FDIC Fund Slides into the Red

Flashback: On January 15, 2009, the head of the Federal Deposit Insurance Corporation, Sheila Bair, insisted that deposits in American banks were secure:

“The FDIC will never go broke. We are still running at a surplus, our reserves seem to be quite fit for the projected closure activity that we have,” Bair said.

Bair said the FDIC won’t rule out that in the future they may need to borrow from the Treasury, but added: “At this time it doesn’t look like we will have to do that.”

Flash-forward: As of today, November 27, 2009, the FDIC is not only broke, but $8.2 Billion dollars in the red:

The agency said Tuesday that its reserve used to protect consumers’ deposits when a financial institution goes under is $8.2 billion in the hole.

end of the third quarter, up from the second quarter’s tally of 416. The new figure represents about 7 percent of all U.S. banks.

In the Tuesday release of the FDIC’s quarterly assessment of the nation’s banking landscape, the agency also reported that banks’ cut lending in Q3 by the largest amount since the government began tracking loan activity in 1984, with declines recorded in every loan category, from commercial and real estate mortgages to small business and corporate funding.

Total loan balances of FDIC-insured institutions fell by $210.4 billion, or 2.8 percent, compared to the second quarter of this year, indicating that banks are still reluctant to extend credit which analysts agree is an essential element of an economic recovery. According to the report, large banks were responsible for 75 percent of the decline. It’s these institutions that hold more than half of the industry’s assets and were the primary recipients of the government’s bailout program – funding intended to jumpstart lending.

Why does this whole “we predict everything is going to be ok” situation seem so oddly familiar?