What is the FDIC Doing?

Suze Orman, what are you and the FDIC doing advertising deposit insurance? Why did I see you on my CTA bus stop today telling me "I can't lose a Penny if my money is 100% FDIC- insured?" According to the FDIC website, the Federal Deposit Insurance Corporation partnered with Suze Orman to raise FDIC awareness in September of 2008. Raise awareness? Why would anyone need to know about the FDIC? Isn't it a good thing when people don't know all about the Federal Deposit Insurance Corporation? I mean that seriously; isn't the only reason anyone would "really" know about the FDIC is if they had money in a bank that failed and needed to figure out if it was covered or not?

That's interesting to consider since this campaign was launched in September of 2008 when major banks were beginning to fail. A review of the FDIC's failed banks list reveals some startling information:

From October of 2000 through October of 2007:

27 banks failed and were taken over by the FDIC.

From January 25th, 2008 through February 20th, 2009

39 MORE were taken by the FDIC,

For those doing the math at home the equation looks like this: 39 > 27 and that ladies and gentlemen is quite problematic. On average from 00' through 07' slightly fewer than 4 banks failed per year, but now bank failures are nearly ten times higher than they were over the past 7 years at over 3 banks a month. I wonder if our largest banks (Bank of America, Citi, and JP Morgan Chase) are now paying 10 times the premium to cover ten times the failure frequency?

Rest assured the FDIC has reserves to cover a problem like this...well, not exactly. Since Suze Orman and the FDIC want us to be informed, lets get informed:

1. As of September 2008 when Orman started working with the FDIC, the Deposit Insurance Fund had approximately; From the FDIC Site:

"$45 billion – but that figure is not static. The fund will continue to incur the cost of protecting insured depositors as more banks may fail, but we continually bring in more premium income."

2. Also from the Fed site, that $45 billion is to cover $4.2 Trillion in insurable deposits. This gives the Fed a reserve ratio around 1.2% based on the floating nature of customer deposits and the insurance funds premium collections and payouts.

3. From the link in item 1 above, Andrew Gray, the director of public affairs at the FDIC wrote a letter to Bloomberg News regarding an article about a potential FDIC failure which Gray called "A disservice to Bloomberg and it's readers." Gray continued on to say:

"...if needed, the FDIC has longstanding lines of credit with the Treasury Department. Congress, understanding the need to ensure that working capital is available to the FDIC to provide bridge funding between the time a bank fails and when its assets are sold, provided broad authority for us to borrow from Treasury's Federal Financing Bank. If necessary, we can potentially raise very large sums of working capital, which would be paid back as the FDIC liquidates assets of failed banks. As per our authorizing statute, any money we might borrow from the Treasury must be paid back from industry assessments. Only once in the FDIC's history have we had to borrow from the Treasury – in the early 1990s – and that money was paid back with interest in less than two years.

Finally, Mr. Evans' suggestion that the "government" could ever be "on the hook for uninsured deposits" demonstrates a misunderstanding of FDIC insurance. To protect taxpayers, we are required to follow the "least cost" resolution, which means that uninsured depositors are paid in full only if this is the least costly option for the FDIC. This usually occurs when a bidder for the failed bank is willing to pay a higher price for the entire deposit franchise. We are authorized to deviate from the "least cost" resolution only where a so-called "systemic risk" exception is made. This is an extraordinary procedure which we have never invoked. And again, any money we borrow from the Treasury Department must be repaid through industry assessments.

I am confident in the strength of the FDIC's resources to make good on our sacred pledge to insured depositors. And, remember, no depositor has ever lost a penny of insured deposits, and never will."

Whoa. What a bold statement to make? NEVER will? I have some questions for you Mr. Gray and I ask them not as an attack. I ask them so that both you and my readers understand the "cost" of the FDIC. So since you've made bold statements to Bloomberg, I think you deserve bold questions asked back.

Mr. Gray, Sir, after a statement such as the one you made in September, I wish I could say that you may soon be eating your words, but unfortunately at this time I cannot. I say this because we both know that the FDIC alone doesn't have enough capital to stop the fall of our banks and protect depositor assets this time around. You said yourself that the FDIC couldn't do it by itself in the late 1990's and this crisis is much worse. So, if you could, the next time you decide to write an "open letter" to a well respected major news agency could you at the very least not lie? Why was it that you needed to bring in Suze Orman as a spokes person in the first place?

Also, because you said yourself the FDIC would receive "bridge funding between the time a bank fails to when its assets are sold," could you or the FDIC when you read this please tell me what your organization would do if our largest banks, Citi, Bank Of America, or JP Morgan Chase failed to sell their assets? How would you mark all of their assets to market to sell them once you took them over? Who would buy them? I desperately want to know so I can tell everyone else on the planet. All of us have been trying to figure out the answer to those questions since late 2007 and we're glad you have a solution for us! Foolishly, we've all been under the impression that the reason our banks are insolvent is because they can't properly price their assets and sell them. Most of the time when we try to assign them a value, nobody wants them, then they become unmarketable securities. Mr Gray what are we doing wrong?

What will the FDIC do assuming it can find a value for these assets? None of us want to buy them for anything near what they were on the books for so who then will cover the loss on the sale? The FDIC? Before you answer keep in mind that some estimates put our banks under water by as much as a trillion or more dollars; a trillion! Your agency has just over $45 billion as of September 08, what do you have now after four bank collapses per month since then? Mr. Gray, Citi bank alone burned through $300 Billion in less than 3 months, can the FDIC keep up with a burn rate like that? Indy Mac cost you almost $9 Billion, that fell in July of last year, and was no where near the size of any of the banks on the verge of collapsing right now.

If we assume that the FDIC can't cover the deficit without the Treasury; I'd bet you guys don't have credit lines exceeding a trillion dollars in this economy to bridge the deficit. Mr. Gray, to cut to the chase and put it bluntly; all the FDIC has at this time is the ability to cheer lead, bring in the common man's finance guru Suze Orman, and then try to make us all believe our deposits are safe. You still exist because your brother and sister agencies spend our money to prop up our banks on the front end, before the FDIC has to get involved and worry about the problem on the back end. So you were correct when you said that your agency doesn't directly cost us as tax payers any money, but since we're paying for the banks survival, who's really paying for the insurance?

Suze Orman wasn't lying when she said we won't lose a penny if our money is 100% FDIC insured, however it's going to cost us a fortune to keep it that way.