note in the FDIC's open letter is the issue of uninsured deposits being paid after a bank failure. Many readers have wondered why the uninsured deposits are sometimes covered after a bank failure even when there's a cost to the FDIC fund. According to the open letter:
To protect taxpayers, we are required to follow the "least cost" resolution, which means that uninsured depositors are paid in full only if this is the least costly option for the FDIC. This usually occurs when a bidder for the failed bank is willing to pay a higher price for the entire deposit franchise.

I can understand the FDIC taking issue to news articles that may cause unwarranted fear for depositors. But I'm surprised to see this much concern about an article describing possible risks to taxpayers. In the next year, we'll learn how real those risks are.

The FDIC's open letter didn't discuss the so-called loopholes mentioned in the article. These exist in the FDIC regulations, and the article claimed they may create a bigger loss for the FDIC. Some of the so-called loopholes mentioned in the article include:
  • Brokered Deposits and banks that are not "well capitalized" being allowed to use them
  • Allowing individuals to have insured accounts at an unlimited number of banks (CDARS as one example)
  • Federal Home Loan Banks (FHLB) being overused as a source of money for banks
  • FDIC reduced to zero the premiums it charged to the 90% of the banks deemed safest, and this continued for 10 years
In the article, the former chief economist for the Federal Reserve described the problem with brokered deposits:
There are always financial incentives for banks in the U.S. to use brokered deposits to take on excessive risk without having to pay for it. ... It allows them to bring in large chunks of money relatively quickly.

In today's world, the internet also allows banks to bring in large chunks of money relatively quickly. I wonder if we'll see more regulations on internet banks. Instead of regulations making it tougher on depositors, how about more regulations on the loan process.

The article covers two major banks that are in bad shape: the well-known WaMu and Florida's largest bank, BankUnited. One disturbing note it mentioned about WaMu is that there are about $45 billion of deposits at WaMu that are not FDIC insured. I think we all can agree that everyone should be below FDIC limits at WaMu.

For more of my FDIC posts and useful FDIC resources, please refer to this post.

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Anonymous   |     |   Comment #1
Uninsured at Wamu.

Those must be deposits of people that died, and left the money behind.

No one with a pulse would do something that stupid.

Would they?

Maybe its where Warren Buffet keeps his liquid funds.
Anonymous   |     |   Comment #2
Whoever the next president is will probably be one of the most unpopular presidents ever because he will be blamed for the rising taxes, inflation, and other problems that result from this debacle.

It is noteworthy that none of our congressmen, including the presidential candidates, uttered a peep while the real estate industry, banks, and mortgage companies were going crazy creating the housing bubble. Greedy homeowners were complicit as well.
Jake   |     |   Comment #3

Just hitting the wires now JPMorgan to buy Washington Mutual deposits and some branches.
Anonymous   |     |   Comment #4
so unofficially, wamu is gone?
Anonymous   |     |   Comment #5
Yes, FDIC is seizing Wamu, and its on a Thursday no less, this was imminent and no surprise
Anonymous   |     |   Comment #6
Well, uninsured depositors at WaMu can relax, you're not going to lose a cent.

The JP Morgan buyout isn't even going to require the FDIC insurance fund to absorb any losses.

I guess I'm now a happy JP Morgan customer.
Anonymous   |     |   Comment #7
I am now a Chase customer, too.

I will be happy for the next 12 months with my 5% CD.

However, after the CD matures, I will probably leave Chase. It has a history of low CD rates.
Anonymous   |     |   Comment #8
I say NO to the govenment bailout. This sounds like the WMD sales pitch all over again. The funny part was when the feds said we will make money from this deal. The gov't will buy failed assets, **** the little people (common stock holders), place in power a puppet board of directors (their friends), and we will be in no better condition. Let nature take it's course, the market will self correct, only 15% of the U.S. can adequately afford home prices at their current rates. The housing market is still "way to high".