The FDIC's Suspicious Marketing Campaign

To mark its infamous 75th anniversary this year, the Federal Deposit Insurance Corporation (FDIC) has recently launched a series of full-page advertisements in U.S. newspapers. The latest such campaign, published in Monday’s Wall Street Journal, celebrates the institutions’ long-term safety net of public funds up to $100,000 and serves to remind depositors that the FDIC is there to protect cash deposits and CDs.

A full-page FDIC advertisement in the midst of the country’s worst financial crisis since 1990 seems just a bit suspicious. I’ve got to wonder if the FDIC is firing a warning salvo ahead of a rash of small bank failures in 2008 and possibly, in 2009. Are more banks likely to fail? Maybe the FDIC wants to remind depositors that cash deposits and CDs up to $100,000 are still guaranteed by the government.

The FDIC was created during the Great Depression as businesses collapsed and bank failures riddled the economy. From 1920 to 1934, a total of 9,812 banks were suspended, closed, failed or merged, according to Colonial Statistics. From March 6 to March 13, 1933, President Roosevelt declared a banking holiday – no financial institutions were open and depositors could not access their funds. During the Great Depression, the Roosevelt administration also confiscated gold ownership.

The number of U.S. bank failures since the onset of the credit crisis last July is still under 100. But from 1988 to 1990, over 1,000 American banks failed, mostly because of the Savings & Loans crisis. Considering the depth and longevity of this crisis, it’s probably fair to assume many more banks will succumb to failure or suspension, especially smaller banks. In fact, a few months ago, Fed Chairman, Ben Bernanke, warned that he expects a rash of smaller banks to fail because of weak capital ratios and bruised balance sheets.

Bernanke, of course, won’t bail-out a small bank in Arkansas or other Mom and Pop banks in Middle America; but the Fed did bail-out Bear Stearns in a forced merger with J.P. Morgan Chase in March and will rescue other large U.S. banks if they pose systemic risk to the financial system. These include J.P. Morgan Chase, Citigroup and Bank of America.

The Fed is desperately trying to help FDIC member banks to rebuild their capital ratios by cutting interest rates to 2% recently.

Low interest rates help boost lending margins for banks as spreads widen between short-term and long-term lending rates. The problem, however, is that with the exception of their largest clients, most banks have pulled back from lending since the onset of the sub-prime debacle last summer. Mortgage lending has collapsed. Consumer credit is especially difficult to secure, especially amid balance sheet erosion, massive write-downs and plunging capital ratios.

Indeed, 2008 marks the 75th anniversary of the FDIC. Yet, I doubt this is a celebratory environment for an institution that serves to protect depositors. I’ve got a feeling the FDIC will be quite active over the next 12 months as smaller banks, including possibly some regional banks, head into bankruptcy.

The government’s safety net might offer peace of mind to some individuals, but for most depositors it’s a stop-gap none of us want to secure. As a precaution, park your cash and short-term emergency liquidity needs at J.P. Morgan Chase, Citigroup, Bank of America or 90-day Treasury bills. I’d avoid small institutions and the regional banks.

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