Message from the Chairman • Sheila C. Bair 5

As the first decade of the new century came

to a turbulent close, the FDIC continued to meet

the challenge of protecting deposits in over half

a billion insured accounts at over 8,000 FDICinsured institutions. Our guarantee has protected

depositors since 1933 with none ever losing so

much as a penny of insured funds. While the

recent period of historic financial turmoil has

required us to take some extraordinary actions to

carry out our mission, it was precisely for times

like these that the FDIC was established some 76

years ago.

Following the liquidity crisis that struck the

financial system in the fall of 2008, the FDIC

continued to focus its efforts in 2009 on stabilizing the liquidity of the industry through our

temporary support programs, strengthening

bank supervision, ensuring the financial capacity of the Deposit Insurance Fund (DIF), and

promptly resolving failed institutions. During

2009, the number of failed banks rose to 140, up

from 25 the previous year and the highest annual total since 1992. Meanwhile, the number of

problem institutions—those with the two lowest

supervisory ratings—rose to 702, which was the

highest year-end total since 1992. Historically,

the vast majority of problem institutions do not

fail. However, elevated numbers of problem and

failed institutions are expected to remain a nearterm challenge, even as the economy recovers,

and there is substantial residual workload from

the failures that occurred in prior years.

Accordingly, the FDIC has been adding to

the operational resources it needs to deal with

its increased workload. The FDIC workforce

grew to 6,557 full-time equivalent positions at

year-end 2009, up from 4,988 at year-end 2008.

In December 2009, the FDIC Board approved a

Message from the Chairman • Sheila C. Bair

Daniel Rosenbaum/The New York Times/Redux
6 FDIC 2009 Annual Report

2010 operating budget of almost $4 billion, a 56

percent increase from 2009, and authorized the

hiring of some 1,600 additional temporary workers, which will expand the FDIC’s total workforce by nearly 25 percent.

Stabilizing Bank Funding 

Through the TLGP

In October 2008, at the height of the financial

crisis, the FDIC introduced a Temporary Liquidity Guarantee Program (TLGP) to help stabilize

the liquidity of the industry through our temporary support programs and promote confidence

across the financial system. During 2009, the

FDIC worked to fully implement the two elements of the TLGP, extended its time frame,

and made plans for an orderly exit as financial

market conditions continued to stabilize. Under

the Debt Guarantee Program, a total of over $618

billion in guaranteed debt was issued, generating

over $10 billion in fees from participating banks.

This program had been instrumental in helping

to reduce risk premiums in the interbank lending

markets until its expiration on October 31, 2009.

The Transaction Account Guarantee Program,

which provides a full guarantee of all deposits

in noninterest-bearing transaction accounts, has

been extended through December 2010.

Balanced Supervision Under 

Adverse Banking Conditions

As supervisor for nearly 5,000 community

banks, the FDIC saw its workload rise in 2009

with the increase in the number of FDIC-supervised problem institutions. The FDIC responded

to these challenges by prioritizing examination

activities, increasing staffing levels, and making greater use of off-site monitoring and on-site

visitations between examinations. We actively

communicate with bankers through a variety

of outreach activities, including a Community

Bank Advisory Committee that was launched

this year. This Advisory Committee was formed

to provide the FDIC with advice and guidance

on a broad range of important policy issues

impacting small community banks throughout the country, as well as impacting the local

communities they serve. We have also worked

closely with other bank regulatory agencies to

issue a number of Financial Institution Letters

on risk management issues, including a statement encouraging banks to meet the borrowing

needs of creditworthy businesses and consumers. Striking this balanced approach to bank

supervision during a period of adversity for the

industry will be essential to ensuring that credit

is made available to finance the anticipated economic recovery.

Keeping the DIF Strong 

While Banks Recover

As part of a plan to replenish the liquidity of

the DIF, insured institutions pre-paid almost $46

billion of deposit insurance premiums at the end

of 2009. This amount represents approximately

what non-exempted institutions were expected to

pay for the 39-month period beginning October

1, 2009. As designed, the assessment prepayment

did not impact the industry’s earnings and capital, allowing the industry to continue rebuilding

its capital base and increasing its capacity to

lend. The prepayments increased the DIF’s total

cash and investments to approximately $66 billion as of year-end. According to current projections, this level of resources will be sufficient

to resolve insured institutions that are projected
Message from the Chairman • Sheila C. Bair 7

losses and maximize recoveries to receivership

creditors, including the DIF.

Preventing Unnecessary 

Foreclosures

Throughout the year, the FDIC remained at

the forefront of efforts to stem the sharp rise

in home foreclosures caused by unaffordable

mortgages and rising unemployment. In addition to advocating wider adoption of streamlined

and sustainable loan modifications, we required

failed-bank acquirers under loss-sharing agreements to modify qualifying at-risk mortgages by

cutting interestrates and, in some cases, deferring

principal. As 2009 ended, the FDIC worked to

expand the availability of principal write-downs

as the erosion of homeowner equity may increase

the likelihood of delinquencies and, in the case of

loss-sharing agreements, losses to the DIF.

Reviving Mortgage 

Securitization

Mortgage securitization and the “originate

to distribute” model of mortgage lending played

leading rolesin the buildup to the financial crisis.

Since the crisis, private securitization virtually

shut down as investors lost confidence in market practices that were insufficiently transparent

and ineffective in aligning their interests with

those of originators and underwriters. During

2009, the FDIC Board began considering new

standards for its existing “safe harbor” protections for securitizations by banks that are later

placed into receivership. These rules, still pending input from the public and scheduled to take

effect in 2010, will be designed to foster better

risk management by strengthening underwriting, providing better disclosure, and requiring

to fail over the next few years; as such, the DIF

will not have to borrow from the U.S. Treasury

to meet its insurance obligations.

