Felix Salmon

Spin at the FDIC

By Felix Salmon
September 25, 2009

No one seems to be a fan of the trial balloon which went up on Tuesday, suggesting that the FDIC borrow money from “healthy” banks. No one, that is, except for Jamie Dimon, who jokingly told Sheila Bair at the Clinton Global Initiative this morning that he thought she was a good a credit and that he would probably be willing to lend her some money if she needed it.

What’s becoming increasingly clear, though, is that the point of the idea is to capitulate to the banking system generally, by multiplying the alternatives to the first-best solution — a simple FDIC special assessment on the banks. The banks probably wouldn’t mind very much if the FDIC tapped its line of credit at Treasury instead of borrowing from JP Morgan and others. What they would mind is taking a direct hit to their equity and capitalization ratios by having to pay unrefundable cash to the FDIC.

Here’s Taunter:

The plan, to put it in plain language, makes no sense.

Why would the FDIC borrow at all? The FDIC – the Federal Deposit Insurance Corporation – is funded by a levy charged to all banks. When the insurance fund runs low, the banks have a supplemental levy. It is the banks’ obligation to keep the FDIC fund topped up.

And here’s Jonathan Weil:

The question Bair posed should be a no-brainer. Borrowing taxpayer money to bail out the FDIC should be an option of last resort reserved for unforeseen emergencies.

Borrowing from banks instead of Treasury, of course, is just as bad, or possibly even worse, since it only serves to take an explicit loan, on which Treasury receives interest, and replace it with an implicit government guarantee, for which Treasury doesn’t get paid at all.

At the moment, the banks are happily sitting on artificially inflated capital ratios, a function of the fact that they never had to pay much money into the FDIC insurance fund and the fact that the FDIC is seemingly reluctant to ask them to pay, today, the real and present cost of its multiple bailouts. Rather than address the issue straight on, the FDIC is trying to come up with clever financial solutions which only really serve to kick the problem down the road. Unfortunately, given that the FDIC seems to be on exactly the same page as the banks it nominally regulates, there’s very little chance that the correct answer to the question — a special assessment — will happen.

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Oops. So much for Sheila Bair. I thought she was one of the hero regulators in this whole mess. Apparently she is just another shill for her (bank) paymasters.


Remember this?

“The new powers would be sweeping… It would enable the government to come in, repudiate employment contracts, pick and choose who you want to keep, who you want to get rid of, what you want to pay them, replace the management, get rid of the boards and bring in better management” – Sheila Bair
msnbc.msn.com/id/29899529/wid/119157/pag e/2

Now we have this:

“FDIC can confiscate all of the net assets and earnings of all FDIC insured banks. That is trillions in total. FDIC can borrow from Treasury, the Fed and even from FDIC insured banks…” -Chris Whalen
industry.bnet.com/financial-services/100 03547/chris-whalen-to-bloomberg-shut-up/

Demanding supreme power?

Confiscating assets, using our tax money, or stealing our credit lines to borrow our deposits to save itself?

No wonder FDIC would never go bankrupt.

How could you feel safe with Sheila Bair running an agency whose primary responsibility was deposit protection?

By now I assumed all of you already found out FDIC was running low in funding.

The sad part was, it had been running low in funding for months.

Yet at the same time Bair was offering billions of bond guarantee for a few elite institutions and billions in sharing losses to consolidate banks. Yep, she was making them even bigger, unlike what she had stated multiple times in public.

When you were angry about AIG’s idiotic swap guarantees with no reserve and trips and parties, the guardian of your life savings was helping Goldman Sachs hand out billions of bonuses and JP Morgan build fancy plane hangar.

“How Do You Spell Sweet Deal? For Banks, It’s TLGP”
online.barrons.com/article/SB12400188667 5331247.html
“The firm said in July it had already set aside $11 billion this year for employee pay”
money.cnn.com/2009/09/09/news/companies/ goldman.pay.fortune/index.htm
“JPMorgan… has ordered two Gulfstreams costing US$120 million… spending US$18 million to renovate a hangar”
http://www.etaiwannews.com/etn/news_cont ent.php

When many of you laughed at and mocked Wamu and Wachovia investors and creditors for questioning Bair, she was spending money that FDIC never had to help wipe out investments and destroy jobs along with health and retirement benefits and homes.

“Its crash cost 18,000 people their jobs”
http://www.hispanicbusiness.com/news/200 9/9/24/collapse_still_haunts_former_wamu _workers.htm

As for her constant pr campaigns to keep people in their homes, it was mostly talk, unpractical, and delusional. Check out what was happening at IndyMac now after FDIC dumped the bank to private investors while covering ” a majority of the losses… in home loan portfolio.”
money.cnn.com/2009/08/18/news/economy/In dyMac_OneWest_mortgage_modification/

The latest freebie courtesy of our deposit protector, PPIP:

FDIC “gave half the upside to an investment fund – ‘Residential Credit Solutions of Fort Worth, a three-year-old company founded by Dennis Stowe, a veteran of the subprime mortgage industry – and kept all of the downside to itself”
seekingalpha.com/article/163317-ppip-jus t-baffling

Will the public not wake up until the showdown among depositors, bondholders, and private investors begin when FDIC runs of money?


Posted by PPY | Report as abusive

FDIC’s main job is to protect deposits. But no, Sheila Bair just had to involve her agency in various programs to help save the banks. Many of her actions never even appeared consistent.

Back in March she told Congress she would reduce assessment fees if FDIC was given a higher credit line.

Now she doesn’t want to borrow from that credit line. Instead she wants to collect more fees?

Even more ridiculous. Let’s say Citigroup fails and FDIC takes it into receivership. How is she going to treat FDIC-backed bondholders?

Is she going to wipe them out like she did with Wamu’s and FDIC will end up being responsible for these debts?

But FDIC doesn’t even have enough money to pay depositors! So how is she going to pay these bondholders? How is she going to treat non-FDIC backed bondholders?

How did FDIC even come up with this dumb borrow-from-bank idea?

How is Bair going to improve lending when she is taking credit lines away from average taxpayers?


Posted by PPY | Report as abusive

By the way, FDIC’s increase in credit line was a bill originally called “The Depositor Protection Act of 2009″ but for some reason got sneaked into the “Credit Card Accountability Responsibility and Disclosure Act of 2009.”

$500 billion of our tax money under the miscellaneous section of the credit card bill… shocked yet?

That money should only be used to pay depositors at future failed banks and is not meant for sharing losses in FDIC’s current PPIP auction like this:

FDIC “gave half the upside to an investment fund – ‘Residential Credit Solutions of Fort Worth, a three-year-old company founded by Dennis Stowe, a veteran of the subprime mortgage industry – and kept all of the downside to itself”
seekingalpha.com/article/163317-ppip-jus t-baffling


Posted by PPY | Report as abusive

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