Federal Deposit Insurance Corporation

The Federal Deposit Insurance Corporation "mission is to maintain the stability of and public confidence in the nation's financial system. To achieve this goal, the FDIC was created in 1933 to insure deposits and promote safe and sound banking practices." At first, the FDIC handled failing banks and repaying insured depositors. However, the role of the FDIC changed after WWII, and the FDIC adopted a more limited role as the banking industry remained stable. In the late 1980s, the Savings and Loans crisis led to FDIC bailout of many Savings and Loans Associations, costing taxpayers $120 Billion. By 1991, the FDIC was in the red and had to borrow money from the Treasury. The FDIC celebrated its 50th anniversary in 1983 and issued a statement highlighting its history. A portion of the statement include: "Out of the ruins, birth was given to the FDIC three months later when the President signed the Banking Act of 1933. Opposition to the measure had earlier been voiced by the President, the Chairman of the Senate Banking Committee and the American Bankers Association. They believed a system of deposit insurance would be unduly expensive and would unfairly subsidize poorly managed banks. Public opinion, however, was squarely behind a federal depositor protection plan."

Recent Banking Crisis
With the collapse of the housing market in 2007, the FDIC began warning about bank failures looming as early as 2008. The bank failures began with the FDIC seizing IndyMac, a California bank, due to housing mortgage losses in 2008. FDIC spent $10 billion on IndyMac's failure. 702 institutions were on FDIC's 2009 watch list. About 140 banks failed in 2009, and bad credit, mortgage, and corporate loans continued to escalate in 2009. In November 2009, United Commercial Bank of San Francisco failed, costing U.S. taxpayers $1.4 billion. "The seizure of the bank by regulators comes after it had already received $299 million in federal financial aid last year. Its closure will cost the insurance deposit fund $1.4 billion, said the Federal Deposit Insurance Corp."

In 2010, the FDIC shut down banks in Nevada and Washington, making the total of bank failures in 2010 so far at 22. In 2009, the FDIC fell in the red, negative $8.2 billion; this is only the second time in the agency's history that the FDIC has slipped into red figures. In early 2009, FDIC "quietly asked Congress to provide up to $500 billion in Treasury loans to repay depositors. The FDIC can draw up to $100 billion merely by asking, while the rest requires Treasury approval. The request was made on the political QT because, amid the uproar over TARP and bonuses, no one in Congress or the Obama Administration wanted to admit they'd need another bailout." FDIC began lobbying Congress to borrow large amounts of money from the Treasury as early as March of 2009. Senator Christopher Dodd of Connecticut introduced in March 2009 to allow FDIC to borrow up to $500 Billion from the Treasury.

Banks show no sign of improving in recent months. Problems with FDIC-insured banks rose 27% in the fourth quarter of 2009. A New York Times article described the situation as: "The Federal Deposit Insurance Corporation is bracing for a new wave of bank failures that could cost the agency many billions of dollars and further strain its finances."

Private Investors Pitch In
Until the early months of 2010, FDIC was solely shouldering the responsibility of shutting down and handling bank failures, they will get some help from private investors. As of early 2010, FDIC have dealt with 240 bank failures since the financial crisis hit. As of May 2010, private investors have begun to take over failing banks, which means the FDIC does not have takeover these banks. "TD Bank of Canada announced that it would buy the South Financial Group. Private investors recently have plowed money into other troubled institutions, like Synovus Financial, Sterling Financial and Pacific Capital Bancorp."

Recent Reforms Proposed
Several reforms have been proposed to reduce the chances of future financial banking crisis. One proposal was put forth by President Obama: "President Obama wants to limit the scope of risk-taking by barring banks with federally insured deposits from trading securities for their own accounts and from owning hedge funds and private equity funds. The plan, policy makers said, would effectively require bank holding companies — which Goldman and Morgan became at the height of the financial crisis — to divest themselves of these lucrative operations." The proposal would allow banks, who do not like the new rules, to drop their status as holding companies while still keeping their trading and investment businesses. The option to drop holding company status could lead to a risky situation. As the New York Times article continues to explain: "Allowing Goldman, or other institutions, to abandon their bank charters carries risks. Such a plan could create a two-tier system, where Goldman could pursue business activities different from its bailed-out peers like JPMorgan Chase. Goldman would lose access to the Federal Reserve’s overnight lending program, which provides emergency financing. But investors may still assume that the government would bail out Goldman if it had trouble, elevating the risk of moral hazard."

FDIC is asking public pension funds to buy stakes or assets of troubled banks. These public pension funds control over $2 trillion, and the FDIC would like them to interject this capital into failed banks. "Direct investments may allow public retirement funds to reduce fees for private equity managers and FDIC to get better prices for distressed assets." Another reform movement is being led by former regulators and bankers. Ex-regulators and bankers are teaming up to raise money to buy failed banks and are led by William Isaac, former FDIC chairman. The group of private banking individuals seek to raise $500 million at first; "BSE Management is a bank opportunity PE fund and a bank holding company that is buying out bankrupted U.S. mid- and small-sized banks from the FDIC."

Expansion of FDIC's Power
Federal regulators have granted FDIC unlimited power to investigate banks. In an agreement between the agency, regulators at the Federal Reserve and Treasury Department, the power granted clarifies FDIC's authority to engage in special examinations of banks. Chairman Sheila Bair commented on the expanded authority: "The F.D.I.C. needs to have a more active on-site presence and greater direct access to information and bank personnel in order to fully evaluate the risks to the deposit insurance fund on an ongoing basis and to be prepared for all contingencies.”

FDIC is also seeking legal action against individuals committing fraud. In July of 2010, FDIC filed a lawsuit against former executives of IndyMac's homebuilding loan division. This lawsuit is the first professional liability suit that the FDIC has brought in connection with recent bank failures occurring since 2008. The lawsuit alleges that IndyMac's loan compensation program encouraged increased loans to homebuilders without any concern for the quality of loans issues. "“HBD’s management pushed to grow loan production despite their awareness that a significant downturn in the market was imminent and despite warnings from IndyMac’s upper management about the likelihood of a market decline,” the FDIC said in its complaint." "The Pasadena bank, known mostly for providing variable-rate home loans without requiring proof of income from borrowers, was seized by the Federal Deposit Insurance Corp. in July 2008 in one of the earliest and biggest bank failures stemming from the mortgage meltdown."

Board of Directors

 * Board Members.


 * Chairman Sheila Bair
 * Vice Chairman Martin J. Gruenberg
 * Director Thomas J. Curry
 * Comptroller of the Currency John C. Dugan
 * Director of the Office of Thrift Supervision (Acting) John E. Bowman

Contact Information
Website: http://www.fdic.gov/about/index.html

Related SourceWatch articles

 * bank
 * banking
 * Federal Reserve System

External articles

 * MarketWatch,"Five Bank Closures to Cost FDIC $1.5 Billion", November 7, 2009


 * Louise Story and Eric Dash,"Banks May Get Help to Escape Proposed Limits on Risk", New York Times, January 22, 2010.


 * Caitlin Kenney,"FDIC in the Red", NPR: Planet Money Blog, November 24, 2009


 * Agnes T. Crane and Lauren Silva Laughlin,"Some Corporate Debt May Be the Safer Bet", New York Times, February 16, 2010.


 * Times Topic,"Federal Deposit Insurance Corporation", New York Times,


 * Damian Paletta,"Bill Seeks to Let FDIC Borrow Up to $500 Billion", Wall Street Journal, March 6, 2009.


 * Review and Outlook,"The Coming FDIC Bailout", Wall Street Journal, September 1, 2009