Who can you trust?

Who backs the backstop?

Marketplace Staff Oct 17, 2008
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Who can you trust?

Who backs the backstop?

Marketplace Staff Oct 17, 2008
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TEXT OF INTERVIEW

Tess Vigeland: Alright, let’s get back to this question of trust. One thing we’ve always assumed we could count on was our checking and savings accounts — CDs and the like. Banks are fortresses of safety, literally and figuratively. Right?

And if something happens to your bank, you’ve got the Federal Deposit Insurance Corporation backstopping it. Right? Well, we wondered who’s backstopping the backstop. Where’s that money coming from?

William Isaac served as chairman of the FDIC in the early 80’s and Mr. Isaac, did you see anything like this current situation during your term?

William Isaac: The banking industry is in much better shape that it was in the early 1980s, but yet we have this widespread instability in the financial markets. That’s the big distinction between the two eras.

Vigeland: Can you compare the bank failure issue for us? How bad is it right now compared to what it was been?

Isaac: Well, it’s not very bad at all. We’ve had two large ones go — IndyMac and WaMu — but there’s only 117 banks on the problem list right now. That number will grow, but 117 is somewhere close to a record low, whereas the period from 1980 to the end of ’91 we had 3,000 bank and thrift failures plus we still had 1,500 banks on the problem list at the end of that period. So this is a much tamer sort of problem right now in terms of the banking industry itself.

Vigeland: Interesting to get a little perspective there. As you know, we are looking at the issue of trust and we want to get to the question of how and why we can trust an agency like the FDIC and to get to that I want to first ask you, where does the FDIC get it’s money to insure our bank accounts?

Isaac: Well, in the first instance, the FDIC gets its money from the banking system. The banks pay premiums to the FDIC and at the beginning of this year the FDIC had approximately $52 billion that it had accumulated from the banks. But it’s important for me to add that the FDIC by law is backed by the full faith and credit of the United States government. So when people say “Can the FDIC fail? Can it run out of money?,” the short answer to that is no.

Vigeland: How does that work? How do we know that the money will actually be there if the very worst were to happen and all kinds of banks went under?

Isaac: Well, it has to be there because the country can’t function without a strong banking system. No country can. Nobody should have any doubt that the government will back up the banking system and the FDIC in particular because the government has no choice.

Vigeland: I guess I am still trying to get at kind of the worst case scenario. You know, I wonder if you can tell us that the FDIC, when it promises to back up $250,000 for every depositor in this country, can it literally do that?

Isaac: Yes, because it’s inconceivable that every bank in the country or even a large number of banks in the country would fail at any given time. If you believe the FDIC is not going to make it, then what you’re saying is that the U.S. is not going to make it.

Vigeland: Bill Isaac is currently the chairman of the Secura Group, a private financial firm. He was chairman of the FDIC from 1981 to 1985. Thank you so much for your time.

Isaac: My pleasure.

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