Sheila Bair has to be given credit, she is working with a whole mess of financial institution failures that would give anyone nightmares. 168 failed institutions with more than $544B in assets have been seized by the FDIC in the last three years and there are 700 more “problem” institutions on the docket. To her defense, it is a bloody mess with residential foreclosure waves continuing to mount along with a commercial real estate storm that is just gaining momentum. What needs to be made clear is that the savior needs its own saving:
The FDIC's Funds have vanished rapidly
Regardless of the FDIC’s current financial situation, it has a lot of assets to swallow up in the near future:
$544B so far and $400B to go
This is not to say that $400B is all that the FDIC is left to deal with as there will be continuous financial pressure on regional and smaller community banks as they are forced to realize their losses. This does not mean that we should all scurry to distribute our cash to many financial instituions out of fear that the FDIC will not be able to back the assets, but that we should be watching to see how the FDIC gets its extra funding. To be sure, the government will be forced to backstop the FDIC just as they backstopped the large banks and the agencies.
What is interesting is that Sheila Bair is trying to utilize a solution that got us into the whole mess in the first place. Instead of selling the seized assets (and risks) from the FDIC’s balance sheet at fair market values (which are quite low), she is looking to securitize the seized assets and slap on an FDIC guarantee to assure investors. That’s right, take a pile of toxic waste and put a nice, shiny government guarantee on it. It did not work so well for MBIA and Ambac, but they did not have the luxury of tapping the taxpayers for some support. You can read about their devious plans at your own leisure.
