Will Banks Fund FDIC ?
The FDIC is currently funded by a small fee charged to every bank FDIC insured account in the country. The enormous amount of bank collapses has nearly exhausted the FDIC coffers.
Call it an industry, rather than taxpayer-funded bailout.
Somehow, a NYT article this AM misses the issue. The article seems to focus on the irony of banks lending to the FDIC, but seems to forget that it is the fees on bank accounts that fund the insurance program in the first place.
But the ironic spin is besides the point — the FDIC is out of money not because it was mismanaged or made horrifically risky investments or engaged in otherwise irresponsible behavior. It is running out of cash because some of the banks it insures engaged in that behavior.
Excerpt:
“Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.
The plan, strongly supported by bankers and their lobbyists, would be a major reversal of fortune.
A hallmark of the financial crisis has been the decision by successive administrations over the last year to lend hundreds of billions of taxpayer dollars to large and small banks . . .
Bankers and their lobbyists like the idea because it is more attractive than the alternatives: yet another across-the-board emergency assessment on them, or tapping an existing $100 billion credit line to the Treasury.”
Note that it is courtesy of a 1991 law passed during the S&L crisis that the FDIC is alloed to borrow from banks. The lenders would get government bonds, with interest rates set by the Treasury secretary.
At first blush, it is not a bad solution to the current problem of the ongoing collapse of too many banks.
Given that the banking industry blew up due to the irresponsible behavior of its own members, seeing some of its leaders step up to facilitate further repairs to the sector is an idea I can get behind — and is greatly preferable to yet another taxpayer funded bailout.
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Source:
F.D.I.C. May Borrow Funds From Banks
STEPHEN LABATON
NYT, September 21, 2009
http://www.nytimes.com/2009/09/22/business/22bailout.html
September 22nd, 2009 at 7:57 am
I may be reading this wrong, but there is something so wrong with this….
Having banks, earn interest on a loan to the FDIC to shore it up is ridiculous. Not only that, the PR blitz on this thing is laughable. Sheila Bair would rather have “bamboo shoots” stuck in her nails than ask Timmy for money?
Is Timmy going to say no? Give me a break.
Assess the banks. This is ridiculous.
September 22nd, 2009 at 8:07 am
So these big banks get money from the Fed at.25% or whatever and then lend it to FDIC at a nice spread, and they get to add the value of these loans to their balance sheets. Sweet
So as the small & mid size banks fail the big banks (the immortal 19) 1)pick up business from the smaller banks. 2)pick up failed banks or segments of these banks from FDIC at firesale prices 3) make profit from lending almost free money to the FDIC to cover their losses.
At some point the FDIC losses and borrowings will grow unmanageable and then Treasury will pay everybody with taxpayer funds, right?
September 22nd, 2009 at 8:21 am
“So as the small & mid size banks fail the big banks (the immortal 19) 1)pick up business from the smaller banks. 2)pick up failed banks or segments of these banks from FDIC at firesale prices 3) make profit from lending almost free money to the FDIC to cover their losses.”– jc, above
you gotta love it when a plan comes together..
and, paraphrasing: “I just love the smell of Consolidation, in the morning..”
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though, w/this: “It is running out of cash because some of the banks it insures engaged in that behavior.”, that seems like “mismanagement/ horrifically risky/ irresponsible behavior.”
Insurance Co.s can Fail, the FDIC can, and should, too. The Only thing the FDIC has ever, successfully, Insured was creeping Ignorance and future Inflation.
~~~
BR: Funny thing is, I referenced the Napalm quote earlier this morning — it goes up about 9:30
September 22nd, 2009 at 8:23 am
“Given that the banking industry due to the irresponsible behavior of its own members, seeing some of its leaders step up to facilitate further repairs to the sector is an idea I can get behind — and is greatly preferable to yet another taxpayer funded bailout.”
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Seriously? You actually think the banks will step up and swallow the cost of this (or of anything else, for that matter)? You think one bank or banker will actually do anything that does not result in a profit? You think there are actually “healthy” banks?
Maybe I’ll start sending banks money to to offset the hit they’ve taken from those in my demographic (middle class) who have defaulted on their mortgages and CC debt — all I have to do is get the banks to lend me the money I’ll use to bail them out.
hipster and jc have gotten it right.
September 22nd, 2009 at 8:23 am
The way this is being spun is preposterous. The industry is making it look like THEY are bailing out the FDIC, when in fact, it is the industry’s failure that has put the FDIC in this position. Rather than borrowing money from banks (at interest), they ought to just steeply increase their insurance fee assessments on banks. The healthy banks will complain that they are being unfairly penalized for the failures of poorly managed banks, but the reality is that even the healthy banks would have been sucked into the abyss earlier this year if not for the government rescues.
