FDIC-insured: The safest your money can be

“I don’t think there’s any doubt the fund is in serious trouble,” said Dean Baker, co-director of the Center for Economic and Policy Research, who emphasized that he is an admirer of FDIC chairwoman Bair. “Clearly, there’s a very strong possibility they’ll need recapitalization by Congress, if not this year then probably sometime in 2009.”

But the FDIC disputes that and took special exception last week to one report that said it could need as much as a $150 billion bailout. “The insurance fund is in a strong financial position to weather a significant upsurge in bank failures,” FDIC spokesman Andrew Gray wrote in response to the Bloomberg news piece. “The FDIC has all the tools and resources necessary to meet our commitment to insured depositors, which we view as sacred. I do not foresee … that taxpayers may have to foot the bill for a ‘bailout.’”

$5 billion in annual revenue
James Chessen, chief economist for the bankers association, pointed out that in addition to the $45 billion that remains in the fund, the FDIC receives some $5 billion a year in interest and premiums from member banks and has a $30 billion line of credit from the federal government that it could tap if needed. Also, at next week’s FDIC board meeting, Bair will propose a hike in bank premiums to further replenish the fund.

Chessen said reforms passed in the wake of the savings and loan crisis in the 1980s, in which another federal deposit insurance agency, the Federal Savings and Loan Insurance Corp., became insolvent and was merged with the FDIC, make it clear that the onus is on the banks, not the U.S. Treasury. “Banks have built up that fund, they pay premiums to support it, they’ll rebuild it and they have to pay back any borrowing from the Treasury that would occur, and that would be a very rare circumstance,” he said.

Regardless of whether or not taxpayer money is at risk, most observers agree that insured deposits are not.

Even Baker, who believes an FDIC bailout is on the horizon, said, “Absolutely they’d be made whole. It would be catastrophic not to do that. Congress would certainly come through with the money to make depositors whole.”

Added Chessen, “Behind it all is the explicit full faith and credit of the government, which of course is exactly what backs Treasury securities. So what backs treasury securities is what backs the FDIC.”

“Nobody is doing a giant fake or a fraud,” agreed Ferguson of UMass. “These are really insured.”

The FDIC does acknowledge that many depositors are not familiar with the details of how deposit insurance works. A press release issued last week reminded depositors that “basic FDIC insurance covers up to $100,000 of deposits per account holder per bank, and up to $250,000 per account holder for deposit retirement accounts.”

Accounts held jointly and in trust can let depositors leverage their coverage well beyond individual limits. The agency’s Web site  provides information about how these limits work.

On Tuesday, presidential candidates Sen. Barack Obama and Sen. John McCain both called for the current limits to be raised.

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