Borrowing Money

Ulli Uncategorized 2 Comments

In an appropriate sign of the times we’re in, the FDIC may have to “Borrow Money from the Treasury” according to the Wall Street Journal:

Federal Deposit Insurance Corp (FDIC) might have to borrow money from the Treasury Department to see it through an expected wave of bank failures, the Wall Street Journal reported.

The borrowing could be needed to cover short-term cash-flow pressures caused by reimbursing depositors immediately after the failure of a bank, the paper said.

The borrowed money would be repaid once the assets of that failed bank are sold.

“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,” Chairman Sheila Bair said in an interview with the paper.

Bair said such a scenario was unlikely in the “near term.” With a rise in the number of troubled banks, the FDIC’s Deposit Insurance Fund used to repay insured deposits at failed banks has been drained.

In a bid to replenish the $45.2 billion fund, Bair had said on Tuesday that the FDIC will consider a plan in October to raise the premium rates banks pay into the fund, a move that will further squeeze the industry.

The agency also plans to charge banks that engage in risky lending practices significantly higher premiums than other U.S. banks, Bair said.

The last time the FDIC had borrowed funds from the Treasury was at nearly the tail end of the savings-and-loan crisis in the early 1990s after thousands of banks were shuttered.

The fact 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, the Journal said.

Yes, considering this option this early in the game after the failure of only 9 banks is a troubling development and a clear sign that worse is to come.

The immediate question that comes to my mind is what happens if the losses of the anticipated bank failures exceed the current $45.2 billion dollar fund reserves? Sure, the FDIC will dip into their Treasury credit line to cover expenses, but then what? Who will ultimately foot the bill if there is a shortage, and most likely there will be?

Of course, you guessed it: The deep pockets of the taxpayer will as always be a ready and available resource to bail out failed institutions.

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Comments 2

  1. Ulli: Can you please clarify what hedging means?
    In one of the posts I read:
    “The safest and most responsible way to use reverse-index ETFs is to hedge or protect your equity portfolio in a bear market. “

    Suppose I hold $ x worth of an ETF. How are the following two different from one another?
    1. Buying $ x worth of invese ETF? (This means, whethere the marekt goes up or down, the value of my portfolion remains the same – am I right?)
    2. Seling the $ x worth of the ETF and having it in money market.

    Are not 1 and 2 above the same in terms of value after so many months? (In the case of 1 above -Till the time I liquidate the long or inverse ETF are not 1 and 2 above same?).
    Thanks for your time.

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