IndyMac losses put more strain on FDIC funds

Yesterday's sale of failed California mortgage lender IndyMac has left the US Federal Deposit Insurance Corporation (FDIC) with a $10.7 billion bill - weakening its reserves further even as the list of failed banks requiring support continues to lengthen.

The FDIC sold IndyMac for $13.9 billion to OneWest, a Californian savings bank backed by a group of private investors. IndyMac originally fell under FDIC control on July 11 last year, in the second largest US bank failure since the FDIC was set up in 1934. "The bank relied heavily on higher-cost, less stable, brokered deposits, as well as secured borrowings, to fund its operations and focused on stated income and other aggressively underwritten loans in areas with rapidly escalating home prices," the FDIC said earlier this year.

But the cost of salvaging IndyMac has almost tripled from the FDIC's optimistic original estimate. In July, the FDIC said it might be able to repair and re-privatise the bank for as little as $4 billion. Even in January, when the OneWest deal was agreed, the FDIC said its Deposit Insurance Fund would only have to pay "between $8.5 billion and $9.4 billion".

The guarantor recently announced its "problem list" of banks in significant danger now includes 252 names as of the end of 2008, up from only 171 at the end of September 2008, with a total of $159 billion in assets - the deposit insurance fund fell by 45% over the last three months of the year to just $19 billion, with another $22 billion set aside for expected losses this year.

Speaking yesterday in front of the Senate banking committee, Arthur Murton, the FDIC's director of insurance and research, said bank failures had reached their highest level since 1993; 25 failed in 2008 and another 17 have failed so far this year, he said. Despite increases in the fees paid by insured banks, the fund's reserve ratio could take up to seven years to return to its target of 1.15%, he said.

With its resources severely strained, Murton called for Congress to expand the FDIC's ability to borrow from the US Treasury. At present it cannot borrow more than $30 billion - a level set in 1991 - and Murton said a permanent increase to $100 billion, and a temporary increase to $500 billion (with consent from the Treasury and the Federal Reserve) was important "to meet all contingencies" and "to demonstrate the FDIC's ability to immediately access significant liquidity even in high-stress scenarios".

Murton also criticised laws that prevent FDIC from building up the fund during prosperous times: once the ratio rises to 1.5%, the FDIC is not permitted to collect any further fees. During the decade of calm markets from 1996 to 2006, this meant the FDIC collected few or no fees, leaving it underprepared for the crisis. Murton warned: "These restrictions on the size of the DIF will limit the ability of the FDIC to rebuild the fund in the future to levels that can offset the pro-cyclical impact of assessment increases during times of economic stress," and called on Congress to revisit this limit.

See also: FDIC: 252 US banks now at risk
FDIC prepares to sell off IndyMac
Regulators shut down IndyMac