September 22nd, 2009 at 8:34 am
great idea-
also- does anyone think there is really a healthy bank outside of few small banks and credit unions here and there-
the banks were and still are insolvent because they are not realizing the losses on their books- hoping for the hail mary by the Fed to make things all better-
no hiding from reality- it will find you in the end
September 22nd, 2009 at 8:40 am
if the dis-connectd small & mid-sized banks were making the loans to bailout the 19 mega banks for the FDIC, at profitable interest rates, that would seem to be a fix .. the 19 mega banks would also need to be charged per account # (the FDIC self funding tax – like a nickle – make it a dime per monthly statement – Truman is on that coin – the nuke option – tat for tat)
… unless the 19 mega banks deliberately tank the economy again to take down the small & mid-sized banks (Highlander)
the other way around .. 19 mega banks with US Treasury borrow status borrow @ .25% interest; loan to inter-connected small & mid-size banks to loan back to themselves*
ring around the rosey .. pockets full of posey*
* coda – I think thats the reason junk mail is so pervasive (newspaper inserts too) .. spend it before ya lose it (taxed profits to IRS)
September 22nd, 2009 at 8:46 am
a few comments were close, but no one explicitly noted the surreptitiousness here: if the Fed/Treasury loan money to the FDIC, people who understand go berserk – no one wants more taxpayer money bailing out banks. instead, the Fed, which we already know provides nearly free money to the banks in the short term markets, continues to flood the banks with money, and “strongly suggests” that the banks lend to the FDIC – just like Paulson strongly suggested that Ken Lewis not walk away from MER.
it’s just a loophole – a way to make it look like the banks are taking care of their own insurance fund.
sidenote #1 : isn’t “healthy bank” an oxymoron?
sidenote#2: i can’t wait until they make the “banks” like AXP and GS – who got bank charters just to get some TARP bucks contribute to the fund – although i’d guess it would be in proportion to deposits.
September 22nd, 2009 at 8:50 am
Marc Faber’s Gloom, Boom and Doom report is out. He is saying what I have been saying – massive debt, runaway inflation, debasement of dollar, lowering of American living standards.
http://finance.yahoo.com/tech-ticker/article/337749/Bullish-Today-Marc-Faber-Is-%22Highly-Confident%22-the-Future-Will-Be-Very-Bleak?tickers=^DJI,^GSPC,EEM,FXI,VNM,EWZ,SPY&sec=topStories&pos=9&asset=&ccode=
September 22nd, 2009 at 8:51 am
i thought this chart was particularly interesting- financial sector pay vs. avg US compensation-
http://www.bearishnews.com/wp-content/uploads/2009/09/financial-sector-profits.gif
appears to have taken off in 1980 . . .hmmm . . .I . . .wonder . . .
September 22nd, 2009 at 8:52 am
ps – think about the concept of loaning money to your insurance company. talk about absurd.
September 22nd, 2009 at 9:10 am
Kid says–
“talk about absurd.”
undoubtedly- as if the banks truly had the money- when we know that if not for “mark to fantasy” they would all have “going out of business” signs in their entryways-
all liquidity- thanks to Uncle Sam- being loaned back to . . . Uncle Sam- w/ interest
September 22nd, 2009 at 9:18 am
this is just more “Extend and pretend” – instead of hitting the banks with a special assessment, which is what any sane solution would do, they’ll just “borrow” from the banks until we get through these bank failures and the fund magically replenishes itself during a period of prosperity… the only problem is, we know that doesn’t work – we’ve practically proved it.
September 22nd, 2009 at 9:26 am
There are so many conflicts with this plan it’s hard to know where to start.
First, the FDIC is independent and is guaranteed access to $100B from the Treasury.Turbo Timmy can rant but Bair should do what is best for the agency. I thought she was the only character in this cast with balls – so to speak.
Second Turbo Tim is soooo in bed with the Immortal 19, instead of paying their fair share to solve a mess largely of their creation this has been twisted around to create a new profit center for the Immortal 19.
If all the regional and community banks had the same access to free fed money that the Immortal 19 have most wouldn’t be liquidated by the FDIC. The Fed & Treasury have created an uneven playing field where they provide unlimited support to 19 banks and then provide a new profit line for these banks as they eliminate their competition. They’re making the Too Big To Fail bigger & more profitable!
September 22nd, 2009 at 9:27 am
This is a really poor post Barry.
1) The FDIC insures banks, but what it charges for insurance is less then it needed to establish adequate reserves for a banking crisis. That’s as reckless as AIG charging a few bips to insure MBS securities. Offering cheap insurance to a reckless counterparty is reckless in itself.
2) You don’t expect the FDIC to stiff the banks lending to it if they don’t have the money to pay back. If good banks lend to the FDIC and that money gets lent out to bad banks who then can’t pay it back because their insolvent then the FDIC is in the exact same position. It still needs to limp over to the treasury. Its a shell game.
