Too Big
to Fail: The FDIC Went Bankrupt Last Summer. The Financial Media Say Nothing.
Gary North
Jan. 28,
2010
According
the the FDIC, the FDIC is broke. It has been broke since before September. You
can see for yourself here.
In
September, the FDIC was $8.2 billion in the hole: red ink. By now, it's far
more in the hole. In June, it was $10.3 billion in the black. Year to year,
September to September, it lost $42.8 billion.
The FDIC
has been kind enough to provide a graph.
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The FDIC has released the summary and the graph, yet Sheila Bair,
who runs it, has said nothing. Instead, after the results were known, she gave
a speech to bankers in November in which she said that "too big to
fail" must be scrapped by the government.
We've had too many years of unfettered risk-taking, and too many
years of government subsidized risk. It's time we changed the rules of the
game. It's time we closed the book on the doctrine of too big to fail. Only by
instituting a credible resolution process and removing the existing incentives
for size and complexity can we limit systemic risk, and the long-term
competitive advantages and public subsidy it confers on the largest
institutions.
The FDIC
is too big to fail. If it were allowed to fail, there would be a true run on
the banks. People would demand currency. The banks could not deliver the
currency. They would fail. We would get a replay of 1930-33. She knows it. The
Federal Reserve economists know it.
In late
August, when the FDIC was busted, she gave a speech with this assurance.
Now let me turn to how failures are affecting the Deposit
Insurance Fund, or the DIF. First: failures cost money. And the costs are
charged to the DIF. But one thing that you should know is that the DIF balance
has already been adjusted downward for the cost of failures that are expected
to occur over the next year. Just as banks set aside reserves for loan losses,
we set aside reserves for anticipated bank failures.
Our total
reserves -- consisting of both the DIF balance and a contingent loss reserve --
are available to absorb losses. The DIF balance reflects the net worth of the
insurance fund. It's also a guide for setting deposit insurance premiums for
our industry-funded system. So when a bank fails, to the extent that we have
already reserved for a failure, the loss comes out of the contingent loss
reserve. For example, when Colonial Bank failed two weeks ago ... there was no
reduction in the fund because the estimated loss had already been reserved for.
We review
the adequacy of the contingent loss reserve every quarter, and make adjustments
as warranted. As illustrated in this chart, we have been shifting large sums to
the contingent loss reserve as our failure projections have grown. The total
reserves are now over $42 billion.
FDIC resources run deep
FDIC resources run deep
Our total
reserves should be distinguished from the cash resources at our disposal to
protect depositors. As this last chart shows ... our sources of liquidity to
protect depositors in future failures include not only the $22 billion of cash
and Treasury securities held by the DIF as of June 30, but also the ability to
borrow up to $500 billion from the Treasury. To sum up, a decline in the fund
balance does NOT diminish our ability to protect insured depositors.
The
T-bills were gone when she gave the speech. She referred to June. But June was
long gone.
Deception?
Big time! From a woman who postures herself as the conscience of the banking
system.
Congress
has been bailing out the FDIC for six months.
One
pro-Bair site as late as October 15 wrote
this of her position.
The fact that Sheila Bair--the only top regulator in this country
who's been outspoken about the causes of the crash--can't turn to either the
Obama administration or to Congress to replenish the FDIC's fund is a symptom
of just how sick our system is. She's betting that things will get better
between now and next year, that new financial regulation will be in place, that
the economy will turn a corner, and that Congress and the American people won't
view a request from her to replenish the FDIC's fund with taxpayer money as a
taxpayer bailout that marks her as the same kind of leach as Kenneth Lewis of
Bank of America or Franklin Raines of Fannie Mae.
By that
time, the FDIC was already receiving funds from the government.
The press
says nothing.
The FDIC
too big to fail. Taxpayers and buyers of Treasury debt will pay. So will people
who don't factor in inflation.
The news
media know. There is a cover-up going on in plain sight. They stay silent.
Nobody
cares. Americans are beyond the point of caring. The deficit numbers are huge,
and they keep growing. Americans believe in cost-free government debt.
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