FDIC Out of Rescue Bucks

It’s official: The FDIC is broke, again.

Not without a sense of irony, FDIC chair Sheila Bair announced late yesterday that the deposit insurance fund — the fund that backstops all our savings accounts — will be running at a deficit today for the first time since the S&L crisis in 1991. As we forecast in August, the 120 bank failures (and counting) over the last two years have stripped the fund of over $52 billion — its entire war chest. Under current FDIC projections, it’ll be another $48 billion before this is all said and done.

To remedy this ailment, Bair proposed yesterday that the FDIC should force banks to prepay insurance fees through 2013, which would raise the government arm a cool $45 billion. That’s nice, as it would give the taxpayer’s checkbook a break. But we’re sure American banks — which reported just $1.8 billion in income in the first half of 2009 — can’t wait for a bill this size. Heh.

“Changing rules to avoid a crisis has the unintended drawback of perverting the simplistic process of cause and effect,” notes Eric Fry. “And if you change the rules often enough, nobody wants to play anymore. The participants either figure out ways to cheat, or they refuse to play the game at all… and search for some other game where the participants ‘play fair.’

“A buyer of common stocks, for example, might begin to prefer Russian securities over the American variety. After all, if neither jurisdiction will reliably and equitably apply securities laws, why not invest in the Russian issues that carry much lower valuations and much higher growth prospects? Or to put it another way, if both jurisdictions will behave capriciously — handing out favors to cronies, while bending long-standing laws and regulations in the name of expedience — why pay a premium for American equities?

“Similarly, the buyer of global sovereign bonds might begin to ask himself why he should prefer a low-yielding U.S. Treasury bond to a higher-yielding bond from an issuer like Brazil. This bond buyer might begin wondering why he should continue investing in the dollar-denominated securities of a government that is on track to pile up a massive $2 trillion deficit this year, rather then investing in the real-denominated securities of a government that is running a primary budget SURPLUS.”

The Daily Reckoning