Word: fdic
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Here's how it will work in the FDIC's case: Later this year, along with their scheduled 2009 fee, banks will pay the FDIC all of the fees that they believe they will owe the agency through the end of 2012. But even though the banks will make those payments this year, they won't show up on 2009 income statements. Instead, each bank will add an asset, a big one, to its balance sheet, right below where the cash they just handed over to the FDIC used to be. It will be called something like prepaid FDIC premiums...
...case of big banks like Bank of America or Citigroup, the upfront payments could run to a few billions. But the FDIC and analysts say banks will be more than able to cover it. Cash flow is not their problem. Capital is. And because the prepayments won't hit earnings, at least not initially, those capital ratios we have been worried about to show if banks are solvent won't change. Banks, all too familiar with accounting tricks, seem overjoyed by the FDIC's solution...
...problem with the FDIC's solution is it does nothing to keep its fund officially out of the red. That's because the same accounting that allows banks to hide the costs will prevent the FDIC from marking up its own assets. Just as the banks get to add an asset to their balance sheet for the money they are prepaying, the FDIC has to book a liability for the money that it has received from the banks but is not actually entitled to yet. That liability will lower the balance of the FDIC's fund by the same amount...
Worse, many analysts just see this as a short-term fix. Even after banks shell out all of these billions, many believe the FDIC will still not have enough money to deal with the increase in failing banks...
...works out nicely if the prepayment actually covers what the FDIC needs for the next three years," says veteran bank analyst Ed Narjarian of the ISI Group. "But more than likely, the FDIC is going to be back for more before the three years...