And as for Bailing out the Bailer-Outer? The FDIC Fund. Grab the Maalox.

[chill_wind]

Bailing out the Bailer-Outer: the FDIC Fund
Posted by Heidi N. Moore
October 1, 2008, 12:33 pm

Only in this topsy-turvy credit crisis can this make sense: The Federal Deposit Insurance Corporation’s fund is running low.

The FDIC’s proposed solution for its funding problem? More than double the amount it’s willing to insure each bank depositor to $250,000.

Associated Press
Sheila C. Bair

It’s twisted logic, but favored by FDIC chair Sheila Bair and Presidential candidate Barack Obama. The idea, as explained to us by Bryan Cave banking partner Karen Garrett, is that raising insured deposits to $250,000 from $100,000 would give depositors more comfort that their money is safe. That would prevent panicked runs on banks when their customers get worried and pull money out. Fewer bank runs would mean that the FDIC would not have to reach deep into its fund to insure more banks. “I don’t think the point is the numbers game,” Garrett told Deal Journal. “I think it's to restore confidence. The point is just to calm people down.”

The FDIC, like many of the institutions it oversees, is not tackling the effect of the credit crisis as much as it is tackling its own missteps during the economic boom between 2004 and 2007. The FDIC’s insurance fund comes directly from premiums charged to banks. “If there's a question, it should be whether a bigger fund shouldn't have been built up as we headed into this crisis,” said Garrett. “This didn't just happen overnight for them. They've been concerned about the risks in the loan portfolios.

Should there have been an analysis to increase the reserves at that point?” The FDIC is making up for it now with a request unlimited emergency funding from the Treasury today.

(...)

The FDIC will likely raise premiums anyway. The question is whether it will be in time to make a difference

(more)

from: http://blogs.wsj.com/deals/2008/10/01/bailing-out-the-bailer-outer-the-fdic-fund/?mod=googlenews_wsj



More about that HERE


FDIC seeking temporary unlimited Treasury loans
Wed Oct 1, 2008 3:42pm EDT


Democrat Barack Obama and Republican John McCain who are running for president support boosting the insurance limit to $250,000.

Banks pay into the Deposit Insurance Fund, which stood at about $45 billion at the end of June, but the legislation says they would not be assessed for the temporary increased amount.

So far this year 13 banks have failed, including IndyMac and Washington Mutual Inc, which was acquired by JPMorgan Chase & Co in a transaction that did not dent the insurance fund. More bank failures are expected.

Next week the FDIC is slated to hold an open meeting to propose a plan to replenish the fund. Bair has said that she expects the FDIC to raise premiums for banks that accept volatile deposits.



http://www.reuters.com/article/topNews/idUSTRE48T7F920081001?pageNumber=3&virtualBrandChannel=10112


Next week?


As an aside, I thought this was curious: On September 14, The NYT ran a piece on the demise of Merrill Lynch and Lehman, which included this passage:

Administration officials acknowledged this week that more bank failures are inevitable, and the main protection for depositors — the Federal Deposit Insurance Corporation — is likely to exhaust the reserves it has built over the years from bank insurance premiums.

http://www.nytimes.com/2008/09/15/business/15lehman.html?hp=&pagewanted=all

It was pointed to by this blog:

FDIC broke?

From the NYT article about Merrill/Lehman currently on the front page of their site:

Administration officials acknowledged this week that more bank failures are inevitable, and the main protection for depositors — the Federal Deposit Insurance Corporation — is likely to exhaust the reserves it has built over the years from bank insurance premiums.

Uh. Does that mean what I think it does?

http://www.guinness416.com/?p=74


The NYT has since edited that out.

But you can still find it inside this reprint, carried at The Herald Tribune

Deals shake finance world

THE NEW YORK TIMES

Published: Monday, September 15, 2008 at 1:00 a.m.
Last Modified: Monday, September 15, 2008 at 1:03 a.m.
NEW YORK -

Administration officials acknowledged this week that more bank failures are inevitable, and the main protection for depositors — the Federal Deposit Insurance Corp. — is likely to exhaust the reserves it has built over the years from bank insurance premiums.

What we need now is a systemic solution and to admit that this is an extraordinary situation,” Meyer said. Meyer said the government should go to the heart of the crisis — the mortgage market — and start buying up mortgage-backed securities in a broad rescue.

http://www.heraldtribune.com/article/20080915/ARTICLE/809150296/2055/NEWS&title=Deals_shake_finance_world

Forget the Maalox. Maybe the Guiness bloke has the better idea.

[pnwmom]

1. It does make sense. It will make the banks more stable

and it shouldn't cost the government much, if anything. Here's why.

The $100K limit doesn't apply to individual people or corporations, it applies to separate accounts at separate banks. If you want more than $100K in an insured account, you simply spread it around. You can have both joint accounts and individual accounts at one bank -- and each would be insured separately. Or you can spread your money around as many banks as you want.

So people/businesses with more than $100K, or close to the limit, were beginning to pull their money from their original banks in order to put them in other banks. Not because the new bank was safer -- but to get another $100K in coverage. All this moving money around was de-stabilizing banks without saving the government money -- in fact, it was increasing the chance that a bank might fail and deplete FDIC funds.

[chill_wind]

2. ...

[dixiegrrrrl]

3. I got good news and I got bad news.

Good news: the legislation will put more money into the FDIC.

Bad news: The money is worthless.

Good news: Most of the banks that failed were merged with healthy banks, so FDIC did not have to pay off a lot of depositors.

Bad news: The money we are using to "rescue" AIG, FDIC, Fannie and Freddie,
is debt.

More bad news: The derivatives and credit card defaults are on the horizon.

No one has ever accused me of being cheerful in the early morning.

[chill_wind]

4. I'll take the uncheery sober truth over reckless deceit by my government

any morning of the week.

(forget the Guinness afterall.)