Bloomberg’s Jonathan Weil has an uncharacteristically boneheaded column about the FDIC’s money troubles. He begins:
The FDIC’s insurance fund is going broke, and Sheila Bair is wondering aloud about how to replenish it. This means one thing for taxpayers: Watch your wallets.
I learned about the column from FT Alphaville, which notes that it inspired Chris Whalen of Institutional Risk Analytics to send an angry e-mail to Weil and others at Bloomberg declaring that:
If you can’t get your collective minds at Bloomberg News around the nuances of federal finance and the workings of the FDIC, THEN STOP WRITING ABOU[T] IT.
Whalen’s entirely valid point is that the FDIC can’t run out of money—it’s got a $500 billion credit line from the U.S. Treasury that it hasn’t tapped yet, and would surely be able to borrow even more if it came to that. Weil acknowledges this in his column, but then writes:
if the FDIC starts tapping its credit line at the Treasury, there can be no assurance it would be able to pay back all the money through future assessments on banks.
Well, I guess there can be no absolute “assurance,” but if we continue to have a banking industry that turns a profit, it shouldn’t be all that hard to eventually pay back anything the FDIC borrows. Much of this cost will still hit Americans’ wallets—but in our capacity as bank customers, not taxpayers (as banks are usually able to pass on the cost of increased deposit insurance premiums). There’s not much solace in that, I know, but at the same time Weil’s contention that the draining of the insurance fund is evidence that the FDIC “has been mismanaged, and its credibility as a regulator is in tatters,” is silly.
As a regulator, FDIC supervises state-chartered banks that aren’t members of the Federal Reserve system—that is, smallish banks that played little or no role in igniting the financial conflagration of the past couple of years. It also takes over and shuts down or sells off troubled banks supervised by other regulators such as the Fed, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision—but it’s those other regulators that are supposed to tell it when there’s trouble.
The reason the FDIC might soon have to borrow some money is because banks are caught up in their worst crisis since the 1930s. It was in the 1930s, of course, that Congress created the FDIC with the intent of heading off bank runs by insuring that small depositors wouldn’t lose their money. It’s been hugely successful in that; the problem is that we allowed the creation of a shadow banking system of securitization, money market funds and investment banks that was outside the FDIC umbrella and turned out to be pretty susceptible to bank runs. There’s lots of blame to go around for letting this happen, but not very much belongs with the FDIC.
My main complaint with the FDIC, in fact, is that it seems to try too hard to structure deals for troubled banks that minimize the direct hit to the deposit insurance fund. It’s usually better to acknowledge the cost now and move forward (making the entire banking industry bear the cost once it returns to health) than to saddle previously healthy banks with lots of bad assets. But the FDIC goes through all sorts of contortions to cut the up-front cost of bank failures precisely because it knows what kind of hell it’s gonna catch from thick-skulled members of Congress and journalists if it has to use some of its credit line from the Treasury.