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Wednesday, August 27, 2008 2:46 AM

Cash Strapped FDIC Considers Tapping Treasury

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The WSJ is reporting FDIC Weighs Tapping Treasury as Funds Run Low.

Federal Deposit Insurance Corp. Chairman Sheila Bair said Tuesday her agency might have to borrow money from the Treasury Department to see it through an expected wave of bank failures.

Ms. Bair said the borrowing could be needed to cover short-term cash-flow pressures caused by reimbursing depositors immediately after the failure of a bank. The borrowed money would be repaid once the assets of that failed bank are sold.

The last time the FDIC borrowed funds from Treasury came at the tail end of the savings-and-loan crisis in the early 1990s after thousands of banks were shuttered. That the agency is considering the option again, after the collapse of just nine banks this year, illustrates the concern among Washington regulators about the weakness of the U.S. banking system in the wake of the credit crisis.
My Comment: Notice when the last FDIC cash shortage occurred. It was at the tail end of the S&L crisis. Arguably we are in the initial stages of this crisis.
"I would not rule out the possibility that at some point we may need to tap into [short-term] lines of credit with the Treasury for working capital, not to cover our losses, but just for short-term liquidity purposes," Ms. Bair said in an interview. Ms. Bair said such a scenario was unlikely in the "near term."

She said she did not expect the FDIC to take the more dramatic step of tapping a separate $30 billion credit line with Treasury, which has never been used.
My comment: Unrealistic optimism will be punished in due time.

Problem Banks List Rose 30% in Quarter

Bloomberg is reporting Banks on "Problem List" Rose 30% in Quarter.
The U.S. Federal Deposit Insurance Corp. said its "problem list'' of banks increased 30 percent in the second quarter to the highest total in five years as more commercial real-estate loans were overdue.

The list had 117 banks as of June 30, up from 90 in the first quarter and the highest since mid-2003, the agency said today in its quarterly report without naming any institutions. FDIC-insured lenders reported net income of $4.96 billion, down 87 percent from $36.8 billion in the same quarter a year ago.

"More banks will come on the list as credit problems worsen," FDIC Chairman Sheila Bair said at a news conference in Washington.

Second-quarter earnings fell from $19.3 billion in the previous quarter, driven by higher provisions for loan losses, the FDIC said. It was the second-lowest net income reported since the fourth quarter of 1991 behind the $600 million reported in the fourth quarter of 2007, the agency said.

"The results were pretty dismal, and we don't see a return to the high earnings levels of previous years any time soon," Bair said.
My Comment. The time it takes bank earnings to recover may be measured in decades not years.
The agency in October will consider a plan to replenish the account that will likely include an increase in the premiums charged banks, Bair said.

A greater share of the increase will be shifted to "riskier institutions so that safer institutions won't be unduly burdened,'' she said.
My Comment: Risky institutions should be shut down now. Why wait? Postponing the problem only makes matters worse.

So here we are, at the beginning of a credit crunch, and the FDIC is already considering tapping the Treasury. Supposedly it's only for "short-term cash-flow pressures". However, short term will eventually become long term, which bears the question:

How Long Can The Fed Last?

Cumberland Advisors has an interesting chart showing declining securities at the Fed. Let's take a look.

Factors Adding to Reserves and Off Balance Sheet Securities Lending Program

click on chart for sharper image
Chart Courtesy of Cumberland Advisors.

A the current pace, the Fed runs out of treasuries about a year from now. Things are about to get very interesting.

Mike "Mish" Shedlock
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