The FDIC acknowledges it is to run out of money

Sheila Bair has run out of options to seize banks because the FDIC’s coffers are running dry.  Now she either needs to tap taxpayer money via a loan from the Treasury or she has to raise funds through a special assessment on banks, who are already capital-constrained.

Via Reuters:

U.S. bank regulators are considering tapping a line of credit with the U.S. Treasury Department and may explore other lesser-known options to replenish the dwindling fund that safeguards bank deposits.

Federal Deposit Insurance Corp Chairman Sheila Bair said on Friday that the agency would meet at the end of the month to discuss options to rebuild the fund, which has been significantly drained by a sharp increase in bank failures.

"We are carefully considering all our options, including borrowing from Treasury," Bair said, referring to the agency’s $500-billion line of credit with the Treasury Department. She was speaking at a global finance conference in Washington.

But regulators are still reluctant to tap the line of credit because they want to avoid temporarily using taxpayer money to clean up the banking mess, she said.

Bair said the FDIC also had lesser-known alternatives for replenishing the fund, such as prepayments of assessments on banks and issuing a note. She did not give further details on those options.

Other options include more special assessments on banks. The FDIC has already charged the industry one emergency fee of $5.6 billion this year, and is authorized to levy two more.

A few comments are in order.

1. Anyone could see this coming.  Last month I indicated that there were not enough funds on hand in my post “The FDIC to draw on its line of credit at Treasury soon.” I said my piece there and in the post “The FDIC and the socialization of banking losses” about how this will socialize losses.
2. Earlier in the week, Sheila Bair was telegraphing publicly that she was considering levying fees on banks to make up for the lack of funds.  On Wednesday, Sheila Bair explained FDIC strategy to Maria Bartiromo, stating that she was considering getting the money to pay for seizing banks from other banks.
3. Bartiromo asked Bair point blank whether it was wise to try and get the money from still solvent banks when they were capital constrained as this would restrict lending.  Bair artfully dodged the question because she doesn’t have an answer for this.
4. Having prudent banks pay up for the mistakes of their reckless brethren is the height of moral hazard.  This would not be good policy.

Meanwhile the bankruptcies continued unabated. Here are 93 and 94 for 2009:

First Financial Bank, National Association, Hamilton, Ohio, Assumes All of the Deposits of Irwin Union Bank, F.S.B., Louisville, Kentucky, and Irwin Union Bank and Trust Company, Columbus, Indiana

The FDIC and First Financial Bank entered into a loss-share transaction on approximately $2.5 billion of the assets of Irwin Union B&T Company and Irwin Union Bank, F.S.B. First Financial Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-share arrangement is projected to maximize returns on the assets covered by keeping them in the private sector. The agreement also is expected to minimize disruptions for loan customers.

Despite the phony stress tests, the end of mark-to-market, the bailouts, the huge money supply increase, the buying up of toxic assets by the Fed and all the other extraordinary measures, the U.S. banking system is still very, very weak.`