Les Jones

Senate bill would raise FDIC borrowing from $30B to $100B

Tuesday, March 31st, 2009 | Economics |

If you’re not mad about the FDIC’s shameful conduct in the banking meltdown it’s because you’re not paying attention. Mish has the latest:

In a galling move that has nothing to do with credit card reform at all, the Senate slipped in a provision to allow the “FDIC to borrow up to $100 billion from the U.S. Treasury, an increase from $30 billion now. The FDIC has said the additional borrowing authority may reduce a special one-time fee imposed on banks to replenish the deposit insurance program.”

And of course borrowing “from the U.S. Treasury” means borrowing from taxpayers. By getting the money from taxpayers they reduce the “special one-time free imposed on banks.” Translation: they’re putting the burden of bailing out failed banks on the taxpayer, rather than the banks. Recall that the FDIC collected almost no insurance fees from banks from 1996 to 2006.

Note that just six months ago the FDIC was publicly repudiating a Bloomberg News report that said the FDIC might need $150 billion in taxpayer money to cover deposits at failed banks. Back in the long ago innocent age of September, 2008 the FDIC stated in the strongest terms:

Let me be clear: The insurance fund is in a strong financial position to weather a significant upsurge in bank failures. The FDIC has all the tools and resources necessary to meet our commitment to insured depositors, which we view as sacred. I do not foresee – as Mr. Evans suggests – that taxpayers may have to foot the bill for a “bailout.”

Yet here we taxpayers are in the faraway future of March, 2009, being asked to foot the bill for a “bailout.” This bill calls for an increase on the FDIC’s borrowing limit against taxpayers to $100 billion, and a Congressman recently called for $500 billion for the FDIC “bailout.” As long as we’re putting bunny quotes around words, note that the FDIC is “borrowing” this money from the taxpayer. What do you suppose the odds are that we will get our money back?

In summary, the FDIC - the federal agency tasked with insuring against bank failures - failed to collect insurance premiums, failed to adequately account for banks’ risky lending, failed to foresee just six months ago what Bloomberg News saw as a looming disaster, and will now be taking tens or hundreds of billions in taxpayer money to bail out the failed banks they themselves were supposed to insure. If you’re not mad about the FDIC’s shameful conduct in the banking meltdown it’s because you’re not paying attention.

Note that this is a bill and is not yet law, but at this point this sort of taxpayer bailout of the FDIC is probably unavoidable. The least we should get out of this is reform of the FDIC. In particular, I want banks to pay insurance premiums year in and year out, just as I pay my home, auto, and life insurance premiums even in good years when my house didn’t burn down, my car didn’t get totaled, and I didn’t keel over and die. That’s how real insurance companies work and it’s how the Federal Deposit Insurance Corporation should work.

Tags: banks, fdic, mortgage mess

3 Comments to Senate bill would raise FDIC borrowing from $30B to $100B

Mike
April 2, 2009

Except that, and you probably know this, it is not insurance, in the true sense of the word.

Banks don’t pay in to the FDIC to insure against some natural disaster or unforseen event wiping out deposits, FDIC insurance is supposed to guarantee depositors that they’ll get some money back in case the banks play too fast and loose with fractional reserve lending and give out so much money they make themselves insolvent.

Which is the easiest road to profitability in the banking industry, but puts a quick end to a banker’s career. Which is why they came up with the Federal Reserve, FDIC, et. al., so they should shift the cost of failure off to the American taxpayer, “insure” against their own foolish business practices, and keep themselves in business at all cost.

FDIC should be dissolved, and insolvent banks allowed to fail.

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