Federal Deposit Insurance Corp. officials and banking industry leaders said yesterday they are considering proposals to borrow the money needed to pay for bank failures as a way to avoid directly asking taxpayers to bail out the bank insurance fund.
The proposals were floated at a "banking summit meeting" called to find ways for the industry to replenish the FDIC's coffers, which have been drained nearly dry by the worst string of bank failures since the Great Depression.
Yesterday, for the first time, FDIC Chairman L. William Seidman acknowledged that the fund could run out of money this year if the current recession drags on longer than expected and causes more banks to fail.
However, "There is no crisis here," Seidman emphasized. "At this point I don't see any likelihood that we will have to go to the taxpayer."
After meeting with Seidman, banking leaders issued a statement saying the "industry is confident it can provide a private sector solution" to the drain on the FDIC. The bankers vowed to maintain their record that "no taxpayer funds have ever been used to handle a failed bank."
But the FDIC borrowing plans already have been described by the director of the Congressional Budget Office as a "back door way" of turning to the taxpayers, because they call for borrowing from the Treasury. "That is the taxpayers," CBO Director Robert Reischauer told the Senate Banking Committee earlier in the week.
Seidman also suggested that the FDIC might replenish the deposit insurance fund by borrowing from the very banks the fund insures, an idea that has been called "smoke and mirrors" by one congressional banking expert and "juggling money" by another.
Under that plan, the FDIC would borrow money from the banks, then raise deposit insurance premiums by enough to repay the loan, thus using the banks' own money to pay back the funds borrowed from them in the first place.
Despite such criticism, the plan to borrow for the FDIC has rapidly gained support in Congress, the Bush administration and the banking industry in the last two weeks.
The idea is popular with bankers because it could allow them to escape the stigma that the savings and loan industry has carried since the government was forced to rescue the S&L deposit insurance fund. Federal Reserve Board member John LaWare made that point yesterday in a speech to a New York banking industry group, urging them to do what they can for the FDIC to "avoid the label of a taxpayer bailout."
Borrowing is politically appealing because it would let the administration and Congress escape the wrath of voters who are already resentful about paying for thrift failures. Because the FDIC already has extensive borrowing authority, the White House would not have to ask for an FDIC bailout and Congress would not have to vote any money.
Seidman said FDIC officials believe that the agency has the legal authority to borrow about $65 billion -- far more than bank failures are expected to cost. The agency has a $5 billion line of credit from the Treasury that can be used whenever needed and has the power to borrow another $60 billion from either private sources or the government. Seidman, who has spoken in the past of perhaps needing between $5 billion and $15 billion, said the FDIC is considering asking Congress to boost the Treasury borrowing limit.
Disputing other projections that the FDIC could run out of money soon, Seidman said the FDIC does not foresee enough banks failing to wipe out the fund.
But even under optimistic economic scenarios, the FDIC "will likely have to borrow money for liquidity purposes" Seidman said. That is because the FDIC has to pay out cash when a bank fails but gets much of the money back later when it collects on the bank's loans and sells its other assets.