Big banks still hold FDIC captive

August 21, 2009

Sheila Bair has moved with impressive alacrity to shutter failed small and medium-sized banks. But she is still held hostage by the too-big-to-fail four.

Over the last eight days, her agency has been particularly busy, handling the two largest bank failures of the year. Last Friday it was Colonial Bank, today it will be Guaranty Bank.

With $25 billion and $14 billion of assets respectively, Colonial and Guaranty are the sixth- and 10th-largest failures in the history of the FDIC. Still, they pale in size compared to the biggest banks.

Bank of America Merrill Lynch, which had $2.3 trillion of assets at the end of the second quarter, is nearly 100 times larger than Colonial. JPMorgan Chase, with $2.1 trillion, and Citigroup, with $1.8 trillion, are nearly as big. Wells Fargo had $1.3 trillion, 100 times more than Guaranty. These amounts don’t include hundreds of billions of dollars of off-balance sheet assets.

Yet even Colonial and Guaranty are large enough to give the FDIC indigestion. Its deposit insurance fund had just $13 billion as of March 31. The 56 failures since then will cost it an estimated $16 billion, including nearly $3 billion for Colonial. (That amount excludes Guaranty – the FDIC should provide an estimate for those losses later today.)

It’s an unsettling thought if you have money in a bank. Officially, FDIC backs $4.8 trillion worth of deposits. If you include “temporarily” insured deposits, the total is $6.3 trillion. Yet the insurance fund protecting these deposits is going broke. Soon, the FDIC may have to draw on its credit line at Treasury.

It’s not surprising, given the sorry state of the Deposit Insurance Fund and the gargantuan heft of the big four, that FDIC is taking a bifurcated approach to bank resolutions.

Bair has moved decisively to close small and medium-sized banks. With the monsters, she not only assisted in their bailouts — providing federal insurance for their debt even as she already insures their deposits — she also sponsored their continued growth — putting WaMu in the hands of JPMorgan and pushing Wachovia into the arms of Wells Fargo.

Not that she had much choice. The biggest banks are far too big for her to resolve. One way to measure this is deposits in failed banks as a percentage of GDP.

(Click chart to enlarge in new window)deposits-in-failed-banks

In 1934, the worst year for bank failures during the Depression, the total was 6.4 percent.  In 1989, the most expensive year for the FDIC during the S&L scandal, it was 2.5 percent.  Last year, the figure was 1.6 percent.

But the 2008 figure excludes Citi, BofA and Wachovia, which properly should be dumped in the failure bucket. Citi and BofA were goners without bailouts while Wachovia failed and fell into the arms of bailout recipient Wells Fargo. When you include those three, deposits in failed banks jump to 15.7 percent of GDP for 2008.

The FDIC, which was created to protect society from deposit runs, is no longer able to fulfill its mission because the biggest banks have grown far beyond its grasp.

That’s why these banks need to be downsized dramatically. A tax on assets is a good idea, but not enough. To break them up, Washington should limit the deposits in any single bank to a threshold far below what the big four currently hold.

14 comments

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Without FDIC’s $21 billion bond guarantee for Goldman Sachs, GS could not have paid back $10 billion TARP money and marked $11 billion for its bonus pool.

FDIC’s $40 billion bond guarantee essentially bought Wamu for JP Morgan, helped the bank pay back $25 billion TARP money, and will build a premier hangar for JPM’s private jets.

Nobody forced Sheila Bair to back bonds for these monsters, just like nobody could force her to help CIT.

*imho*

Posted by PPY | Report as abusive

Thanks for this article. It sends shivers up my spine! I’m not sure if I should thank you for telling the truth — or curse you for it!

When a corporation is TBTF, it controls the government and by extension the people. It can do pretty much anything it wants, success or failure are irreverent. It is a de facto monopoly, might as well be a government agency.

So there you have it. The events of the past 1.5 years amply confirm the character of the TBTF business. The US banking system, dominated by TBTF banks, and supposedly the captain of capitalism, is actually the captain of socialism. TBTF destroys free market capitalism.

Now everybody knows.

Posted by The Real Deal | Report as abusive

[...] Big banks still hold FDIC captive Sheila Bair has moved with impressive alacrity to shutter failed small and medium-sized banks. But [...]

I’ve been wondering when someone would publish this information. Every time there’s outrage about the bank bailout, I’ve wondered if those people have ever given thought to how much the FDIC insurance would be worth.

We definitely need to downsize and split up banking and finance but how to get it done is another story. Their money is too plentiful and the lawmakers are too greedy. I’m afraid we’ll never be able to put the genie back in the bottle. All the uproar about health care reform will be nothing compared to banking reform.

Posted by andreams | Report as abusive

The article says “gargantuan heft” of the big four. I think it should say “garanguan theft” instead!