September 22nd, 2009 at 9:38 am
Davver1
The loans are to pay the costs of the liquidations, the FDIC is doing nothing to help the Big Banks competitors to survive. Reductio ad absurdum. When there are only 19 large banks left they will have to pay all the costs of liquidating their competition and that will never happen. The FDIC will be liquidated without assessing the 19 banks
September 22nd, 2009 at 9:41 am
Turbo Tim’s public private plan survives – maybe. 60:1 leverege with non-recourse Treasury $.The taxpayers will be getting another rod up their…
No Treasury money for FDIC but $30B non-recourse bucks to the sharks in the tank
http://www.forbes.com/2009/09/11/ppip-fdic-fed-business-tarp-geithner.html
September 22nd, 2009 at 9:45 am
It seems pretty stupid to hand over this profit to private banks since that cost ultimately will be payed by the taxpaying costumers. Why not just let FDIC lend from the Fed or government, no middle men taking a fat cut, ultimately means less cost for the taxpayers/customers. But I guess those numb brained clowns screaming about big government and deficits have created enough support for Wall Street to make another scam possible.
September 22nd, 2009 at 10:23 am
Can the funny money get any funnier?
September 22nd, 2009 at 10:36 am
@I-Man: Short-answer? Yes, it (we) can!
September 22nd, 2009 at 11:01 am
ahab:
“appears to have taken off in 1980 . . .hmmm . . .I . . .wonder . . .”
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You wonder correctly.
September 22nd, 2009 at 11:19 am
A year ago, Chris Whalen stated that “the FDIC will not run out of money” (8:50). I wonder if he’d want to clarify that statement today…
September 22nd, 2009 at 11:39 am
One more scam by big guys to make easy money. Why don’t FDIC get money from fed at the same rate and save the spread for tax payers.
September 22nd, 2009 at 11:42 am
Certainly the biggest affront and fraud yet.
“The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin . . . . Bankers own the earth. Take it away from them but leave them the power to create money, and, with a flick of a pen, they will create enough money to buy it back again. . . . Take this great power away from them and all great fortunes like mine will disappear, for then this would be a better and happier world to live in. . . . But, if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit.”
- Sir Josiah Stamp, president of the Bank of England and the second richest man in Britain in the 1920s.
September 22nd, 2009 at 1:10 pm
Isn’t the FDIC also running out of money because congress approved them ceasing to collect fees for a decade including the boom?
September 22nd, 2009 at 2:20 pm
Sorry, Barry, gotta disagree violently with you on this one – even if the Treasury sets rates on the aforementioned bonds which are comparably low as the bailed-out banks are paying their own depositors, it still amounts to the government paying the banks to self-insure … the same banks whose fiscal recklessness it was which caused the FDIC insurance fund to be exhausted to begin with, and which are only able to claim “healthy” status by virtue of explicit government backstop and what is arguably the biggest legalized accounting fraud in history (the FASB “mark to fantasy” scam).
I have a better idea: Rather than increasing assessments on *all* banks (including the few prudent ones) like the FDIC did earlier this year, or paying the same bad actors who bankrupted the FDIC to “self-insure” (while still knowing that the government has their back if – or better, when – they screw the pooch again), the FDIC actually MAKES ASSESSMENTS ON INDIVIDUAL BANKS AT RATES REFLECTIVE OF THEIR RISK-TAKING? What a radical idea, eh? Why, that would be the moral equivalent of charging 20-30-something males who ride motorcycles more for insurance than Volvo-driving soccer moms. Crazy, I know…
September 22nd, 2009 at 2:20 pm
Edward Harrison had an interesting quip:
“bankers like this idea because it makes the regulator beholden to the regulated. Am I wrong or is this the worst idea you have heard since this crisis began?”
http://www.nakedcapitalism.com/2009/09/the-fdic-to-get-credit-from-banks-even-while-banks-restrict-lending.html
September 23rd, 2009 at 12:42 am
A few key points:
There is no such thing as “the banks.” There are individual banks. The banks that were the problem can no longer be taxed. The banks that were not the problem will bear the burden.
Today an individual bank that accepts a deposit cannot use the deposit to buy fed funds or treasury bills, the safest of investments, and earn enough interest to pay the FDIC insurance premium. It can only cover the FDIC assessment by making riskier loans or investments.
The FDIC assessment is not very closely tied to risk, not nearly as closely tied as my auto insurance. In the last deposit insurance crisis, around 1990, I was in a meeting with FDIC economists who told me that I didn’t understand their system because I was trying to think of it like insurance. I said, “Hmmm. Federal Deposit Insurance Corporation.” They said, forget the part about it being insurance.
September 23rd, 2009 at 4:02 pm
This was so yesterday; here’s from today:
Here’s Taunter:
Insurance is a form of redistribution, it doesn’t conjure funds out of the air, only banks can do this.
Since banks can make instant money by lending it, why not put this tool to good use for once, and let the banks invent some free money to bail out depositors in failed banks? What’s so wrong with that?
http://economic-undertow.blogspot.com/2009/09/more-fdic-follies.html