Does the FDIC have enough money?
On the heels of the IndyMac failure, one must begin to wonder whether the FDIC has enough money to bail out all of the banks that we should reasonably expect to fail as a result of the credit crisis. To answer that question, I went straight to the FDIC website.
In its press release on the IndyMac failure, the FDIC said:
Based on preliminary analysis, the estimated cost of the resolution to the Deposit Insurance Fund is between $4 and $8 billion. IndyMac Bank, F.S.B. is the fifth FDIC-insured failure of the year. The last FDIC-insured failure in California was the Southern Pacific Bank, Torrance, on February 7, 2003.
–FDIC press release to IndyMac Failure, 11 Jul 2008
There are two things to note based on this press release.
- How much can the FDIC handle? The total amount of losses to be covered is estimated to be as high as $8 billion. According to the FDIC 2007 Annual Report, the FDIC has only $53 billion to cover losses of this nature. If all the banks on the FDIC watch list were to fail, how much would it cost the FDIC? Does the FDIC have estimates calculated for this?
- Where are other potential bankruptcies? The FDIC had been working long enough on the IndyMac case to come up with a loss estimate figure it felt comfortable with releasing in a press statement to the public. How long were they in there? And how many other banks is the FDIC working with right now? (For example, National City Corp. confirmed it entered into memoranda of understanding with the Office of the Comptroller of the Currency and the Federal Reserve Bank of Cleveland on May 5 and April 29, respectively, effectively putting the bank on probation. – source: WSJ, 10 Jun 2008)
- Will the FDIC action at IndyMac destabilize the regionals? Regional banks are being killed. In the market today they are off substantially in the wake of the IndyMac failure, Zion (ZION) and NCC (NCC ) in particular. NCC has been halted pending news.
My personal view is that the IndyMac bailout by the FDIC is the first of many to come. The FDIC does NOT have adequate capital to meet all of these bailouts. Many in the markets understand this and are selling shares in any questionable banks. I reckon this could lead to a run 0n some of the more vulnerable players, triggering another IndyMac-like rescue until the U.S. government steps in and raises the FDIC capital.
The FDIC’s need for capital can come from one of two places: the banks it insures or the U.S. taxpayer. Who do you think will get stuck with the bill? My bet is on taxpayers? With the Fannie-Freddie bill to be borne by taxpayers too, this credit crisis is looking very expensive for U.S. consumers.
(updates to follow this afternoon)
Related articles
National City Reports No `Unusual’ Activity After Stock Plunges, Bloomberg, 14 Jul 2008
Avoid Financials as `Fires’ Continue, Birinyi Says, Bloomberg 14 Jul 2008
WaMu Shares Sink as Lehman Flags Losses, SmartMoney, 14 Jul 2008
Below are the 2007 year end financial statements for the Deposit Insurance Fund of the FDIC.
Deposit Insurance Fund
| Deposit Insurance Fund Balance Sheet at December 31 Dollars in Thousands |
||
|---|---|---|
| 2007 | 2006 | |
| Assets | ||
| Cash and cash equivalents | $4,244,547 | $2,953,995 |
| Investment in U.S. Treasury obligations, net: (Note 3) | ||
| Held-to-maturity securities | 38,015,174 | 37,184,214 |
| Available-for-sale securities | 8,572,800 | 8,958,566 |
| Assessments receivable, net (Note 7) | 244,581 | 0 |
| Interest receivable on investments and other assets, net | 768,292 | 747,715 |
| Receivables from resolutions, net (Note 4) | 808,072 | 538,991 |
| Property and equipment, net (Note 5) | 351,861 | 376,790 |
| Total Assets | $53,005,327 | $50,760,271 |
| Liabilities | ||
| Accounts payable and other liabilities | $151,857 | $154,283 |
| Postretirement benefit liability (Note 11) | 116,158 | 129,906 |
| Contingent liabilities for: (Note 6) | ||
| Anticipated failure of insured institutions | 124,276 | 110,775 |
| Litigation losses | 200,000 | 200,000 |
| Total Liabilities | 592,291 | 594,964 |
| Commitments and off-balance-sheet exposure (Note 12) | ||
| Fund Balance | ||
| Accumulated net income | 52,034,503 | 49,929,226 |
| Unrealized gain on available-for-sale securities, net (Note 3) | 358,908 | 233,822 |
| Unrealized postretirement benefit gain (Note 11) | 19,625 | 2,259 |
| Total Fund Balance | 52,413,036 | 50,165,307 |
| Total Liabilities and Fund Balance | $53,005,327 | $50,760,271 |
The accompanying notes are an integral part of these financial statements.
| Deposit Insurance Fund Statement of Income and Fund Balance for the Years Ended December 31 Dollars in Thousands |
||
|---|---|---|
| 2007 | 2006 | |
| Revenue | ||
| Interest on U.S. Treasury obligations | $2,540,061 | $2,240,723 |
| Assessments (Note 7) | 642,928 | 31,945 |
| Exit fees earned (Note 8) | 0 | 345,295 |
| Other revenue | 13,244 | 25,565 |
| Total Revenue | 3,196,233 | 2,643,528 |
| Expenses and Losses | ||
| Operating expenses (Note 9) | 992,570 | 950,618 |
| Provision for insurance losses (Note 10) | 95,016 | (52,097) |
| Insurance and other expenses | 3,370 | 5,843 |
| Total Expenses and Losses | 1,090,956 | 904,364 |
| Net Income | 2,105,277 | 1,739,164 |
| Unrealized gain/(loss) on available-for-sale securities, net (Note 3) | 125,086 | (172,718) |
| Unrealized postretirement benefit gain (Note 11) | 17,366 | 2,259 |
| Comprehensive Income | 2,247,729 | 1,568,705 |
| Fund Balance – Beginning | 50,165,307 | 48,596,602 |
| Fund Balance – Ending | $52,413,036 | $50,165,307 |
The accompanying notes are an integral part of these financial statements.
