Indian Agency’s Investments Cost U.S. Insurer Millions

A Bureau of Indian Affairs policy that led to the investment of more than $66 million in tribal trust funds in failed banks has cost the Federal Deposit Insurance Corp. millions of dollars, a spokesman says.

“They are one of our most egregious violators,” FDIC spokesman Alan Whitney said of the BIA practice of using money brokers to invest tribal trust funds in unstable banks paying high returns.

“There’s a joke around the FDIC that we really don’t have to maintain this very expensive, elaborate bank-monitoring operation and structure here,” Whitney said. “If we want to know where our problem banks are, all we have to do is follow BIA money.”

In a telephone interview Friday from Washington, Whitney said that the high-yield returns, mostly in the form of short-term certificates of deposit, should be “a red flag” to investors that institutions offering such rates may have problems.

Whitney said that no tribal funds were lost because the deposits were covered by FDIC insurance, but the dollar loss to the FDIC has been “several millions of dollars. The question is: How many millions?”

He said FDIC officials have tried repeatedly to get the BIA to halt the practice of using brokered funds, “but they do not seem inclined to do so.”

Such funds are large pools of deposits handled by brokers, who place the money in institutions offering the highest rates of interest. Many of those institutions are in poor financial shape and are desperate to attract depositors.

Brokered funds are deposited in $100,000 blocks so any loss will be covered by the FDIC.

Whitney said that FDIC Chairman William M. Isaac wrote the BIA in 1984 asking it to stop the practice, but received no response. A BIA spokesman said the agency had no record of Isaac’s letter.

Fred Kellerup, who heads the BIA investment division in Albuquerque, said that there is “nothing wrong” with trying to get high returns on brokered funds.

When told of the FDIC’s concern that the practice was costing the agency millions of dollars, Kellerup replied: “That’s their problem.”

In recent testimony before a House banking subcommittee, Isaac submitted a list of 80 banks with extensive deposits in brokered funds that have been closed or forced to merge with other banks since Jan. 1, 1982.