The Next Bailout
September 2, 2008 – 11:52 amThe Federal Deposit Insurance Corporation is on the brink of bankruptcy and taxpayers may be forced to pony up hundreds of billions to bail it out—for the second time in a generation.
All the while banks like Washington Mutual are deliberately putting taxpayers at greater risk. But more on WaMu later.
Created during The Depression, the FDIC protects depositors from bank failures by insuring deposits up to $100,000. To fund itself, the FDIC charges insurance premiums to member banks.
It ran out of cash once, in the early 90s, due to the savings and loan crisis. Back then S&Ls advertised high interest rates to attract deposits, which they used to fund everything from speculative land deals to risky derivative trades. Their marketing pitch to depositors was compelling: high interest rates on deposits backed by federal insurance, for which the banks themselves paid little. When their risky investments lost money, they’d simply offer higher interest rates to bring in more deposits. Like any Ponzi scheme, eventually the S&Ls went bust. And taxpayers were left holding the bag.
Regulators, and Congress, still haven’t learned their lesson…..
FDIC reported last week that its assets stand at $45.2 billion, a puny 1.01% of the nation’s insured deposits, the lowest level since its bankruptcy twenty years ago.
This is not an opportune moment for FDIC to be short of cash: the bigger news from its report is that the list of “problem” banks has jumped to 117 from 90.
Sure enough, the next day Chairwoman Sheila Bair said FDIC may have to borrow money from taxpayers.
Ultimately, the bill may be quite steep. Ten banks have failed this year, costing FDIC over $10 billion. But there are dozens of bank failures yet to come.
One possibility looks particularly frightening: Washington Mutual.
WaMu has over a hundred billion dollars in the most toxic types of home loans—subprime, Alt A “liar loans,” home equity loans, pay option ARMs—the kind worth 30-60 cents on the dollar. It’s stock is down over 90%, losses are piling up and the bank is short of cash.
In a move reminiscent of the S&L scandal, WaMu recently began offering the highest deposit rates in the nation: 5% on one-year CDs (hat-tip CR). That’s 1.4% above the national average.
Normally, big banks don’t have to offer the highest interest rates to attract deposits. But in the wake of the subprime crisis, some of the largest banks are also some of the most desperate.
Before it went bust, California’s IndyMac offered interest rates well above average. Countrywide, recently rescued by Bank of America, is still in the top ten.
Banks desperate for capital today are willing to sacrifice profits tomorrow. So they market high interest-rate savings products to attract the capital they need to keep funding loans. With federal insurance protecting them, why wouldn’t depositors take advantage of high rates?
According to the FDIC website, WaMu had over $140 billion of insured deposits at the end of June. To put that in perspective consider IndyMac, which went bust in July. IndyMac had $16 billion of insured deposits and will cost $9 billion to bail out.
If WaMu fails, it could wipe out FDIC’s remaining $45 billion.
Bair knows the FDIC doesn’t have enough cash to survive this banking crisis. Besides asking the U.S. Treasury for funds, she wants to raise deposit insurance premiums. But banks are perilously short of cash themselves.
So where will FDIC find the billions it will need to finance its way out of this crisis? Taxpayers, most likely.
And the more deposits that troubled banks attract by offering high interest-rates, the higher the price of the inevitable taxpayer-funded bailout.
One wonders: how may bailouts will taxpayers have to fund? There was $29 billion for Bear Stearns, $150 billion for low-income Americans (the “stimulus plan”), $300 billion for homeowners and lenders in the latest housing bill, soon perhaps a couple hundred billion for Fannie Mae and Freddie Mac, potentially $50 billion in loans for Detroit carmakers and possibly hundreds of billions more for the nation’s bank depositors. The bill may ultimately top $1 trillion.
A trillion here, a trillion there and pretty soon you’re talking real money.
Posted in Economy, bailout, banking, credit crunch, taxpayer issues |
16 Responses to “The Next Bailout”
The list of troubled institutions during the S&L crisis reached close to 2,000 - compared to 177 today. Get real.
By kr on Sep 2, 2008
kr–the number of failed banks isn’t the point. It’s the size of their balance sheets. The S&L scandal cost $150b to dig out of. WaMu by itself has $140b of deposits, of which a third could be lost if they go bankrupt. That’s just ONE bank….
By RolfeWinkler on Sep 2, 2008
KR, your making the assumption that they are actually telling you how many banks are really in trouble. Is it 177 or is it 1770 or maybe 2500?
The most troubling aspect of todays economic troubles is the opacity of the information being disclosed and the intentional manipulation of the numbers in order to fend off things like bank runs. With the way the economy “feels” right now, it wouldn’t take much to have the average person removing all of thier money from banking institutions and keeping it as mattress money. If that happened then the financial sector would be completely done in something less than an instant.
I really don’t believe we have been given the real “troubled list” and I also believe that in reality the troubled list is far higher than the 177 we have been told and in fact is probably much higher than the 2000 or so that were listed in the S&L crisis.
