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The mortgage "bailout" bill passed the Senate and although some are upset, as it had not passed the House, others are breathing a sigh of relief. In true Senate fashion several things were tacked onto the bill, two tax bills that no one could figure out how to pay for and a "temporary" increase in the deposit-insurance limits for banks and credit unions. The New York Times reported that this change could affect quite a few people and institutions, but perhaps not for the best.

The F.D.I.C. insures roughly $4.5 trillion in deposits, and has $45.2 billion in its fund. If the bill passes, those numbers would change substantially. Currently, the F.D.I.C. insures deposits up to $100,000. The proposal is to raise that to $250,000.

The limit has not been raised for nearly three decades and the increase is intended to bolster customers’ confidence and avert the kind of runs that toppled Washington Mutual, the nation’s largest savings and loan.

The Congressional Budget Office estimated that the new provision would extend F.D.I.C. coverage to $700 billion of currently uninsured deposits. That would increase insured deposits nationwide by about 15 percent, according to a letter sent Wednesday to Christopher J. Dodd, the Senate Banking Committee Chairman.

Proponents say that the move should help calm the nerves of depositors and stabilize the banking industry. After the emergency takeovers of WaMu and the Wachovia Corporation, bankers have worried about customers withdrawing their money.

Criticism comes from other corners, claiming that this increase won't do much good at all and could in fact make things worse by allowing banks to take on risks they normally wouldn't.

William M. Isaac, who was the chairman of the F.D.I.C. between 1981 and 1985, said that lifting the limit to $250,000 is “all show, no substance.” “It doesn’t do what needs to be done,” he said. “It might make somebody’s grandmother feel good, but that is not the problem that we have in the financial world: banks won’t lend to other banks.”

For more than a decade, the banking industry pressed the government to increase its insurance coverage. Congress last raised the limit on insured deposits in 1980, to $100,000 from $40,000. But despite years of rising prices, lawmakers resisted increasing the cap.

The concern was that raising the limit would increase the moral hazard, giving banks and customers incentives to take more risk than they otherwise would take. But with the banking industry under siege, that view appears to have changed.

Still, the move will put more pressure on the insurance fund.

Regulators arranged the emergency takeovers of WaMu and Wachovia without suffering any new losses. But a wave of new bank failures could deplete the fund, and eventually force the F.D.I.C. to draw down on its $30 billion line of credit from the Treasury, or at worst, ask Congress for more cash.

Here's the kicker. Sheila C. Bair, the F.D.I.C. Chairwoman says that they didn't have enough time to prepare for this...(all emphasis added by myself)

“It’s unfortunate that we didn’t have more time to build up the fund in the good times,” said Sheila C. Bair, the F.D.I.C. chairwoman, in an interview Wednesday. The F.D.I.C. did not have the power to raise its premiums until February 2006 and proposed using it for the first time two weeks after Ms. Bair took over the agency the following June. “It is what is, and we are dealing with the situation,” she added.

It's funny she should say that as the procedures the F.D.I.C. had taken towards these premiums in the previous decade or so had been...well, lax.

When banks were flush, most of them paid nothing for a golden government guarantee. Bank failures were so rare that, for a decade, the Federal Deposit Insurance Corporation waived most of the premiums it normally would have collected to insure bank deposits.

After forgoing premiums from 1996 to 2006, the agency must now turn to struggling banks and ask them to pay more, putting more pressure on the industry. If a large number of banks fail, the F.D.I.C. may have to turn to the Treasury for more money, forcing taxpayers to foot the bill.