To FDIC or Not To FDIC, That is the Question

On February 23rd I got a little disgusted when I saw Suze Orman advertising with the FDIC. While I waited for the bus Suze told me that "I couldn't lose a penny if my money was 100% FDIC insured" and after reading this I couldn't help but laugh. "At what cost" I thought?

Today the hidden cost of maintaining the FDIC is starting to rear its ugly head and I think it's time for Andrew Gray to answer some of the tough questions I posed to him on the 23rd. I don't want to attack Mr. Gray, everyone makes mistakes. However, if you read this Andrew, at the very least please apologize to Bloomberg news columnist David Evans for your harsh tone and scathing remarks about his journalism. I know you are not the "official" mouthpiece of the FDIC but you were the one who published and authored this letter which is still up on the FDIC website to this day. It clearly was written in an attempt to tarnish Mr. Evan's seemingly solid journalism and not for any useful purpose, to me that is not appropriate, I'll leave it at that.

So you're probably wondering why I am saying all of this? Well before continuing let's take a look at what the Chairman of the FDIC, Sheila Bair, had to say regarding the current state of her agency and why I think tough questions need to be asked and difficult decisions made.

Excerpts from "FDIC's Bair says Insurance Fund Could Insolvent This Year" published by Bloomberg today.

"Federal Deposit Insurance Corp. Chairman Sheila Bair said the deposit insurance fund could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency.

“Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.

“A large number” of bank failures may occur through 2010 because of “rapidly deteriorating economic conditions,” Bair said in the letter. “Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative.”

The FDIC last week approved a one-time “emergency” fee and other assessment increases on the industry to rebuild a fund to repay customers for deposits of as much as $250,000 when a bank fails. The fees, opposed by the industry, may generate $27 billion this year after the fund fell to $18.9 billion in the fourth quarter from $34.6 billion in the previous period, the FDIC said. The fund was drained by 25 bank failures last year.

Smaller banks are outraged over the one-time fee, which could wipe out 50 percent to 100 percent of a bank’s 2009 earnings, Camden Fine, president of the Independent Community Bankers of America, said yesterday in a telephone interview.

“I’ve never seen emotions like this,” said Fine, adding that he’s received more than 1,000 e-mails and telephone messages from angry bankers.

“For risk-based assessments, our statute restricts us from discriminating against an institution because of size,’’ Bair wrote.

Bair rejected arguments that the agency should use government aid to rebuild the fund. The FDIC has authority to tap a $30 billion line of credit at the Treasury Department.

“Banks, not taxpayers, are expected to fund the system,” Bair said. Asking for taxpayer support “could paint all banks with the ‘bailout’ brush.”

So in summary the plan from Miss Bair is to effectively tax solvent, responsible, well capitalized banks who have a chance of surviving the economic crisis through higher FDIC insurance premiums. Bair admits it will "wipe out" nearly all of the profits for 2009 in smaller banks, but says the "FDIC cannot discriminate on size." Is there any way the FDIC could subsidize failure or hurt the already weak banking industry more? Remember that according to the FDIC these fees are required to protect our deposits in failed banks and thus the increase in premium is justified.

Miss Bair also answered a question I had posed in the original piece on FDIC insurance. I had written:

"...Your agency [The FDIC] 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 [referring to the estimated shortfall of BAC and C]..."

According to Bair the FDIC's credit line is a measly $30 Billion dollars from the Treasury. Bair also said with the new fees the FDIC will generate $27 Billion in new capital and that the fund fell $15.7 billion from January to March 1. $15.7 billion in 3 months? The economy isn't getting better anytime soon (Bair also admits this hence the new fee) thus the burn rate should remain constant for much of this year. How will the new fees cover this cost and keep the FDIC from needing the treasury line? The facts presented tell us the $27 Billion will be gone by late summer at best. So if the profitable banks give us all of 2009's net income now, and the FDIC still can't cover the cost, how can tax payers not have to fund the FDIC line from the treasury?

Lastly, consider the following information regarding the $8.5 Trillion Dollar amount that tax payers are thus far on the hook for related to our banks through the bailout process.

(Click for larger image)

Image Compliments of The Center for Research on Globalization

Of this amount we have already spent $3.2 Trillion to keep our banks afloat. Since Bair is saying the FDIC can't discriminate on who has to pay the new premium increases to keep the FDIC solvent this means insolvent banks have to pay as well. So what I want to know is how increasing the premium to the banks doesn't cost tax payers anything when we already own a large portion of the banking system? Is the money paid to the FDIC from Citi and Bank of America, or any other assisted bank for that matter, not in fact tax payer money?

The Facts

According to the Bureau of Economic Analysis the national US savings rate as a percentage of disposable income is this:

You saw right, there was actually a quarter in 2005 when the US savings rate per household was negative. That does in fact mean we were spending more than 100% of our income and clearly could have zero savings under that scenario. As of the last quarter in 2008 the savings rate was higher than it's been in years at 3%. According to the census bureau, in 2007 (the most recent data) median household income was $50,740 and in 2007, 13% of US households were living below the poverty line of $21,200 in annual income. Lastly, to be consistent, in 2007 based on the median income figure above, most Americans lived within roughly the 25% tax bracket. (with deductions this rate is undoubtedly lower, however if you include all of the costs to get to "true" disposable income I feel using 25% as an adjustment is more than appropriate).

The Math
Now before doing the math on this also keep in mind our unemployment is higher now than it has been in nearly a generation; read if you don't have a job, you can't save. Also if 13% were under the poverty line in 2007 even more are now based on unemployment; poor people can't really save either.

Annual Income
$50,740

Average Tax Rate at 25% (Disposable Income Adjustment)
($12,685)

Total Disposable Income
$38,055

Current Average Savings Rate at 3%
$1,141.65

The Conclusion

We need to get rid of the FDIC along with the moral hazard it creates and we need to do it fast. Yes I said it, the FDIC needs to be gone, it creates a moral hazard in our system, and in it's current form intends to penalizes solvent profitable banks. Of course it's scary to think that your money in a bank isn't insured, but wouldn't that encourage banks to compete on solvency, make good loans, and remain well capitalized in order to attract more deposits? Wouldn't we all be much more careful about who we decided to bank with and why if we couldn't rely on "required insurance"? If the bailouts hadn't occurred would anyone have left their money in Bank of America or Citi without the FDIC and Suze Orman telling us it will be alright? If not, would the small profitable banks have gotten a larger deposit base, then been able to lend properly and ease our credit situation without the use of more tax payer funds? Would added transparency come to the system because banks would have to compete on their balance sheets rather than on their gimmicks?

Bair, Gray, The Government, and the American people need to look in the mirror and face the facts. Simply put the real cost of keeping the FDIC is staggering to the tax paying public under the current economic environment. All in all what are we getting for having the insurance besides the FDIC bridging the sale of a failed bank to another government backed bank anyway? Miss Bair, I now have a question for you: What does the FDIC project the tax cost on $8.5 Trillion in bailout funds allocated to our banks by the US taxpayer to be? My guess is that it will be a lot more than $1,141.65 FDIC insured dollars per year.