Tuesday, September 29, 2009

FDIC Contemplates Making Banks Prepay $36 Billion In insurance Premiums


Lajuan Williams-Dickerson, is this true? Can it be?

We are skeptics but even TILB never saw this coming.

According to this story, the FDIC is contemplating asking, nay, forcing its insureds (banks) to prepay three years worth of insurance premiums. When we posted last week about the rumors the FDIC might rob the rich banks to pay the poor banks, we thought "maybe one quarter's worth of fees". But three years?


We can't even get our mind around the balls that Sheila Bair must have dangling. She must f'ing hate Tim Geithner. Pure hate. She apparently prefers further imperiling the entire banking system to asking him to provide the FDIC with fresh cash that he (the Treasury) is legally bound to provide.

And why?

Ego is almost certainly the answer.

As long time TILB readers know, the issue the FDIC is facing is multifold:

  1. The Deposit Insurance Fund (DIF) is negative. It brings in maybe $200-250 million of "revenue" per week but losses have substantially exceeded that. Using the FDIC's own numbers, we put the DIF at negative $1 billion before Georgian Bank's failure this weekend ripped another $892 million (perhaps $670 million net of revenue) out of the FDIC's already negative coffers. Our estimate is that the FDIC's Deposit Insurance Fund now has worse than negative $1.5 billion in its equity position (unless the FDIC chooses to fraudulently manipulates its reserving, which now is clearly on the table - TILB is basically expecting it at this point);
  2. Much of the negative position is caused by reserving, so while the FDIC is insolvent and would have been taken over our failed if it were not a socialized insurer to begin with, it actually has plenty of "assets" to deal with its losses for the coming year;
  3. However, an enormous portion of those "assets" are not cash. In fact, the largest line item on the DIF's balance sheet - by far - is toxic mortgages and other toxic loans that the FDIC could not sell when it took over a given bank. TILB's estimate is this number is currently in the $30-35 billion range. And to date, they have basically refused to sell these "assets" so we can safely opine those loan values are rapidly deteriorating in value as the delinquencies accelerate and servicing is limited or non-existent.

As we noted last week, charging premium before it's actually due does not fix the solvency problem. Borrowing money does not plug a hole that is fundamentally and "equity" problem. The DIF will still be negative and thus the FDIC will still be functionally insolvent. However, it does temporarily solve the "cash" problem that the FDIC was facing.

With that "solution" comes several potentially ill outcomes, most importantly the FDIC would be sucking $36 billion of much needed capital out of the banking system all at once in order to shore up the same banking system (bend your noodle on that for a bit), ironically making strong banks much weaker while not helping weak banks. This effectively will raise the cost of funds for strong banks (Sheila may as well go kick Helicopter Ben straight in his tiny balls). This capital is needed by banks to protect their own balance sheets or, God Forbid, to make new loans. But alas...

Next, she's kicking the can down the road: Sheila Bair will not be running the FDIC when it comes time to pay the piper as she's already announced that she likely won't stand for reappointment. This is creating a shitstorm for her successor.

Three, think of what this is signalling as to the scope of pending bank failures. The FDIC needs an immediate $36 billion infusion? Using the FDIC's own numbers, we know that the in the third quarter alone (6/30 - 9/30) losses for insured banks have been $14.9 billion so far. Last week we estimated that the FDIC likely had less than $10 billion of that precious asset called "cash" remaining. How long will the $36 billion last? One year? Maybe 18 months of we're generous? And then what? Banks won't owe any new premium for another 18 - 24 months at that point. How many times can the FDIC tap already staggering banks for more money? We suspect we will find out.

The Citizen Guarantors of the FDIC - you and me - will inevitably have to step up to the plate on this. It is a function of when, not if at this point.

We have a lot more to say on this matter, but frankly it's probably best if we just let it play out before letting the steam come out of our ears.