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
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
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
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
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.”

  1. Sobers says

    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…….

  2. Edward Harrison says

    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:

    It outlines how easy credit leads to a brittle and vulnerable banking system a la Japan 1989 and the US-UK in 2008.

  3. Terry says

    …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.

Comments are closed.

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