Barry emailed me this AM to ask about the commentary last week by Jonathan Weil of Bloomberg News regarding the FDIC:
FDIC Is Broke, Taxpayers at Risk, Bair Muses: Jonathan Weil
The thrust of the piece is that “FDIC’s insurance fund is going broke, and Sheila Bair is wondering aloud about how to replenish it. This means one thing for taxpayers: Watch your wallets.”
This makes for sensational and salacious copy. Unfortunately, the entire thesis of the article is wrong.
I have gotten used to the media butchering stories about the FDIC’s deposit insurance fund, but this piece from a writer an intelligent and thoughtful as Weil demands rebuke. As Barry said to me, we all expect Bloomberg to get stories right. When they miss something as basic as this, it makes both of us scratch our heads.
Let’s first look at the lead of the comment quoted above. Last week, in an open blast to the media taking Bloomberg to task, I said the following:
“Repeat after me: The FDIC does not run out of cash. The FDIC does not run out of cash. FDIC can confiscate all of the net assets and earnings of all FDIC insured banks. That is trillions in total liquidity. FDIC can borrow from Treasury, the Fed and even from FDIC insured banks. They can also issue notes.”
I then reminded Weil et al that the BANKING INDUSTRY pays for not only the operations of the FDIC, but for the deposit insurance fund (“DIF”) as well. So Weil’s comment that taxpayers should reach for their wallets is just scare mongering.
I continued to spank Weil: “Our worst case loss to the FDIC fund is $300-400bn THROUGH THE CYCLE. Where is the problem? It is in your minds and the minds of your editors. If you can’t get your collective minds at Bloomberg News around the nuances of federal finance and the workings of the FDIC, THEN STOP WRITING ABOUT IT.”
As we wrote in a research note on 9/1/09: “An important point in the analysis is that estimated losses for failed bank resolutions by the FDIC are running around quarter of failed bank assets, a level much higher than between 1980 and 1995, when failures cost an average 11 per cent. Our firm’s long held view of the likely loss rate peak for the US banks in this credit cycle is 2x 1990 loss rates or, as noted by the IMF, around 4 percent of total loans.1 Since total loans and leases held by all FDIC insured banks was some $7.7 trillion as of Q2 2009, the IMF estimate implies a cumulative loss of over $300 billion.”
BTW, I have a long article in the next issue of The Bank Credit Analyst that goes through all of this in detail.
So the bottom line of all this is that, yes, the number of bank failures and the cost of cleaning up this mess will be much higher than the 1990s. But because the FDIC is industry funded and because the industry DOES NOT WANT TO BE SEEN BORROWING FROM THE TREASURY, the entire point of Weil’s piece is off the mark. In fact, my sources tell me that the banking industry is supporting a proposal at FDIC to prepay DIF assessments for several years in order to raise cash and reduce the need for borrowing from the UST.
Now that is a story worthy of Jon Weil’s time and talent.