FDIC That Started in Thumb Area Faces Increased Pressure with Bank Failures
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President Franklin Roosevelt speaks to the nation regarding the banking crisis March 12, 1933.
So you believed the optimistic reports that the great recession of 2009 was over?
Maybe not.
The Federal Deposit Insurance Corporation (F.D.I.C.) is coming under increased pressure because of the failure of banks nationwide.
The F.D.I.C. itself is fighting for its life as banks are failing all over the nation, and the rate of failures is escalating.
Commercial real estate mortgage failures threaten to deplete the FDIC's fund, which guarantees deposits of up to $250,000 per account. The new level of the insurance fund puts the ratio at 0.22 percent, far below the federal minimum of 1.15 percent.
It is not a well-known fact that the F.D.I.C. originated with a man named James Purdy, president of the Gagetown State Savings Bank in mid-Michigan.
Gagetown, in fact, barely shows up on the map, being a small farming community of less than 400 persons located on an un-numbered road from Unionville to Forestville about 25 miles east of Bay City.
Mr. Purdy joined his father in the banking business in 1890 and soon became president of the bank. They also owned a farm where the picturesque Octagon Barn is located. The barn, a major tourist attraction, is now operated by the Michigan Department of Natural Resources (DNR).
States a local historical source regarding Mr. Purdy: "Under his leadership the bank flourished and was one of only two banks in Michigan to remain solvent during the Great Depression."
In our recollection the other bank saved was the Peoples Commercial and Savings Bank of Bay City, with James E. Davidson at the helm. Davidson became a local legend by flying to Detroit and returning with $1 million to deposit, and convincing local business people to keep their assets in the bank. He broke the run on the bank, thus preserving the deposits of hundreds of local families, and becoming one of the all-time great local heroes.
Well, as the story goes, Mr. Purdy met with other Michigan bankers in Lansing and convinced Sen. Arthur Vandenburg to introduce a bill to have the federal government guarantee deposits.
President Franklin D. Roosevelt liked Purdy's idea and the F.D.I.C. was born.
Roosevelt said: "On March 3 banking operations in the United States ceased. To review at this time the causes of this failure of our banking system is unnecessary. Suffice it to say that the government has been compelled to step in for the protection of depositors and the business of the nation."
As FDR spoke these words to Congress on March 9, 1933, the nation's troubled banking system lay dormant. More than 9,000 banks had ceased operations between the stock market crash in October 1929 and the banking holiday in March 1933. The economy was in the midst of the worst economic depression in modern history.
The FDIC was born three months later when the President signed the Banking Act of 1933. Opposition to the measure had earlier been voiced by various politicians and prominent bankers. They believed a system of deposit insurance would be unduly expensive and would unfairly subsidize poorly managed banks. Public opinion, however, was squarely behind a federal depositor protection plan.
The insurance system was an immediate success in restoring stability. The bank failure rate fell dramatically, with only nine insured banks failing during 1934. During the 30-year period beginning with World War II,the booming economy and conservative bank regulators and the bankers minimized risks to the financial system, and the importance of deposit insurance in maintaining stability declined. Rep. Wright Patman, Chairman of the House banking committee, argued in a 1963 speech that there were too few bank failures - that we had moved too far in the direction of bank safety.
The F.D.I.C. has been working very well since then.
That is, until now.
A week ago F.D.I.C. took over Warren (MI) Bank, with about $538 million in assets and $501 million in deposits. The Huntington National Bank of Columbus, Ohio, assumed the deposits and about $83 million of the assets of the failed bank. The failure of Warren Bank is expected to cost F.D.I.C. $275 million.
The F.D.I.C. has never faced a challenge like it does now. While three banks failed in 2007 and 25 went under in 2008, so far this year the number of distressed banks rose to the highest level in 15 years and 98 banks have closed.
The deepening recession in the second quarter of 2009 resulted in more banks with bad loans, according to the report.
More than 28 percent of all F.D.I.C. insured institutions reported a net loss in the second quarter, compared with 18 percent in the same quarter of last year.
The FDIC's insurance fund balance has dropped from over $50 billion to around $10.4 billion over the past year, according to Mark Calabria, of the Cato Institute. "With further losses in the construction lending and commercial loan sector, it is almost certain that the remaining insurance fund balance will be depleted," he said.
FDIC has two options to replenish its insurance fund, charge banks higher fees or borrow from the U.S. Treasury like it did during the savings and loan crisis of the early 1990s.
FDIC reported the number of troubled banks rose to 416 at the end of June, up from 309 during March. This is the largest number of problem banks since June 30, 1994, when 434 banks were on the endangered list.
Banks insured by the FDIC posted a total quarterly loss of $3.7 billion, a vast change from the same period last year when they reported a total profit of $4.8 billion.
Earlier this year F.D.I.C. was frantically hiring about 1,500 people, at up to $250 per hour, to deal with real estate crisis situations in the western states. The agency has formed private equity and other profit groups to help move mountains of toxic debt off book. It is also peddling packages of bad loan paper in e-bay like auctions.
Some individual buyers have reported acquiring houses at 10 percent of previous value.
"While challenges remain, evidence is building that the U.S. economy is starting to grow again," FDIC Chairman Sheila Bair said.
"The banking industry, too, can look forward to better times ahead," she added. "But, for now, the difficult and necessary process of recognizing loan losses and cleaning up balance sheets continues to be reflected in the industry's bottom line."
Bair said the FDIC has "ample resources" to protect depositors. "No insured depositor has ever lost a penny of insured deposits ... and no one ever will," she asserted.
The FDIC reported that nearly 66 percent of banks and savings and loans reported earnings lower than those in the second quarter of 2008, and more than a quarter posted a net loss.
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