Banks didn't pay into FDIC coffers from 1996 to 2006.

For 10 years—including the boom times banks enjoyed in the first half of this decade—the FDIC was prevented from collecting fees from 95% of financial institutions, which it would have used to further build up its safety net in the event it would someday have to bail out a bunch of stupid losers who confused banking with alchemy.

Cornelius Hurley, director of the Boston University law school's Morin Center for Banking and Financial Law, told the Boston Globe that if the FDIC has to take over a large bank—say, Citibank—the funds that remain would be drained "in a flash."

"Typically you would build up a reserve during the halcyon days to protect yourselves during a recession," he said, calling the decision to stop collecting most premiums "a political one" that was pushed by banks and not based on strict accounting principles.

Of course the American Banking Association says it made no sense to pay into the FDIC during those 10 years because they had more than enough money. Congress, not surprisingly, agreed with them.

But James Chessen, chief economist of the American Bankers Association, said that it made sense at the time to stop collecting most premiums because "the fund became so large that interest income on the fund was covering the premiums for almost a decade." There were relatively few bank failures and no projection of the current economic collapse, he said.

"Obviously hindsight is 20-20," Chessen said.

House Financial Services Committee chairman Barney Frank agreed that officials believed at the time that the good times would last and that bank failures would not be a problem.

"We had this period where we had no failures," the Massachusetts Democrat said in an interview yesterday. "The banks were saying, 'Don't charge us anything.'"

At the end of 2008, the FDIC's insurance fund ratio was 0.40% of all insured deposits, far below the minimum 1.15% mandated by Congress.

Source: Boston Globe

This is a good example of how banks, the rich ect. cut the corners a bit, make lots of money, and then the consquences for those actions are felt by the poor. The tax payer will probably pay the money that the banks should have been putting in all those years, we'll bail em out while they get to keep their money.

You would think lending money out x9 what you have in reserves would be a good enough deal for the banks. It never seems enough for any profit seeker.

[edit on 12-3-2009 by ghaleon12]

Also to add,

1) Fannie and Freddie WERE NOT the root of the mortgage part of the current crisis. "Subprime" loans were the ones that were really the problem, and these were mostly financed by private investment that was chasing higher returns (subprime meant higher interest rates). It was not the "government" pushing people into home ownership that was the problem...it was the banks that were pushing the delusion that the higher returns from subprime mortgage-backed-securities came at little additional risk. No one forced banks to make lots of subprime loans - it was their greed that did that.

2) The reason why the crisis became SO BAD, and so systemic, and so persistent, is credit derivatives, not people failing to pay their mortgages. The reason the banks and insurers like AIG became insolvent is these derivatives, which they used to vastly overleverage themselves. Thank Phil Gramm for the legislation that allowed them to do this legally. Once it was made legal, the temptation to overleverage was overwhelming because it made for massively amplified gains in the short term. It also made for massively amplified risk, and it's STILL unwinding. This is the main reason the banks are still bleeding money.

3) The mortgage interest deduction doesn't really affect lower income borrowers as much because for smaller mortagages it won't exceed the standard tax deduction (or won't exceed it by very much). Actually, most of the money saved by taxpayers using the mortgage interest deduction is saved by higher income taxpayers. It's largely a subsidy for the rich.