Government Accountability Office's Condensed Audit Opinion
To the Board of Directors
The Federal Deposit Insurance Corporation
The accompanying condensed financial statements, which comprise the condensed balance sheets as of December 31, 2008 and 2007, and the condensed statements of income and fund balance/accumulated deficit and condensed statements of cash flows for the years then ended for the two funds (the Deposit Insurance Fund (DIF) and the FSLIC Resolution Fund (FRF)) administered by the Federal Deposit Insurance Corporation (FDIC), are derived from the audited financial statements of the two funds for the years ended December 31, 2008 and 2007. In our report dated May 20, 2009, we expressed an unqualified opinion on those statements.
In that report, we stated that we found
the financial statements of each fund are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles;
FDIC had effective internal control over financial reporting and compliance with laws and regulations for each fund; and
no reportable noncompliance with the laws and regulations we tested.
In addition, we highlighted in our opinion on the DIF’s financial statements the following items that were disclosed in DIF’s financial statements:
Deteriorating economic conditions exerted significant stress on banking industry performance in 2008 and threatened the viability of some institutions, particularly those having significant exposure to high risk residential mortgages or residential construction loans. In 2008, the DIF incurred $18 billion in estimated losses from the failure of 25 insured institutions, and recognized additional estimated losses of $24 billion for insured institutions the banking regulators believe are likely to fail. FDIC identified additional risk that could result in $25.1 billion in further estimated losses to the DIF should potentially vulnerable insured institutions ultimately fail. FDIC continues to evaluate the ongoing risks to affected institutions and the effect of such risks on the DIF. Actual losses, if any, will largely depend on future economic and market conditions and could differ materially from FDIC’s estimates.
At December 31, 2008, the DIF’s balance was $17.3 billion, and its ratio of reserves to insured deposits was 0.36 percent, substantially below the statutory minimum ratio of 1.15 percent. Consistent with the Federal Deposit Insurance Reform Act of 2005, FDIC adopted a plan to restore the fund’s reserves to the minimum ratio of 1.15 percent of insured deposits through increased premium assessments, and it intends to charge an emergency special assessment to assist it in rebuilding the fund. In addition to DIF’s existing resources, FDIC can borrow up to $100 billion through the Federal Financing Bank and, until recently, up to $30 billion from the U.S. Treasury for the DIF to carry out its insurance functions, subject to a statutory limit. At December 31, 2008, this limit was $69.0 billion. Recently enacted legislation increased its borrowing authority with the U.S. Treasury to up to $100 billion.
During 2008, the federal government acted to counter the systemwide crisis in the nation’s financial sector. This resulted in the creation of two guarantee programs, with combined exposure to FDIC at December 31, 2008, totaling $904 billion. FDIC charges fees to participants that are to be used to cover any losses under both guarantee programs. The federal government took additional actions subsequent to 2008 to further stabilize the financial sector. These actions included efforts to provide assistance to two large financial institutions, and to establish a program to remove troubled real-estate loans from the balance sheets of financial institutions. These actions created additional exposure to FDIC and the DIF, but the total magnitude of this exposure is unknown at this time.
The condensed financial statements do not contain all the disclosures required by accounting principles generally accepted in the United States of America. Reading the condensed financial statements, therefore, is not a substitute for reading the audited financial statements of the two funds.
Management is responsible for the preparation of a summary of the audited financial statements in accordance with accounting principles generally accepted in the United States of America.
Our responsibility is to express an opinion on the condensed financial statements based on our procedures. These procedures consist principally of comparing the condensed financial statements with the related information in the audited financial statements from which the condensed financial statements have been derived. We performed our work in accordance with U.S. generally accepted government auditing standards.
In our opinion, the condensed financial statements of the DIF and the FRF for the years ended December 31, 2008 and 2007, are consistent, in all material respects, with the audited financial statements from which they have been derived.
Steven J. Sebastian
Financial Management and Assurance