Tough Times at the FDIC

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Insurance is only as good as the insurer backing it, the old saying goes. Last fall, we learned that the hard way with AIG (NYSE: AIG). Before that, plenty of Wall Street banks feared bond insurance provided by Ambac (NYSE: ABK) and MBIA (NYSE: MBI) might not be worth the paper it was written on.

With this in mind, I'd like to introduce you to the FDIC -- the agency that insures deposits, should your bank go kablooey. And, you know, that happens these days.

First, know that the FDIC really can't run out of money. Being an arm of the government, nearly unlimited amounts of cash from by the U.S. Treasury are merely a phone call away. The FDIC isn't going under. Your deposits are safe.

Nonetheless, things are looking about as bleak as ever. On Tuesday, the FDIC announced that its deposit insurance fund dipped into negative territory for the first time since 1991, some $8.2 billion in the hole.

This figure includes a nearly $22 billion provision for future losses, so the well isn't completely dry just yet. But no doubt, the FDIC needs money, and it needs it quick.

Where's it going to get it?

Back in September, the FDIC said it'd make member banks prepay insurance premiums at the end of this year through 2012. Banks like Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), and JPMorgan Chase (NYSE: JPM) could write a big check up front, replenishing the FDIC's coffers by $45 billion, then hold the prepayment amount as a prepaid asset, so there'd be no material impact on bank shareholders.

But let me reiterate a point made in September: Prepaying future funds is not the same as raising additional funds. And when an account is dangerously low -- in this case, below zero -- you must, must, must raise additional funds.

Prepaying funds makes the FDIC's funding dilemma go away ... for the time being, and it makes the negative deposit insurance fund figure meaningless ... for the time being. But what happens if, before 2012, the deposit insurance fund starts to run dry again? With the problem bank list the highest it's been since 1993, this is actually quite likely. Yet with banks having already prepaid their premiums, income to revive the deposit insurance fund will be nonexistent.

Where, then, will the money come from? Your guess is as good as mine, but in all likelihood, it'll come from special one-time assessments charged to the banking industry. This solves the problem, but it makes us wonder: Why not just do it today?

Actually, the answer is obvious: Kicking the can down the road can be fun while lasts.