FDIC To Raid Federal Reserve Coffers

By: Money_Morning

Keith Fitz-Gerald writes: The "Bailout Bens" are at it again.

I'm talking, of course, about U.S. Federal Reserve Chairman Ben S. Bernanke, who's clearly decided it will be " bailouts for all ."

Why is this problematic? Federal Deposit Insurance Corp. Chairman Sheila C. Bair last week said that the government agency "may need to tap into [short-term] lines of credit with the Treasury for working capital," but "not to cover our losses," The Wall Street Journal reported .

After all, why hit up Treasury when you can have the taxpayer cover your losses?

In a bid to shore up a bank-insurance fund that's been drawn down by the U.S. credit crisis, not only is the FDIC planning to raid the Federal Reserve's coffers; it's also apparently making plans to increase the premiums it charges the 8,500 banks and thrifts that are required to pay into the fund. According to an industry insider that I've spoken to about this, the FDIC also is planning to charge a significantly higher premium to those institutions engaged in "riskier" lending practices.

The danger is that both of these actions could squeeze profit margins in the already-fragile banking industry and that any embryonic sector recovery from the credit crisis would be nipped in bud.

What matters and what concerns me about Chairman Bair's news conference remarks is that nobody ever goes broke from so-called " accrual accounting ."

Working capital indeed.

The reality is that the FDIC hasn't got enough cold hard cash on hand to insure the deposits it is supposed to be overseeing - even with a record $50.2 billion in funds at its disposal. Despite the fact that reserves are four times the $11.4 billion the FDIC thought it needed a year ago, $50.2 billion is only 64% of the $78 billion in troubled assets listed as of the second-quarter's close.

And it's only going to get worse - much worse, in fact.

First, you can bet that only a fraction of the assets from other troubled institutions will show up on that list in the quarters to come. By my back-of-the-envelope calculations, the FDIC could need as much as $124 billion in the next six months to shore up the assets of "problem institutions" - which is Fedspeak for banks on the brink.

So, in as much as Chairman Bair may believe she's got things under control, her comments strike me as straight from the Ministry of Whitewash when she says such a scenario is unlikely in the "near term."

Indeed, while speaking at the news conference, Bair told reporters that she and her FDIC compatriots "don't think the credit cycle has bottomed out yet," and don't believe that U.S. banks will return to high levels of earnings anytime soon. Bair said she expects that banks and thrifts will keep building up their reserves for the next several quarters.

The industry is already paying a full third of its net operating revenue into the system to build up reserves, meaning the Fed is the only place left to turn to.

Which, of course, means that taxpayers like you and me are once again going to be put even deeper in hock to bail out the financial institutions that created this mess in the first place.

Nearly two years ago, I heard laughter when I suggested that the global credit crisis would be a trillion-dollar problem . Well, they're not laughing now. Especially when I tell them that I'm now predicting that the total fallout from the credit crisis will exceed $2 trillion.

It seems quite clear from Chairman Bair's comments that "Bailout Ben" is just getting started - even though the Fed is already pumping $170 billion a year into the financial system.

Other federal agencies are in trouble and so are legions of banks - and not just from subprime-mortgage debt, either. Factor in inadequate reserves for credit-card defaults, home-equity lines of credit, automobile loans and other forms of consumer debt and it becomes very clear that this could get a whole lot worse before it gets better.

In fact, as banks panic and consumers hunker down, money flows could dry up, signaling still further economic contraction. It's a viscous circle and one that feeds on itself. And that's what former Vice President Al Gore would label as " an inconvenient truth ."

But we taxpayers are the ones who will be experiencing the inconvenience.

News and Related Story Links :

• Forbes.com : FDIC Under Pressure .
• FDIC.gov : Federal Deposit Insurance Corp. Web Site .
• Investopedia : Accrual Accounting .
• Money Morning News Analysis: The Worst U.S. Housing Market in a Generation Could Mean $1 Trillion in Write-Downs .
• Money Morning Financial Commentary : Dear Ben: To Save the U.S. Economy, Here Are the Moves You Need to Make Now .
• Money Morning Financial Commentary : Inside Wall Street: The Fannie Mae/Freddie Mac Bailout is Necessary - But Don't Expect a Happy Ending .
• Money Morning Exclusive Interview : Jim Rogers: More Pain for the Greenback, and the Failure of the Federal Reserve .

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