The FDIC’s Secret Bank Bailout Program


The original $750 billion TARP program created last year to bailout the banking industry caused a public uproar.  The Treasury, the Federal Reserve and the President all predicted massive banking failures and economic collapse if the TARP bill was not passed.  Congress finally passed the TARP legislation against the will of many voters who felt that those who had caused the economic crisis would now be rewarded by being bailout out with public monies.

The TARP funds were soon virtually depleted as numerous banking institutions were given huge sums of cash to stay afloat.  It became obvious by last autumn that funding beyond the original $750 billion TARP program would be needed to prevent numerous banking failures.  It was also obvious that it would be political suicide to publicly request more funds from Congress.

Last fall another bailout program was devised to provide additional massive amounts of funding to the banking industry.  This massive and costly bailout was implemented without public debate and without an official act of Congress.  Sheila Bair, FDIC Chairman, announced in October 2008 that the FDIC was initiating the Temporary Liquidity Guarantee Program (TLGP).  The FDIC’s published highlights of the program are as follows:

The FDIC has created this program to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount.

The FDIC’s guarantee of senior unsecured debt issued by entities participating in the TLGP’s Debt Guarantee Program is designed to preserve confidence and encourage liquidity in the banking system in order to ease lending to creditworthy businesses and consumers. Current indications suggest that entities participating in the TLGP’s Debt Guarantee Program are benefiting from both improved access to funding and lowered borrowing costs.

Under the Final Rule, the FDIC’s payment obligation will be triggered by a payment default. The FDIC will continue to make scheduled interest and principal payments under the terms of the debt instrument through its maturity, except that, for debt issuances whose final maturities extend beyond June 30, 2012, at any time thereafter, the FDIC may elect to make a payment in full of all the outstanding principal and interest under the debt issuance.

On March 17, 2009, the FDIC’s Board of Directors adopted an interim rule that extended the debt guarantee component of the FDIC’s Temporary Liquidity Guarantee Program. The interim rule provides that insured depository institutions and certain other participating entities may issue FDIC-guaranteed debt through October 31, 2009.

TLGP Taxpayer Liability Now At $340 Billion

Under the program financial institutions can sell debt which is fully guaranteed by the US Government through the FDIC.  To date, approximately $340 billion in low cost debt has been sold under the TLGP.  The FDIC now guarantees not only customer deposits but also $340 billion in bank debt held by investors.  Much of the TLGP debt was issued by major banks that in all probability will not default.  Nonetheless, the FDIC has increased their potential exposure to loss while the FDIC Deposit Insurance Fund (DIF) has steadily decreased due to losses on bank closures.

Will The FDIC Need A Bailout?

The FDIC currently has only $18 billion in the DIF, while ensuring $4.7 trillion in deposits and $340 billion of bank debt.  With the possibility that 500 banks may fail this year, the FDIC Deposit Insurance Fund should be quickly depleted.  It is almost a certainty that the FDIC itself will be needing a Government funded taxpayer bailout at some point this year.

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