Federal backstop programs may need bailout of their own

Sure glad our federal government stepped in to bail out overleveraged Wall Street and all those big banks. But who's going to bail out the feds?

I'm not talking about our Grand Canyon of a federal deficit, its own travesty in the making. Let's focus instead on three more tangible federal programs created to backstop pensions, home mortgages and bank deposits. Each is on thin ice when so much more is being asked of them, and when the pace of economic recovery remains far less clear than we would like.

The Pension Benefit Guaranty Corp. is a federal agency that pays pensioners their benefits when company pension funds fail. The PBGC, for example, backs the pensioners benefits of many now-defunct but well-known companies. They range from two such Tampa companies as Anchor Glass and Harvard Industries (both, coincidentally, once run by former Tampa Bay Devil Rays owner Vince Naimoli and both declaring bankruptcy in 2002) to the likes of Circuit City, LTV Steel, Polaroid and Delphi automotive.

On Friday, the PBGC said that its deficit had almost doubled to $22 billion in fiscal 2009 and that its exposure to future losses from weak companies had more than tripled.

That's one bailout in the making.

Enter the Federal Housing Administration, or FHA, whose borrowers can get mortgages with only 3.5 percent down payment. (Hmm. Little money down in a declining housing market?) When borrowers default, the FHA pays off the lender.

Lately, FHA was pressured to lend more to compensate for the pullback by traditional lenders. Now the FHA's reserves have dropped to $3.6 billion. That's one-half of 1 percent of the $685 billion in loans insured by the agency and well below the statutory minimum of 2 percent.

That's a second possible bailout in the making.

Now comes a third player, the Federal Deposit Insurance Corp., a federal backer of bank deposits amid the biggest wave of bank failures in nearly 20 years. As of Friday, 123 banks had failed this year. Last week, the FDIC ordered banks to prepay $45 billion — three years' worth of premiums — to replenish its exhausted insurance fund. Experts, citing fragile housing markets and troubled commercial real estate, warn that hundreds of banks may yet fail. The FDIC will have to deal with those failures, too.

The first step of this agency bailout just took place with the FDIC demanding money in advance from the very banks that are less than robust these days. It may not be the last time the FDIC asks for extra funding. The agency also holds a line of credit with the U.S. Treasury as an extra source of emergency money.

These are just three examples of grossly underfunded insurance programs the federal government provides but, for various reasons, won't or can't capitalize properly.

There are many other cases of underfunding, from Fannie Mae and Freddie Mac at the federal level to Florida's own strained fiscal budget and the lean hurricane reserves behind the state-run Citizens Property Insurance Corp.

All kind of like Wall Street and the rise of our hedge fund society. Borrow big, leverage big and pray the economy stays strong enough to keep the high-wire act running. We're all peas in a pod.

Robert Trigaux can be reached at trigaux@sptimes.com.

Federal backstop programs may need bailout of their own 11/16/09 [Last modified: Tuesday, November 17, 2009 7:24am]

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