Bailout Grants FDIC Unlimited Access To Funds From Treasury!

Yesterday I wrote about the lack of sound fiscal judgement exercised by extending the insurance limits on FDIC deposits within the bailout bill. The move which is aimed at nothing more than restoring consumer confidence in banks puts the entire Federal Deposit Insurance program at risk.

After the failures of Indymac, WaMu, and Wachovia and failures of dozens of other banks, FDIC was forced to negotiate buyouts of these corporations from larger financials because FDIC did not have sufficient assets within their own insurance fund. Yesterday, I pointed out that just one national failure or large regional bank failure could easily wipe out the $45 billion Federal Insurance fund and cause a bailout of FDIC and panic to sweep through the banking sector.

Congress apparently has the same fear, as yesterday they approved the bailout plan with not only an increase in FDIC coverage (bad, fiscally unsound move), but also granted FDIC unlimited borrowing power from the United States Treasury over the next year. Unlimited borrowing power, without congressional oversight or approval. This move would allow FDIC to tap into billions of Taxpayer dollars to maintain the viability of the system.

With increased limits, FDIC only has the insurance funds available to protect 180,000 accounts with maximum deposits of $250,000. Although this number seems large, take for instance if National City Bank, a bank that has been on the Failure warning list for months, were to fail. FDIC would immediately try to negotiate a buyout of the bank from a larger institution in order to relieve their liability; but if no buyer was found, FDIC would be responsible for claims on deposits at the bank. National City is a large regional bank with over 1400 branches and over 4 Million Households With Deposit Accounts. National City alone has over $98.5 billion in deposits and like other banks only a pittance is held in reserves. Now imagine if a larger bank, perhaps JP Morgan, or Citi, or Bank of America would collapse.

In business you plan for the best, but must be prepared for the worst. Yesterday, the Senate, in an attempt to do nothing more than restore consumer confidence in the banking system, passed legislation that increased FDIC's actuarial risks and granted that agency unlimited access to taxpayer dollars.

J Brown
October 2nd, 2008

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