The Federal Deposit Insurance Corporation is in serious trouble. The Federal Corporation (the FDIC is not a direct federal agency) run by Sheila Bair is practically insolvent. Ms. Bair has said that the fund insuring bank deposits for all Americans could be wiped out this year without new fee increases from U.S. banks and thrifts.

She is looking for a solution to a problem that has only grown worse at the FDIC since the beginning of the credit crunch.

Net income in the last quarter of 2008 dropped to $5.8 billion at 8,450 banks and savings and loans that were insured by the FDIC which was down from $35.2 billion in 2007. For 2008, net income dropped 27 percent, to $105.5 billion. American banks doubled loan loss provisions to $68.2 billion.

1 in 4 insured institutions with financial assets of more than $10 billion have reported net losses for the 4th quarter. The percentage that were unprofitable in 2007 — 11.6 % — was at the highest since 1991.

By the end of 2007, there were 76 FDIC-insured non-private banks and savings institutions on the “FDIC Problem List,” with combined assets of $22.3 billion, up from 64 institutions with $18.5 billion at the end of the third quarter of 2007.

As of Mid - 2009 there have been over 70 bank failures. The strain of winding down these institutions is causing further strain on the resources of the FDIC. It is unclear whether the Obama administration will provide more liquidity to the FDIC to cover the expenses of winding down even more failed institutions.

Small banks are not happy that Bair has requested higher fees from member banks. Camden Fine of the Independent Community Bankers of America says the new fee will sweep out 50% to 100% of all net income for fiscal year 2009 for these smaller institutions.

He says these larger assessments would be difficult to swallow during a period of economic expansion. But since we are in the midst of the worst financial crisis since the 1930s these new assessments imposed by the FDIC will not just be onerous but ruinous as well.

Bair claims that these new assessments (fees) are absolutely necessary for the long term stability and vitality of the Deposit Insurance agency and that she has considered other less reasonable alternatives. One of those alternatives is to simply adjust higher the fees for the largest banks and leave the smaller banks to pay the regular assessments to the FDIC. But, ironically, these smaller thrifts and savings and loan corps. are in far better shape than giants like Citigroup and Bank of America precisely because they did not get involved with the arcane world of CDO, RMBS, CDS and all of the other esoteric acronyms that have nearly destroyed Wall Street.

Federal Deposit Insurance Corp. officials warned the largest U.S. banks on March 9, 2009 that they might be charged more for the agency’s debt guarantees, according to people familiar with the matter.

Sheila Bair has said she has no interest in using Federal Bailout aid to assist the bottom line of the FDIC. Her reasoning is that banks and not the common American taxpayers are responsible for the premium income that the FDIC depends on to function.

Experts say that despite the troubles the FDIC is having at the moment it is not feasible to take one's money out of the FDIC insured institutions. The U.S. government feels that the FDIC is "too important to fail" and that a lack of confidence in it would certainly spark a run on banks nationwide. President Obama and the Republicans in Congress can agree that that is not what is desired by anybody.

The Federal Deposit Insurance Corporation has a $1.4 trillion Temporary Liquidity Guarantee Program. This is TWICE the size of the Troubled Asset Relief Program. The programs purpose is to allow banks and insurance companies to borrow and lend more readily via two routes.

The Debt Guarantee Option, debt issued by June 30, 2009 and maturing no later than June 30, 2012, is guaranteed by the FDIC. The FDIC has guaranteed $224 billion in new debt under this option, with the potential of arriving at $1 trillion.

The second route is the Transaction Account Guarantee Option. It fully guarantees certain checking and non-interest-bearing accounts through December 31, 2009. According to the FDIC it has guaranteed approximately $684 billion under this option so far.