TOPICS > Economy

FDIC Losing Money as Many More Banks Face Collapse

August 27, 2009 at 2:01 PM EST
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The FDIC reported that its insurance fund shrank 20 percent in the second quarter. Jeffrey Brown speaks with a reporter and analyst about troubled banks.
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JEFFREY BROWN: And still to come on the NewsHour tonight: finding the truth on health care reform; talking to the leaders in Myanmar; and remembering a fabled political family.

That follows our update on the nation’s troubled banks. Today, the FDIC, which guarantees bank deposits, said banks lost more than $3.5 billion in the second quarter. The agency also reported that its insurance fund shrank another 20 percent, down to $10.4 billion. That’s the fund’s lowest level since the savings and loan crisis in the early ’90s.

So far this year, 81 banks have failed. Another 416 are on the FDIC’S so-called “problem list.”

Here to parse some of those numbers are Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting firm to the financial services industry, and Binyamin Appelbaum, banks and banking reporter for the Washington Post.

Welcome back to both of you.

Karen Petrou, the first thing this tells us, the banking sector is still struggling, right?

KAREN SHAW PETROU, managing partner, Federal Financial Analytics: That’s right.

JEFFREY BROWN: What’s the biggest problem for the banks right now?

KAREN SHAW PETROU: Bad loans, and lots of them. Bad loans they wrote in the lead-up to the crisis and loans that are going bad now because of unemployment and ongoing economic problems.

JEFFREY BROWN: So, Binyamin, I mean, we were hearing about all these sort of fancy investments. We talked about those for many months. But this is simpler stuff, not less bad, but simpler stuff, right?

Bread and butter banks hurting

Karen Shaw Petrou
Federal Financial Analytics
That's a very troubled sector. Shopping malls, office complexes, similar multifamily types of buildings of those loans are also a significant concern.

BINYAMIN APPELBAUM, reporter, The Washington Post: Right, it's a new problem. Instead of sort of stupid loans that banks made and shouldn't have made, we now have loans that made sense at the time that have gone bad because people lost their jobs, because their businesses aren't, you know, pulling in money anymore.

These are sort of the bread-and-butter categories: credit card lending, auto lending, lending to small businesses, lending for commercial development. All of these sort of basic building blocks of the economy are falling apart right now.

JEFFREY BROWN: And including -- mostly because of the housing -- these are mortgages, as well?

BINYAMIN APPELBAUM: And mortgages. Still mortgages, yes.

JEFFREY BROWN: So, Karen, what kind of banks or is there a type -- I mean, is there a pattern here of what kind of banks are most in trouble?

KAREN SHAW PETROU: It's across the board, but the more speculative residential mortgages, some of the fancy -- what Binyamin rightly described as stupid mortgages -- the more of those you've got, the worse you are -- and commercial real estate. That's a very troubled sector. Shopping malls, office complexes, similar multifamily types of buildings of those loans are also a significant concern.

JEFFREY BROWN: What kind of -- what would you add to that, in terms of the kind of banks that are in trouble?

BINYAMIN APPELBAUM: Yes, Sheila Bair, the chairman of the FDIC, said today that we're talking a lot here about smaller banks, institutions that haven't received as much help from the government as some of the larger firms have received, institutions that were pushed into a focus on commercial lending, on commercial real estate lending. Because bigger banks were dominating consumer lending, some of those institutions are now very exposed and in a lot of problems because they focused so exclusively on development and that business has now gone so dramatically south.

JEFFREY BROWN: But these were loans that they were making in the go-go years, right? I mean, these looked real good for a long time.

Plagued by the recession

Binyamin Appelbaum
The Washington Post
Back in the early '90s, the last time we went through something remotely approximating this, there were 10 straight quarters of decline. So by some measures, we could be fairly early in this process of the industry contracting itself.

BINYAMIN APPELBAUM: Yes, some of them did look good for a long time. Some of them are of more recent vintage. But that's right; these are now banks that are being plagued by the recession itself rather by their decision-making, per se.

JEFFREY BROWN: And, Karen, these problems come even as we're getting some better signs in the rest of the economy.

KAREN SHAW PETROU: They are, but those are tentative and early. And for as long as unemployment rises, as long as the gross domestic product is down, and as long as we're working through our -- the speculative excesses -- and we're just beginning to do that -- the banking system is going to stay a problem.

JEFFREY BROWN: "As long as," you say. How long does that mean? Any ideas?

KAREN SHAW PETROU: Oh, I think we're at least a year-and-a-half to two years out to see a really sustained stability in the U.S. banking system.