Drink the Koolaid if you want, makes us all feel better after all but the true substance of the problem is more like arsenic than koolaid. Eventually the smoke and mirrors will be seen through and then all hell is going to break loose.
By Chad N on Sep 2, 2008
Very funny. Thanks. You made my day.
By Marc Authier on Sep 2, 2008
You make a great point Chad. WaMu ISN’T EVEN ON “THE LIST” of troubled banks. It’s facing a cash crunch courtesy of the Federal Home Loan Bank, which is demanding more collateral for the loans it gives WaMu. FDIC knows this is a problem. But if they include WaMu on the list, then the corresponding tally of assets at troubled institutions would skyrocket.
It shouldn’t come as a surprise that WaMu isn’t on the list. IndyMac wasn’t either when it went belly up.
By RolfeWinkler on Sep 2, 2008
You should put the federal government and most the US states on the list too. Just kidding. Not reallyt. You are lucky in the US to have all those guillable foreigners. Nice, but mostly stupid foreign investors that do not really understand english. Keep the good work ! Next on the list ? The FED itself.
By Marc Authier on Sep 2, 2008
As a survivor of the S&L Crisis of the late 80’s, I am in shock that I have to go through this again, not only financially, but employment wise as well. Not only are jobs few and far between, but the compensation is lower even in allot of basic jobs.
So, employers are trying to make more on the bottom line, but they are hurting potential “customers”. Someone got rich during this fiasco, and where is that money?
Being in the mortgage industry was a distinquished career, now it has been trashed by all these greedy people. I long for the day when we return to the “old methods”. The desire for everyone to have the American Dream stretched itself thin, in money and ethics.
Now we have to pay for it. While I was prudent in my underwriting, the guidelines were so loosely created that almost anyone could get a loan.
I live in my house, and I will struggle to keep, even though the value dropped. One day it will come up again… And that is what the public should do, forget you “lost” value, keep the payments up, it will return. No one wants to accept their “losses”, yet sometimes you have to so the industry can recover.
By dinochick on Sep 2, 2008
The question is which KoolAid are they feeding us, Ken Kesey or Jim Jones. Big difference.
Just remember that Paulson said they bailed out Bear Stearns to keep the financial system from collapsing. You really think they won’t lie to us for the same reason? They can justify nearly anything in support of that cause.
They are buying time to unwind this mess quarter by quarter with ‘only’ $100 B losses each time. Eventually it will get into the trillions, but not all at once.
By Douglas Tuttle on Sep 2, 2008
Chris Whalen at Institutional Risk Analytics said
the cost of a bank bailout could reach $500B.
By gp on Sep 2, 2008
Nice comments but if things play out the way they did in Japan then real estate values may be 20 years before they recover. The way BB is playing this game it looks like we will be in Japan2 before much longer.
By EWaddilove on Sep 2, 2008
Let’s not forget the “mother of all crisis” Credit defualt derivatives these large banks are holding. A whopping $62 trillion. Paul Volker is a very well respected former FED chairman. Who is going to bail all this out?
By Goldbug on Sep 2, 2008
I realize this may be irrelevant but I thought it was the FSLIC (not the FDIC) that ran out of money during the S&L crisis of the early ’90s.
By wootendw on Sep 2, 2008
wootendw–you are correct, though the FSLIC was folded into the FDIC after it failed. And for a time thereafter, the FDIC itself showed a negative cash balance.
By RolfeWinkler on Sep 2, 2008
The problem is not the ‘SUB-PRIME” loans. . I have done alot of 2 year fixed loans and here comes my client again. . after I counceled them to pay their bills on time they are now ready for a 30 year conforming loan. . . That’s what that is all about!! Now, you have these big lenders coming out with pick your payment loans and stated w-2 wage earner!!! What did you think would happen?
By Angela on Sep 3, 2008
We need to flush the garbage out of the system. If that means a second Depression, so be it. No, it won’t be pretty, but given the choice of a bit of strong medicine now and a complete meltdown later, it’s really not much of a choice.
By Tesh on Sep 3, 2008
1. The problem is that in many places the property (main banks asset) is overprised several times… - so in order to restore ballance you need at least either 2-4 times inflation or 2x-4x property price fall. One should be able to pay off for his home in 10-15 years MAXIMUM, not 35-50…
2. FDIC is nice, for solving local (small) troubles, but in this case (from someone that’s knows modern history) it looks like 1989 in east europe with people having thousands of rubbles on the deposit books (Saving accounts, from state bank). First the accounts are frozen (1990-1991), and than bank goes bust… And since mostly thay were retiered, most of them never had seen thair money again (the states started returning some parts of it in 20 years time).
3. If the problem persists, FDIC may be forced to freeze some of the deposits of busted banks. (Like it happened in case of FSU), or thay will stat adding zeroes to banknotes.
PS: NEVER keep ALL your eggs (savings) in the one buceket, and try to learn on others people mistakes (instead of doing in on your’s own).
By Tom on Sep 4, 2008