When Will the FDIC's Bailout Come to Fruition?

The slew of bank failures that typically accompany a Friday night have inspired many people to approach these bouts of creative destruction as if it were a sport - say college football - worthy of following, documenting, and parsing. I am one of those people. That being said, I think it's about time that I devote some attention to the arguably mythical creature known as the FDIC's Deposit Insurance Fund (DIF). This fund is theoretically used to bridge the gap between the value of the deposits recovered in a bank failure, and the total value of bank depositor's claims that are insured by the FDIC. The DIF is largely funded via an assessment (read: tax) on FDIC member banks. A couple years ago, nobody paid that much attention to the DIF; it's balance remained relatively stable throughout time, and was only affected by the occasional bank failure. Presently however, the FDIC is in the midst of a 92-bank-failure-year which has reduced the balance of the DIF from $45.217B at the end of June '08, to a mere $10.386B as of the quarter ended June 30th, 2009. It is this fact alone which most discredits comparisons between today and the S&L crisis; although the S&L fiasco saw a much longer list of bank failures, consolidation within the banking industry over the past 20 years has led to fewer - yet much larger - banks today. For instance, last night's failure of Chicago based Corus Bank will cost the FDIC's DIF $1.7B.

It's become clear that the FDIC will be unable to prevent the depletion of the Deposit Insurance Fund; the question is how long it will be before the FDIC officially receives it's "bailout" from Treasury, in the form of a "loan" from the taxpayers. Well, we know that the DIF's balance is still in the billions of dollars, although it is certainly in the single digits by now. I can also state that a reasonable number of monthly bank failures - for the next 6-8 months at least - is between 15 and 30 banks per month. However, the total number of bank failures doesn't offer a very predictable estimate of DIF losses; as we've observed over the past year, the range of failed banks total assets/deposits is very large. My most reasonable estimate is that monthly DIF losses will range between $100MM and $3B; this doesn't allow for any black swan events of course, but those are useless to attempt to forecast. That being said, the FDIC could require a Treasury bailout in as soon as 2 months, or in the best case scenario, as far into the future as May/June 2010. If I were a bookie, I would probably set the under/over date for an FDIC bailout at December 15th, 2009. It's probable that I could balance my books with a date like that, however, my personal bet is that the bailout will have to occur before the end of October 2009. Sphere: Related Content

CIT's Last Hope May Be Government Rescue

In yet another twist to the story that will not end, Senator Chriss Dodd (D-CT) stated with regards to CIT Group Inc.(CIT) :

"I wouldn't rule out the possibility of a government intervention financially",

and

"Maybe there are some alternative ideas that would allow the company to survive in an altered state, but still allow it to provide the assistance and support they have to smaller business"

This statement comes on the heels of what appears to be an effort by the advisers to CIT's bondholders to push the company into Chapter 11 bankruptcy in August. This news was initially broken by Bloomberg(here), who purpotedly learned of the adviser's intentions through "people familiar with the matter".

We must remember that although Chris Dodd is the Chairman of the omniscient and omnipotent Senate Banking Committee, his voice does not necessarily represent that of the Administration's, or for that matter, the voice of fellow Democrats in Congress. If your recall, earlier this week Chris Dodd managed to get in the crossfire of the impotent Capitol Hill debate that centered around whether or not to buy more F-22 fighter jets this year. This was by the way, one of the more irrelevant and useless debates we have ever seen, as the entire escapade was about Obama trying to prove that he could save the country slightly more than a Billion dollars by curtailing a weapons program. For whatever reason, Dodd and a handful of others bucked up to Obama and positioned themselves as staunch defenders of the program. The most likely explanation being that the F-22's are scheduled to be manufactured in Dodd's district. This is beyond the point though, which is that the king's soldiers do not always fall in line with each other. Throw a little high-from-victory Republican opposition into CIT's bailout equation, and the outcome appears far from a given.

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