Insuring Against Financial Disaster
Haluk Ünal, professor of finance, has 20 years’ experience in exploring and
understanding the supply, demand and regulation of financial services, which
gives him a unique viewpoint on the financial crisis.
He sees the economic recovery plan as akin to an insurance payout after a
disaster, with the federal government—and the U.S. taxpayer—making the payout.
“Any insurance company would ask two simple questions before writing a check for
an insurance payout,” says Ünal. “Did you pay your insurance premiums? And what
was your deductible?”
Ünal traces part of the current problems back to the passage of a crucial
piece of legislation, the Federal Deposit Insurance Corporation Improvement Act
of 1991 (FDICIA), which mandates that the FDIC stops collecting insurance
premiums when the size of the insurance fund exceeds 1.25 percent of the total
insured deposits from funds that are highly rated.
By preventing the FDIC from collecting premiums when times are good, says
Ünal, this legislation kept the government from having the assets on hand to pay
out in the case of a financial disaster just such as this one. And the FDIC is
not allowed to collect funds at all from investment banks (like Lehman Brothers
and Goldman Sachs), mortgage giants (like Fannie Mae and Freddie Mac), and
insurance giants (like AIG).
Minimal insurance premiums were collected from financial institutions in the
past 10 years. In 2006 the FDIC collected just $32 million dollars total from
the entire financial system. Had the FDIC collected just $5 billion per year in
insurance premiums from the banking industry—the amount collected in 1996—the
agency would have $120 billion on hand today, one third of the funds needed for
the $700 billion bailout plan. If the FDIC had also collected insurance premiums
from investment banks and the mortgage and insurance giants, Ünal estimates it
would now have $250 billion in its coffers.
What is worse, says Ünal, is that the $700 billion rescue plan reflects the
barest minimum of the actual cost of the financial meltdown to the American
taxpayer. The current insurance liability of the FDIC is $4.2 trillion dollars,
the estimated amount of deposits covered by the FDIC. $3 trillion dollars have
been added to this liability in order to shore up Merrill Lynch, Morgan Stanley
and Goldman Sachs. Add to this the $3.5 trillion resulting from the rescue of
other entities like Fannie Mae, Freddie Mac, AIG, and Bear Stearns, and the
federal government now has an explicit insurance liability of $11 trillion.