| Deposit Insurance Fund Statement of Cash Flows for the Years Ended December 31 Dollars in Thousands |
||
|---|---|---|
| 2007 | 2006 | |
| Operating Activities | ||
| Net Income: | $2,105,277 | $1,739,164 |
| Adjustments to reconcile net income to net cash provided by operating activities: | ||
| Amortization of U.S. Treasury obligations | 571,267 | 599,274 |
| Treasury inflation-protected securities (TIPS) inflation adjustment | (313,836) | (109,394) |
| Depreciation on property and equipment | 63,115 | 52,919 |
| Loss on retirement of property and equipment | 153 | 0 |
| Provision for insurance losses | 95,016 | (52,097) |
| Terminations/adjustments of work-in-process accounts | 0 | 433 |
| Exit fees earned | 0 | (345,295) |
| Unrealized gain on postretirement benefits | 17,366 | 0 |
| Change In Operating Assets and Liabilities: | ||
| Decrease in unamortized premium & discount of U.S. Treasury obligations (restricted) | 0 | 1,359 |
| (Increase) in assessments receivable, net | (244,581) | 0 |
| (Increase) in interest receivable and other assets | (20,442) | (14,635) |
| (Increase)/Decrease in receivables from resolutions | (350,309) | 147,258 |
| (Decrease) in accounts payable and other liabilities | (39,580) | (166,822) |
| (Decrease)/Increase in postretirement benefit liability | (13,748) | 129,906 |
| Increase in exit fees and investment proceeds held in escrow | 0 | 3,639 |
| Net Cash Provided by Operating Activities | 1,869,698 | 1,985,709 |
| Investing Activities | ||
| Provided by: | ||
| Maturity of U.S. Treasury obligations, held-to-maturity | 6,401,000 | 5,955,000 |
| Maturity of U.S. Treasury obligations, available-for-sale | 1,225,000 | 845,000 |
| Used by: | ||
| Purchase of property and equipment | (1,607) | (11,721) |
| Purchase of U.S. Treasury obligations, held-to-maturity | (7,706,117) | (9,050,372) |
| Purchase of U.S. Treasury obligations, available-for-sale | (497,422) | 0 |
| Net Cash Used by Investing Activities | (579,146) | (2,262,093) |
| Net Increase/(Decrease) in Cash and Cash Equivalents | 1,290,552 | (276,384) |
| Cash and Cash Equivalents – Beginning | 2,9 53,995 |
3,230,379 |
| Cash and Cash Equivalents – Ending | $4,244,547 | $2,953,995 |
Update 19 Mar 2009: Given the fact that the FDIC lost a massive $10.7 billion on the IndyMac transaction, I am re-posting this blurb from July.
I said then, and I still believe, the FDIC needs a lot more money or it will be bust. Sheila Bair has already requested $500 billion. See the WSJ article “Bill Seeks to Let FDIC Borrow up to $500 Billion.”
This is bad. Very bad. All I can see here is a cycle of 1) Bank A shares fall on fears of losses/insolvency. 2) Depositors rush to remove savings causing 3) Loss of confidence in Bank A. Either 4) Govt steps in to secure Bank A deposits (as in Northern Rock in UK) thereby effectively guaranteeing deposits in all Banks (as once they save one bank they can’t let another go to the wall with out being sued for favouritism etc), OR 5) Govt does nothing, Bank A goes to the wall, depositors lose out. Cycle begins again at 1) with next bank in line that looks a bit dodgy.
Either the govt ends up guaranteeing ALL savings deposits in the system or there is a domino effect of bank failures throughout the banking system. Either the pain is paid by the depositors individually in the short term, or the taxpayers as a whole in the longer term. You pays your money…….
sobers, unfortunately that is the nature of fractional share banking. Only a percentage of deposits are actually on hand for redemption at any one time. Any bank would suffer a liquidity crisis and be declared insolvent if all depositors rushed in and tried to redeem their deposits simultaneously.
Therefore, it is VERY important that banks look healthy in order to prevent a run. When rumours start to fly vulnerability increases. And when the collective banking infrastructure is as clogged with dead wood as it is now, a domino effect is a systemic risk to avoid.
Thats why it’s critical to liquidity poor banks and leave solid strong ones and why the Feds need to step in and restore confidence by backstopping institutions.
I too, am worried about the domino effect but I do hope the authorities are alert to this risk and act accordingly.
For more on my opinion on this, see the following post:
https://pro.creditwritedowns.com/2008/07/ecb-is-right-and-fed-is-wrong.html
It outlines how easy credit leads to a brittle and vulnerable banking system a la Japan 1989 and the US-UK in 2008.
…and now, according to the WSJ & other MSM this morning, Treasury is proposing that the FDIC be tagged to play the role of public support for the toxic asset public-private entity. Nothing in that brief reporting indicates that (a) the entity will be required to meet any particular fiduciary standards or (b) have to pay insurance premiums the same way FDIC-member banks (& their depositors) do.
It is just another way to stick the American taxpayer with the avaricious greed of the the WS crowd.