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Gov't Bank Bailout Provider Asks Banks for Bailout   September 29th, 2009
FDIC asks banks to prepay       

 
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In yet another example of a government agency being unable to do its job in a fiscally responsible manner, the FDIC--which is charged with bailing out banks that are heading for bankruptcy--now appears to be on the edge of insolvency itself. And so it is asking (drum roll) banks to bail it out! The banks are to bail out the agency that is supposed to bail out the banks!

The staff of the Federal Deposit Insurance Corp. said it expects expenses tied to failed banks to surge to $100 billion over five years -- up 43% from the agency's last estimate in May.

As a result of the rising costs and the pressures on the agency's cash position, the FDIC proposed that banks prepay their deposit insurance premiums for the next three years at the end of December.


When the government starts asking taxpayers (or, in this case, banks) to prepay years in advance, the writing is on the wall.

This is like Social Security running into a deficit (which, incidentally, is now expected next year ) and resolving that by asking taxpayers to pay three year's worth of Social Security taxes this year.

Yes, that will solve the immediate insolvency problem (though it may bankrupt some banks in the process), but this solution implies that the banks that prepay won't have to pay into the FDIC for three years after that. Are we really to expect that the FDIC, after collecting these prepaid fees, will be able to survive three years without additional receipts?

The more likely scenario is that the FDIC will ask for these three years in advance, and then next year (or maybe the year after that) it will report that it needs more money. So it will either ask the banks for more money (making today's proposal a simple 200% fee increase) or will ask the government to bail it out.

Either way, the FDIC would appear to be on the verge of unsustainability. Is any federal government program not about to go bankrupt?

Granted, the FDIC is bound to be strained when times are tough--but that's precisely when the FDIC is, in theory, needed. If the FDIC can't manage itself so that it is viable when times are tough, what's the point? The FDIC is beginning to look more like recent changes in airport security: They don't really provide significant security, just the perception of security.

This country can't be built on perceptions. It must be built on reality. And the reality is that it would appear that the FDIC's viability prospects are dim.

The economy's prospects might be murky as well. Consider that since May (just 4 months ago), the FDIC's expectation of expenses related to bank failures increased by 43%! So while we're being told that the economy is now in recovery, the FDIC is so concerned about increased bank failure that it wants to hit banks up for three-years worth of premiums by the end of the year.

Why would the FDIC expect so many banks to fail in a recovering economy?

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