Posted by Helen Highwater | Report as abusive

You forgot to include the too big to fail banks suck of capital via the bond market and its obligations to pay up someday. Of course the banks just roll the stuff over and over and the game goes on…MarvinMBA

Posted by Marvin | Report as abusive

finally, someone at a mainstream news outlet covering the stuff econobloggers have been shouting about for months!
thanks, and bring back james saft!

Posted by Rojelio | Report as abusive

[...] Posted on August 21, 2009 by gssmith4 Big banks still hold FDIC captive Sheila Bair has moved with impressive alacrity to shutter failed small and medium-sized banks. But [...]

Well I guess the best we can do now is see if the Bankers Day happens next week when the FDIC releases it’s statistics for the 2nd Qtr. If it does, hold on to your shorts and hold on to your cash even tighter! We are about to crest the top of the coaster. ((Put’s hands up)) if this ride does not live up to your expectations you will “not” be getting your money back.

Posted by Faithandwisdom | Report as abusive

[...] Big banks still hold FDIC captive – Rolfe Winkler [...]

I’m afraid I have to disagree with your assertion that Bair has moved quickly to close small and medium sized banks in financial difficulty.

Here’s the simple proof: If Bair were acting in a timely fashion (as the “prompt corrective action” portion of the US Code requires) then banks would be closed while their assets are still reasonably matched in value to their liabilities. This is the fundamental purpose of “prompt corrective action.” In this case, the FDIC’s losses upon bank closure would be relatively limited.

Instead (even though problems at many banks, including Colonial and Guaranty, were obvious months ago), Bair has delayed until the banks’ assets have deteriorated drastically. As a result, the FDIC is taking enormous losses (often 40-50% of assets) with respect to each bank that it finally closes.

Posted by JL | Report as abusive

man o man wtf do we do now? I don’t have enough shells to keep standing on guard duty over my mattress.

I spread my savings around, and am under the FDIC ins limits,but damn with this mess now what do I do?.

I don’t want to close the CD’s again, hell they’re only getting 2% anyway but at least its something and its safer than laying around the house but with this kind of crap I’m starting to wonder.

You don’t want to start some insane panic or run on banks, that would just compound the mess.

Posted by Hoody | Report as abusive

Perhaps your headline should have been “Big banks own the FDIC (and the government)”?
Democratic governments have been hijacked and frog-marched while sleep-walking (dreaming of fat profits from ever increasing property prices on their mortgaged “investments”) into a totalitarian global police state for the benefit of the few at the expense of the many.

Posted by Peter H | Report as abusive

These TBTF banks are staying upright as long as they are able to roll over their debts. As they are long unsolvent, this will end sometime. Government does not have the means to restore these giants from the dead. Government will do anything to kick the can down the road. As bailing out is a wasteful process, and becomes harder as time passes, somewhere government will run out of support. What then?

Posted by johan | Report as abusive

Excellent article and one of many areas that could and should be explored by a special commission with subpoena powers and a full staff of investigators. Just such a commission (the Pecora Commission) was established after the 1929 crash, although it did take years of public outrage before the Senate finally acted in 1932. The commission’s work resulted in the Glass-Steagall Banking Act of 1933, which separated commercial and investment banking and shackled the behemoth of the day, the banking empire of J P Morgan. After decades of lobbying and with lots of help from the FED, that law was finally repealed in 1999, though it was effectively dead long before that. The big banks had won and won big: obscene compensation packages, monstrous bonuses and gurrantees from the federal government that they would not be allowed to fail. And this is where we are today.

Posted by Amandus Colver | Report as abusive

[...] Rolfe Winkler at Option Armageddon on the dire condition of the FDIC deposit insurance fund: [...]

[...] Going Broke – Bank Run Time? Big banks still hold FDIC captive [...]

[...] 21st, 2009 Big banks still hold FDIC captive Post a comment [...]

After looking into this more, I see now where the fed won’t let the FDIC go broke, it will just “bail” them out as all the other broke items. Even the stock pusher clowns on CNBC incl the one with the noise making machine say so. Only thing I guess would be next question though is if a “big” bank was to go, just how long would the FDIC decide it wanted to take to pay the “insured” accounts? My guess is a while. So I use 3 different banks and maybe even a 4th to spread things around as not all banks in my area are 5 star rated, they are 3 to 5. But I figure they won’t ALL go at the same time. ( I hope :) ) No reason to keep it in cash cause if the situation gets as bad as some think, the paper won’t be worth shit either, and since you don’t have a Ft Knox you probably won’t have that much gold around either, besides a lb of meat is edible, a lb of gold just sits there, if I had the meat why would I want the gold?

So relax, keep “some” cash available but keep the rest in the bank, you’ll get it back some time lol

Posted by Hoody | Report as abusive