Banks are not the only ones struggling in the growing financial crisis. The fund established to insure their deposits is also feeling the pinch, and the taxpayer may be the lender of last resort.
The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation's largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday.
Treasury has already come to the rescue of several corporate victims of the housing and credit crunches. The government took over mortgage finance companies Fannie Mae and Freddie Mac, and helped finance the sale of investment bank Bear Stearns to J.P. Morgan Chase & Co.
Eleven federally insured banks and thrifts have failed this year, including Pasadena, Calif.-based IndyMac Bank, by far the largest shut down by regulators.
Additional failures of large banks or savings and loans companies seem likely, and that could overwhelm the FDIC's insurance fund, said Brian Bethune, U.S. economist at consulting firm Global Insight.
"We've got a ... retail bank run forming in this country," said Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics.
Treasury Secretary Henry Paulson said Monday that the country's commercial banking system "is safe and sound" and that "the American people can be very, very confident about their accounts in our banking system." FDIC officials also have said 98 percent of U.S. banks still meet regulators' standards for adequate capital.
But fear is growing on Main Street as well as Wall Street about the likelihood of multiple bank failures and the strain that would put on the FDIC.
The fund, which is marking its 75th anniversary this year with a "Face Your Finances" campaign, is at $45.2 billion — the lowest level since 2003. At the same time, the number of troubled banks is at a five-year high.
FDIC Chairman Sheila Bair has not ruled out the possibility of going to the Treasury for a short-term loan at some point. But she has said she does not expect the FDIC to take the more drastic action of using a separate $30 billion credit line with Treasury — something that has never been done.
The FDIC's fund is currently below the minimum set by Congress in a 2006 law. The failure of IndyMac Bank in July cost $8.9 billion.
Next month, Bair plans to propose increasing the premiums paid by banks and thrifts to replenish the fund. That plan is likely to be approved by the FDIC board, which consists of her, Comptroller of the Currency John Dugan, Thrift Supervision Director John Reich and two other officials.
Bair also is considering a system in which banks with riskier portfolios would be charged higher premiums, raising the possibility those costs could be passed on to consumers.
A Washington Mutual failure would dwarf the largest bank collapse in U.S. history — Continental Illinois National Bank in 1984, with $33.6 billion in assets.
By comparison, WaMu and its subsidiaries had assets of $309.73 billion as of June 30 and IndyMac had $32 billion when it shut down.
Arthur Murton, director of the FDIC's insurance and research division, said that when large institutions have failed in recent years, the hit to the fund has been about 5 to 10 percent of the company's assets.
Standard & Poor's Ratings Service late Monday cut its counterparty credit rating on WaMu to junk, action that followed downgrades by both Moody's and Fitch last week. Concern about the Seattle-based thrift, which has significant exposure to risky mortgage securities and other assets, has grown in recent weeks, and the company's stock price has plummeted.
WaMu responded Monday by saying that it did not expect the S&P downgrade to have a material impact on its borrowings, collateral or margin requirements. The bank said its capital at the end of the third quarter on Sept. 30 is expected to be "significantly above" required levels and that its outlook for expected credit losses is unchanged.
Some analyst estimates put the cost of a WaMu failure to the FDIC at more than $20 billion, but other experts say it is very difficult to predict. Unknown, for example, is the amount of advances that institutions may have taken from one of the regional banks in the Federal Home Loan Bank system. Banks and thrifts have significantly increased their requests for advances, or loans, from the 12 regional home loan banks since the mortgage crisis began last year.
These amounts aren't publicly disclosed but must be repaid if a bank or thrift fails, notes Karen Shaw Petrou, managing partner of Federal Financial Analytics.
If the FDIC doesn't have enough cash to cover the initial costs of a bank or thrift failure, one option would be short-term loans from the Treasury. That last happened in 1991-92, during the last part of the savings and loan crisis, when the FDIC borrowed $15.1 billion from the Treasury and repaid it with interest about a year later.
Based on projections of possible scenarios of bank failures, "between the (insurance) fund that we have now and our ability to draw on the resources of the industry ... we do have the resources" needed, Murton said Tuesday.
Though short-term borrowing from Treasury for working capital may be possible, he said, tapping the long-term credit line is unlikely.
But Whalen said the Federal Reserve, the Treasury and Congress should "immediately devise" and announce a plan to backstop the FDIC with up to $500 billion in borrowing authority to meet cash needs for closing or selling failed banks.
"While the FDIC already has a credit line in place and this figure may seem excessive — and hopefully it is — the idea here is to overshoot the actual number to reinforce public confidence," Whalen wrote in a note to clients. "Simply having Treasury Secretary Hank Paulson or Ben Bernanke making hopeful statements is inadequate. Like it says in the movies: 'Show us the money.'"
Before Congress passed the law overhauling deposit insurance in 2006, about 90 percent of all insured banks and thrifts — considered to have adequate capital and to be well managed — paid no premiums to the FDIC. Today, all of them do.
There were 117 banks and thrifts considered to be in trouble in the second quarter, the highest level since 2003, according to FDIC data released last month. The agency doesn't disclose the names of institutions on its internal list of troubled banks. On average, 13 percent of banks that make the list fail. Total assets of troubled banks tripled in the second quarter to $78 billion, and $32 billion of that coming from IndyMac Bank.
Last month, Bair called those results "pretty dismal," but said they were not surprising given the housing slump, a worsening economy, and disruptions in financial and credit markets. "More banks will come on the (troubled) list as credit problems worsen," he said. "Assets of problem institutions also will continue to rise."