The FDIC’s $20.9 Billion Problem
by Martin Denholm, Senior Editor, Investment U
Wednesday, February 24, 2010
The Federal Deposit Insurance Corporation – better known as the FDIC – has a big problem.
Actually, it’s got 702 big problems.
In figures just released, the number of so-called “problem banks” (and that’s putting it mildly in some cases) surged by 27% during the fourth quarter of 2009.
As of December 31, 2009, a total of 702 banks fell into the “problem” category – up from the 552 institutions at the end of Q3 2009. It was the largest jump since 1992. Together, they represent $402.8 billion in assets – a 16% rise over the $345.9 billion in the previous quarter.
A further 20 banks have fallen by the wayside in 2010, on top of the 140 in 2009. To put that in perspective, just 28 banks went bust in 2007 and 2008.
And the FDIC – the government institution charged with insuring $13.1 trillion worth of Americans’ deposits in case of bank failures – is now buckling under the enormous weight of these problem assets.
A Bloated Deficit for Consumers… But Fat Profits for Banks
For the second straight quarter, the FDIC remained mired in deficit territory – a deficit that has now spiralled to $20.9 billion. That’s more than double the deficit in the previous quarter.
So you wouldn’t expect the FDIC chief, Sheila Bair, to strike an optimistic tone. Yet there she is, boldly stating, “Consistent with a recovering economy, we saw signs of improvement in industry performance.”
Hmm… I’ve heard of putting a positive spin on things, but that’s bordering on delusional. (Although, I guess it helps that the FDIC has a $500 billion credit line available from the U.S. Treasury Department.)
It’s a fact that a large chunk of the banks’ “improvement” – at least in terms of the $12.5 billion in combined 2009 profits that they reported (up 177% over 2008) – stems from this: their ability to borrow money for practically zero interest, then turn around and dump it into higher-yielding investments, rather than lending it to businesses and consumers. (My colleague Mark Skousen also pointed this out in his recent Investment U column.)
Give those CEOs a bonus! Oh, yeah… many of them got one – courtesy of that performance, plus taxpayers’ bailout money, of course.
As far as the FDIC is concerned, it may grab more power, as part of the overhaul to the financial system and new regulations. The House has already passed a bill, which gives the FDIC more authority to deal with failing, non-banking institutions, plus those whose recklessness threatens the financial system. A version of the bill is currently being drafted for the Senate, too.
Best regards,
Martin Denholm
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