FDIC is bankrupt!

The FDIC is struggling mightily to stay solvent. Given that there are bank failures every Friday, it's no easy feat for the FDIC to stay ahead of the game.

Bank of America, Major Banks’ FDIC Premiums May Top $10 Billion.

The Federal Deposit Insurance Corp.’s plan to rebuild its reserves may cost Bank of America Corp. and three of the largest U.S. banks more than $10 billion. Bank of America, the biggest U.S. lender by deposits, may owe $3.5 billion under an FDIC proposal that banks prepay three years of premiums, based on the lowest assessment rate multiplied by the bank’s $900 billion in June 30 U.S. deposits.

“This seems like a very hefty amount,” said Tim Yeager, a finance professor at the University of Arkansas and former economist at the Federal Reserve Bank of St. Louis. “The FDIC’s projections of future losses are pretty severe, and they are trying everything they can to avoid tapping the Treasury.” Prepaid fees is yet another attempt to keep the game going. How much longer this can last is anyone's guess. Those prepaid fees are going to hurt bank earnings 100% guaranteed. The fees may even push some struggling banks into bankruptcy.

- Email (below) from a Bank Owner, who as been in the business 30 years, regarding FDIC and Under-Capitalized Banks writes:

"This will certainly mark the end of the banking model using wholesale funding and aggressive deposits to fund commercial real estate projects. In other words this is going to come down hard on the FIRE economy. I have been in banking for over 30 years and from my perspective this is much worse than anything I have seen. God help us if cap and trade passes!"

At times, I have been extremely hard on Shelia Bair. She has said many things that I strongly disagree with. However, I have to commend her for two things.

1) Shelia Bair stood up to Geithner regarding the PPIP and banks being allowed to bid on their own assets. Clearly she recognized banks bidding on their own assets at taxpayer risk was outright fraud. Of course, I think the whole PPIP proposal was (and still is) fraud, but in retrospect I have to wonder if her stance caused this ridiculous program to go on the back burner. If so, Bair deserves a salute. Note that PPIP is still not up and running.

2) Shelia Bair is now refusing to borrow money from the treasury (taxpayers) to shore up FDIC. Instead, she has been raising fees and now is proposing pre-paid fees. In other words, she strives to make the riskiest banks pony up for their mistakes, as opposed to dumping the risk on taxpayers. The easy way out for Shelia would have been to simply take money from the Treasury. However, she is taking a much tougher stance, at least for now.

Perhaps, like many of the rest of us she simply cannot stand Geithner. However, regardless of motivation, she is now doing the right thing by making risky banks pay for the risk they undertook.

Is the system fair? Of course not. Citigroup and Bank of America received debt guarantees from the Treasury making their debt appear to be less risky, and their FDIC insurance payments less than they should be. Wells Fargo was the beneficiary of huge tax breaks. However, those items are not Bair's doing, so she should not take the blame. The scorecard of Geithner and Paulson is a big fat zero. Yet, this is now the second thing major thing Bair has gotten correct.

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