FDIC Fail

Since January the F.D.I.C. has seized 94 failing banks, causing a rapid decline in the deposit insurance fund. Despite a special assessment imposed on banks a few months ago to keep the fund afloat, its cash balance now stands at about $10 billion, a third of its size at the start of the year. (Another $32 billion has been set aside for failures that officials expect to occur in the coming months.)

[The FDIC estimated the the last two banks to fail (Louisville, Ky.-based Irwin Union Bank FSB and Columbus, Ind.-based Irwin Union Bank and Trust Co.) cost its insurance fund about $850 million. The FDIC expects that future bank failures will cost the insurance fund around $65 billion through 2013. The FDIC will fail. It's only a matter of time.]

The fund, which stands behind $4.8 trillion in insured deposits, could be wiped out [any day now] by the failure of a single large bank, although the deposit insurance corporation could always seek a taxpayer bailout by borrowing from the Treasury to stay afloat.

Under the law, the F.D.I.C. would not need permission from the Treasury to tap into a credit line of up to $100 billion. But such a step is said to be unpalatable to Sheila C. Bair, the agency chairwoman whose relations with the Treasury secretary, Timothy F. Geithner, have been strained.

“Sheila Bair would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help,” said Camden R. Fine, president of the Independent Community Bankers. “She’d do just about anything before going there.”

Officials say that the F.D.I.C. will issue a proposed plan next week to begin to restore the financial health of the ailing fund.

Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.

Borrowing from the industry is allowed under an obscure provision of a 1991 law adopted during the savings and loan crisis. The lending banks would receive bonds from the government at an interest rate that would be set by the Treasury secretary and ultimately would be paid by the rest of the industry. The bonds would be listed as an asset on the books of the banks. -- The New York Times

Can anyone else see this ending badly?

Worried about the health of your bank? Read:

FDIC Bank Watch List vs. My Bank Watch List

Now my #1 most-read blog post -- of all time.