JEFFREY BROWN: What are people you talk to, Binyamin -- what do they say about the length here and the depth?

BINYAMIN APPELBAUM: Very interesting number. This was the fourth consecutive quarter that the aggregate volume of outstanding loans declined, that the -- you know, the sum total of the money that the banks were putting into the economy shrank.

Back in the early '90s, the last time we went through something remotely approximating this, there were 10 straight quarters of decline. So by some measures, we could be fairly early in this process of the industry contracting itself and sorting out its problems.

The one striking fact about these problems in the banking industry is that they do tend to outlast the recession itself, so even as we start to see strength elsewhere, the banks may still be struggling for some time.

JEFFREY BROWN: But as we see -- the same question I was asking Karen -- as we see things getting better, or we some signs of things getting better, are there some ways that that can seep into the banking system to help begin to prop it up?

Profiting from new business

Karen Shaw Petrou
Federal Financial Analytics
This is the FDIC's deposit insurance fund. It's the sticker on the door of every insured bank and savings association across the country, and it means that your money within the deposit limits.

BINYAMIN APPELBAUM: Sure, and it has already. New loans, new business for banks is becoming more profitable. They're able to borrow at relatively low cost and to lend that money out at fairly high interest rates. That margin, which is the basic business of banking, has gotten healthier in recent months, and so banks are profiting from their new business.

But there's still this massive overhang of all the things they did wrong in recent years. And until they get out from under that overhang, their health won't really improve.

JEFFREY BROWN: Now, Karen Petrou, turning to the FDIC fund that we talked about having gone down once again, first, remind us what this fund is. This is the thing we all hold on to, right, as insuring our deposits?

KAREN SHAW PETROU: That's right. This is the FDIC's deposit insurance fund. It's the sticker on the door of every insured bank and savings association across the country, and it means that your money within the deposit limits, which right now are very generous, is very safe.

JEFFREY BROWN: And where does that money come from, I mean, in the fund?

KAREN SHAW PETROU: It comes from premiums charged to insured depositories. The banks pay for the bank insurance fund. But if the fund runs dry, as it may, then there's a $500 billion line of credit to the U.S. Treasury.

JEFFREY BROWN: Binyamin, "as it may," she said. Explain to us what's happening. It's going down, first of all, because the money goes out to these troubled banks?

BINYAMIN APPELBAUM: Right. What happens is when -- banks collect money from depositors. They lend it out to borrowers. So at any given time, if all of the depositors show up and ask for their money, it's not there. It's with the people who borrowed it.

So when a bank fails, it essentially freezes that process, and the FDIC comes in, and it makes the depositors whole. It gives them the money that is no longer in the vaults.

About a year ago, the FDIC had $42 billion in its big basket to go in and make depositors whole. At the end of the first quarter this year, about $13 billion. Now, about $10 billion. So every time a bank fails -- and we've had about 106 of those since the beginning of the crisis -- some of that money goes out to pay off depositors, and the FDIC has a little bit less left in its vaults to help the next bank failure.

Fund constantly replenishes

Binyamin Appelbaum
The Washington Post
Earlier this year, it went out and collected a special assessment, an additional amount of money from the banks, and it has signaled that it plans to do that again before the end of the year.

JEFFREY BROWN: And I gather that it has signaled that it will be going to the banks to get more, to replenish that? Is that -- that's how it works?

BINYAMIN APPELBAUM: It's constantly replenishing. It's constantly collecting fees from the banks every quarter. Earlier this year, it went out and collected a special assessment, an additional amount of money from the banks, and it has signaled that it plans to do that again before the end of the year.

JEFFREY BROWN: And, Karen Petrou, is it something to worry about, as it goes down?

KAREN SHAW PETROU: It's not something for depositors to worry about. It is something as we think about the banking system, because the FDIC simply cannot charge big premiums right now because the banking system is weak. So the banking recovery will be delayed as we at the same time try to recapitalize the deposit insurance fund.

One of the reasons bank profits are beginning to show some signs of recovery is because the FDIC also now has, for the first time, a backstop not just for deposits, but for the debt that banks issue. Hundreds of billions of dollars of bank and bank-related company debt also now has this FDIC blessing.

And part of our exit strategy is to figure out how we can pull that back. It's going to be a very complicated balancing process to boost the FDIC and stabilize the banking system all at the same time.

JEFFREY BROWN: All right. We'll watch going forward. Thanks so much, Karen Shaw Petrou and Binyamin Appelbaum. Thanks.

KAREN SHAW PETROU: Thank you.