Bair Admits FDIC in the Red Until 2012

By: Mike_Shedlock

Counting projected losses FDIC bank fund in the red until 2012.

The government insurance fund designed to protect consumer bank deposits will likely stay in the red through 2012, Federal Deposit Insurance Corp. chief Sheila Bair said Wednesday.

Testifying before members of the Senate Banking Committee, the nation's top commercial bank regulator stressed that her agency was taking immediate steps to replenish the dwindling fund. But she said those efforts would not put the rescue fund in the black until a little more than two years from now at the earliest.

The fund has come under severe strain in recent months amid the recent surge in bank failures. Ninety-eight banks have failed so far this year, which has reduced the fund's value to $10 billion from $45 billion a year ago.

Last month, the agency painted an even more dire picture, estimating that the fund is currently in the red after taking into account future bank failures it anticipates will happen.

Sheila Bair says "FDIC is a good thing." I strongly disagree. FDIC was a big enabler of risky bank lending.

Without FDIC, banks like Colonial, Bank United, Corus Bank, and possibly even banks like Washington Mutual would have failed long before they mattered.

By offering above market rates on CDs, those bank attracted plenty of capital to the detriment of banks lending responsibly. In order to offer high rates on CDs and deposits, the banks had to take high risks.

Bank United and Corus Bank funded all sorts of risky housing projects including condo towers in the biggest bubble cities. Colonial Bank is under investigation for Fraud.

In regards to CDs, one should chase yield (and risk) on their own dime, without government assistance. In regards to checking accounts, FDIC is not needed because checking accounts are demand deposit accounts, supposedly available on demand, and thus banks have no business lending that money in the first place.

For more on the problems of FDIC and the risk premiums some banks will face as the FDIC attempts to balance its books, please consider Emails from a Bank Owner regarding FDIC and Under-Capitalized Banks and BofA, Wells Fargo, JPM, Citigroup FDIC Fees May Top $10 Billion.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

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