The Real Reason FDIC Is Going Broke

The following excerpts are from a piece written today in Boston Globe. Reading through a well-written article one can not help but notice and recognize the unfortunate and rather shocking facts of our government’s level of negligence, incompetence and shortsightedness.

Last week the Federal Deposit Insurance Corporation [FDIC], the insurer of our nation’s bank deposits, asked for emergency powers to temporarily borrow as much as $500 billion until the end of 2010 to take over failed banks if the Federal Reserve, Treasury Secretary and White House agree such money is warranted. However, the FDIC is now facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006.

The FDIC… tried for years to get congressional authority to collect the premiums in case of a looming crisis. But Congress believed that the fund was so well-capitalized – and that bank failures were so infrequent – that there was no need to collect the premiums for a decade.
FDIC chairwoman Sheila Bair said yesterday that the agency’s failure to collect premiums from most banks “was surprising to me and of 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 some 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,”… said Bair in an interview. “That is how we find ourselves where we are today.”

Cornelius Hurley, director of the Boston University law school’s Morin Center for Banking and Financial Law called the decision to stop collecting most premiums “a political one that was pushed by banks and not based on strict accounting principles.”

With a total of 42 banks failures since last year, and many more expected in the coming months, the FDIC has proposed large insurance premium increases for banks. The agency, notes the Globe, collected $3 billion in premium fees last year versus a proposed collection of up to $27 billion this year. The new hike in fees comes at the very time when many banks can least afford to pay, and some say will be forced to raise consumer fees and curtail lending.

What’s most disturbing from this latest release is that professionals like James Chessen, chief economist of the American Bankers Association, approach the issue almost nonchalantly by saying that it made sense at the time to stop collecting premiums because “the fund became so large that interest income on the fund was covering the premiums for almost a decade.” House Financial Services Committee chairman Barney Frank agreed that officials believed that the good times would last and that bank failures would not pose a problem. My question is: what’s wrong with the idea of building up capital and reinforcing reserves in prosperous times so you can draw down upon them in bad times!!!! This is not even basic economics. It’s common sense. Being naive is one thing, but reading statements like these is hard not to include mediocrity as part of the discussion.

Today’s report is more compelling evidence demonstrating the utter and complete failure and irresponsibility of deragulative practices and laissez-faire type methodologies that prompted our economy to reach such weak and disturbing conditions. Let’s hope we have learned our lesson.

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About Ron Haruni 1070 Articles
Ron Haruni is the Co-Founder & Editor in Chief of Wall Street Pit.

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