Protecting Depositors and 

Resolving Failed Institutions

As the number of failed institutions rose to

its highest level since 1992, the FDIC instituted

strategies to protect the depositors and customers of these institutions at the least possible cost

to the DIF. The FDIC moved to an aggressive

marketing campaign for failing institutions that

successfully led to the sale of the vast majority of

these failed entities to healthier acquirers. These

strategies helped to preserve banking relationships in many communities and provide depositors and customers with uninterrupted access to

essential banking services. To this end, analysis is performed on every failing institution to

identify branches located in low- and moderateincome areas so as to minimize the impact that

any proposed resolution transaction may have on

its customers. Moreover, the FDIC’s use of lossshare arrangements, where failed bank assets

are passed to the acquirer, thus remaining in the

private sector with the FDIC sharing in losses

on the assets, is expected to save the FDIC $30

billion over the cost of liquidation. Finally, in

selling assets, the FDIC developed an innovative structured transaction program that utilizes

private sector asset management expertise while

the FDIC retains an equity interest in all of the

future cash flows. The overarching rationale

behind both the loss-share agreements and the

structured transaction asset sales initiative is

that the long-term intrinsic value of these assets

exceeds their current depressed market value.

Both of these strategies should minimize asset
8 FDIC 2009 Annual Report

Reforming the Regulatory 

Structure

In the wake of the financial crisis, Congress is

considering major legislation to overhaul financial

regulation. The FDIC testified numerous times

during the year on regulatory reform before committees in both the House and the Senate. Our

broad policy view is that Congress needs to help

restore market discipline by repudiating the doctrine that certain large, complex, and interconnected financial institutions are simply too big to

fail. Regulators need to have a clear mandate and

the necessary statutory authorities to close even

the largest banks and non-bank financial institutions when they get into trouble. We also need to

implement regulatory incentives to limit the size

and complexity of systemically important firms.

We support creating a new consumer protection authority for financial products and services

that sets consistent national standards for banks

and non-banks alike. Such an across-the-board

authority would eliminate regulatory gaps where

risks grew unchecked in the buildup to the current

crisis. We also support more stringent regulation

of derivatives markets and creation of a systemic

risk council to share data among regulators and

focus on macro-prudential risks to our financial

system. Finally, the regulatory community needs

to use the powers it already has to more effectively supervise financial institutions and markets

and limit the risky activities that undermined our

financial system.

Creating a More Effective 

International Framework

To meet the challenges of the future and to

protect insured depositors, it is vitally important

issuers to retain a financial interest in the securities while supporting profitable and sustainable

securitizations by insured banks and thrifts. The

goal is to improve industry standards in these

areas in order to avoid future losses to the DIF

and support a revival of mortgage securitization

on a sounder footing.

Protecting Consumers and 

Expanding Access to Banking 

Services

The FDIC has traditionally played a leading

role in shielding consumers from predatory practices and promoting access to mainstream financial services for all segments of the population.

We built on that tradition in 2009 by launching

www.economicinclusion.gov, a new information

portal with links to the FDIC’s many sources of

consumer information and our initiativesto reach

underserved communities. The web site provides

easy access to information on the FDIC’s Advisory Committee on Economic Inclusion, our

Alliance for Economic Inclusion, our Money 

Smart financial literacy program, and the FDIC

National Survey of Unbanked and Underbanked 

Households. This groundbreaking survey, conducted for us in 2009 by the U.S. Bureau of the

Census, revealed that one in four, or 30 million U.S. households, are either unbanked or

underbanked. We are certain that our new Economic Inclusion web site will take us one step

closer to our goal of bringing these unbanked

and underbanked populations into the financial

mainstream.
Message from the Chairman • Sheila C. Bair 9

ful for the hard-working, dedicated, can-do men

and women of the FDIC for all they have done to

respond to the demands of the crisis and help put

the nation’s economy back on the road to recovery. No matter the pressures, they will never

waver in their commitment to excellence in the

service of the American people.

Sincerely,

Sheila C. Bair

that the FDIC continue to improve its capabilities to resolve internationally active banks and

to strengthen the international framework for

responding to financial crisis in cooperation

with other regulators both within the U.S. and

overseas. During 2009, the FDIC was at the forefront of efforts to learn from the lessons of the

financial turmoil by identifying and addressing

weaknesses in responses to banks that are active

across borders. The FDIC co-chaired the Basel

Committee on Banking Supervision’s Crossborder Bank Resolution Group, which prepared a

report on needed reforms to allow for the orderly

liquidation of large, complex international banks.

These recommendations have formed an integral

part of the international effort by the G20 and

the Financial Stability Board to reform the international framework for regulation and resolution

of the largest financial firms. The FDIC continues to work closely with the Financial Stability

Board on these issues.

The FDIC: An Enduring Symbol 

of Confidence

During 2009, the FDIC was called upon to once

again carry out its unique mission as the nation’s

symbol of confidence in an economic crisis. We

successfully performed this mission by protecting

the insured deposits of the American public and

stabilizing the funding base of the industry during

a period of great economic turmoil.

The effects of the recession are likely to persist for some time, and, as a result, the FDIC

will continue to experience a heavy workload

and some unique policy challenges. But we are

prepared to meet these challenges and committed to seeing that our mission is carried out to

a successful conclusion. I am especially grate-