Failure To Collect Leaves Taxpaper With More Bills

The FDIC And Member Banks (Not Taxpayers) Are Responible For Insurance Fund Losses

The FDIC was created by Congress with the 1933 Banking Act to protect bank depositors after the severe financial crises of the early 1930s and officially opened for business Jan. 1, 1934. The agency now insures deposits up to $250,000. Legislation passed by the Congress on February 1, 2006, merged separate insurance funds for banks and thrifts into a single Deposit Insurance Fund.

The FDIC was put in place to protect the depositors, not the banks. FDIC is a insurance organization where member banks pay premiums for the right to wear the FDIC label. No one I know has an interest in putting money into a Non-FDIC insured bank. If you are a banker who wishes to grow your business and profits you need FDIC on your door.

In short the Banking industry should be responible for their decisions and the FDIC insurance reserves. Lots of bright minds have pointed this problem out over many years e.g. The Wharton Financial Institutions Center issued a whitepaper in 2002.

The Last Real-Estate and Banking Party Bar Tab Cost Taxpayers $125 Billion

The ultimate cost of the S &L crisis is estimated to have totaled around $160.1 billion, about $124.6 billion of which was directly paid for by the US government—that is, the US taxpayer, either directly or through charges on their savings and loan accounts. Why did the taxpayer get left holding the bag? Simple, not enough FDIC premiums were charged for the risk the S&L's were taking in leveraging up on a real-estate boom.

Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991 to prevent taxpayers from getting stuck paying the bar tab for the banking and real-estate industries parties, again.

Congress Passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991.

This legislation authorized the Federal Deposit Insurance Corporation (FDIC), for the first time in its history, to charge higher deposit insurance premiums to S&Ls and Banks posing greater risk to the FDIC Insurance Fund. This historic piece of legislation empowered the FDIC to charge members premiums linked to risk.

A 1996 report by accomplished economist Frederic Mishkin a longtime friend and research partner of Fed Chairman Ben Bernanke reaffirms the need for the FDICIA stating the provisions were designed to serve two basic purposes: 1) to recapitalize the Bank Insurance Fund of the FDIC and 2) to reform the deposit insurance and bank regulatory system so that taxpayer losses would be minimized.

The United States General Accounting Office (GOA) issued a report in November 1996 entitled Bank and Thrift Regulation. The very first sentence of the executive summary states, "The thrift and banking crisis of the 1980s caused deposit insurance fund losses estimated at over $125 billion. One of the many factors contributing to the size of the federal losses was weakness in federal regulatory oversight".

As Austin Powers would say, "Deja Vu Two Baby!"

Now take a guess as to what the FDIC and Congress choose to do during the economic boom years of 1996-2006? The biggest reasons for our FDIC reserve shortage is because most banks paid no premiums from 1996 to 2006. Yes, it's a little reported fact that they paid no insurance premiums for 10 years.

Not one private insurance company would stop charging premiums on your auto, homeowners, health, or life insurance for 10 years -----simply because you had no losses. Does some one need to have a Ph.D. in Insurance and Risk to know that's not prudent?

Yet, James Chessen, chief economist of the American Bankers Association, said that it made sense at the time to stop collecting most premiums because "the fund became so large that interest income on the fund was covering the premiums for almost a decade." There were relatively few bank failures and no projection of the current economic collapse," he said. Anyone else wondering what value economist add? Can we export economist to china?

The rising bank losses mean that the FDIC's ratio of deposit insurance funds (DIF) to our bank deposits is down to 0.22%, far below its obligation under the insurance statute to keep it between 1.15% and 1.50%. Said another way, the goal was to only have about 1.5 cents in the rainy day fund and we have only zero cents.

Failure To Collect Premiums For 10 Years May Leave Taxpayers Paying Another Bill

The FDIC and congress concluded years ago that only 1.25% in FDIC reserves were needed to maintain the financial soundness of the fund. So, when the Deposit Insurance Fund (DIF) reached the magic number during the boom years, bankers (didn't want to pay) and regulators saw no advantage to having 2.5% in reserve. But between 1996 to 2006 bankers were jumping into the real-estate boom leveraging up their money lending practice. The S&L crisis became a distant memory.

I will not blame any President, Party or Federal Reserve Chairman for this crisis. They, like us, have a vested interest in America too. Still, I'd expect Greenspan and Bernacke, two Ph.D.s in economics, along with the over 100+ Ph.D.s working on the Federal Reserve staff, to be smart enough to connect-the-dots. Purhaps a few were two busy flipping homes to notice. No wonder Dean Baker, a fellow Ph.D. in economics, is endorsing the bill to audit the Federal Reserve policies, Baker wrote last week, "The country now has almost 25 million people who are unemployed or underemployed as a result of the Fed's disastrous policies". Other economist and financial experts outside the Washington D.C. belt-way raised flags to congress ahead of the Freddie Mac and Fannie Mae debacle. All one needed to do was watch tv to know we were in a real-estate bubble.

Our FDIC Chairman Warned Congress in 2001...No Action

Now FDIC Chairwoman, Sheila Bair, has already testified that the agency's failure to collect premiums from most banks for years was surprising to her and a concern. As a Treasury Department official in 2001, she said, she testified on Capitol Hill about the need to impose the fees, but nothing happened. Congress did not grant the authority for the fees until 2006, just weeks before Bair took over the FDIC. She then used that authority to impose the fees over the objections of people within the banking industry. "That is five years of very healthy good times in banking that could have been used to build up the reserve," she said.

I'm hearing on average, each failure costs the FDIC nearly 30% of a bank's assets.

Now-Needy FDIC Collected Little Premiums for 10 years

The Coming Deposit Insurance Bailout

FDIC May Need Special Fees