Expert Predicts Up To 500 Failed Banks In 2009 – Is The FDIC Ready?

Can The FDIC Handle 500 Bank Failures?

The former head of the Resolution Trust Company, William Seidman, recently provided commentary on the ability of the FDIC to handle its many critical assignments.  According to Mr. Seidman, the successful execution of the FDIC’s new duties is critical to ensuring a recovery of the US financial system.  Mr. Seidman summed up the new FDIC responsibilities as follows:

“To help rescue the financial system from its current mess, the FDIC’s duties now include running the auction of toxic real-estate assets held by financial institutions, setting up a bigger guaranty program to leverage asset purchases, and operating a loan guaranty plan for banks”.

“What’s more, the FDIC has to handle its regular duty of resolving bank failures. Most FDIC experts estimate that there will be a large increase in bank failures this year: between 100 and 500 additional failures, up from 25 failures last year. Bank failures, like the tides, wait for no man. When they happen the agency has to be ready”.

RTC Experience Raises Questions

Mr. Seidman noted that getting the Resolution Trust Company up to speed quickly required quickly hiring thousands of new employees.  “The RTC had to hire several thousand new employees to handle a little over half the value of the legacy assets the FDIC is now handling. It also had to obtain exemption from normal government-hiring requirements to be able to put together a team on a timely basis.”  Due to the size and complexity of dealing with multiple institutions and disposing of hundreds of billions in assets, Mr. Seidman believes that “the requirement for new personnel may be much larger than planned”.

At the current time, Mr. Seidman does not believe that the FDIC has the personnel and resources to adequately handle the multiple missions it has been assigned.  Mr. Seidman noted that “In January 2008 the FDIC had 4,810 employees, of which 223 were in property dispositions. It now has 5,381 employees, of which 636 work in resolutions… But the RTC needed several thousand people to dispose of assets with less property than the current financial crisis presents. Even if it is much more efficient than the RTC, it seems the FDIC is going to be substantially understaffed for a while”.

Ultimate Resolution Remains Unclear

Given the many new critical responsibilities assigned to the FDIC, along with handling up to 500 bank failures, it appears that the FDIC is stretched very thin.  Although Mr. Seidman thinks the FDIC will ultimately succeed in its missions, he offered the following advice: “take it from someone whose been at least partially there: It isn’t going to be easy.  And it has to be done fast”.

Failure of the FDIC to adequately execute its many missions could allow the banking crisis to drag on for many years, impeding the country’s economic health.  Time will tell how the FDIC handles the biggest banking crisis ever.  The scope of the banking crisis seems to be relatively well defined at this point – it is the future “unknowns” that we really have to worry about.