The Great Debate

Savers shoulder the inevitable burden of bad loans

Britain’s new coalition government likes to remind voters we are all in this together. The phrase is rather glib. But in an important sense savers and borrowers around the world are finding the costs of reckless lending are falling on the innocent and guilty alike.

Few people this century will have experienced what it is like to turn up at their bank and be told they cannot withdraw deposited funds because the bank has “suspended” payments.

Suspension sounds harmless. But before the spread of deposit insurance, the word was enough to strike fear into the hearts of depositors, who risked losing much if not all their life savings, and being made to wait months or years for access to what remained.

Between 1930 and 1933, more than 9,000 banks across the United States were “suspended”, accounting for $6.9 billion or 15 percent of all deposits in the country, according to official figures. Behind those numbers are tales of misery for families, farmers and small businesses suddenly left without funds when their bank was suspended or collapsed forever.

So terrible was it, that even the threat of suspension could produce long lines of anxious depositors outside institutions trying to withdraw cash before the tellers closed their windows. In 1907, long lines marshaled by police formed outside the doors of the Knickerbocker Trust Company on New York’s Fifth Avenue as the depositors (“mostly small shopkeepers, mechanics and clerks”) tried to pre-empt suspension.

Senate vote exposes Wall Street impotence

Wall Street’s diminished influence in Washington was made plain yesterday when the Senate voted to approve financial reform legislation by 59 votes to 39.

Industry lobbyists will point out the bill only just managed to scrape the required votes needed to end debate and forestall a filibuster. It fell far short of a lopsided bipartisan majority.

But the formal tally on HR 4173 (Wall Street Reform and Consumer Protection Act 2009) as amended by S 3217 (Restoring American Financial Stability Act 2010) conceals a much wider bigger majority of 63-37 for enacting far-reaching reforms.

from Rolfe Winkler:

Politics and bank regulation don’t mix

The Federal Deposit Insurance Corp tried to seize and sell Cleveland thrift AmTrust last January but local politicians intervened. In the end, the bank still went bust 11 months later - a delay that may have increased losses to the U.S. regulator’s funds. As Congress debates banking reform, AmTrust provides a useful warning that the regulatory apparatus needs to be kept free from politics.

Regulators had known for some time that AmTrust was troubled. AmTrust's chief regulator turned down the bank’s request for TARP money last fall. It also hit AmTrust with a cease-and-desist order, instructing management to change lending practices and boost capital by December 31. When AmTrust missed the deadline the FDIC decided to step in.

But Ohio Congressman Steven LaTourette and Cleveland mayor Frank Jackson convinced Treasury and the White House to keep the regulators at bay. Bythe time FDIC finally seized AmTrust on Dec. 4, its tangible common equity – the capital it has to withstand loan losses – had fallen to $276 million from $943 million the year before. The cost of the bank’s failure to FDIC: $2 billion.

from Rolfe Winkler:

Let’s say RIP to PPIP

Remember PPIP? The Public-Private Investment Program was to provide cheap government financing to encourage investors to overbid for banks' toxic assets.

Investors would overbid, it was thought, because they were being offered a free put option. If the toxic assets they bought fell further in value, taxpayers would be left holding the bag.

The program has been largely left for dead, but the FDIC still sees some life in its part of the plan. Last week, the agency had a pilot sale, offering loans out of the estate of failed Franklin Bank, whose assets are in FDIC receivership.

from Rolfe Winkler:

Banks should pay for FDIC fund

The banking system is still suffocating under the weight of bad loans, and it's well known that the FDIC doesn't have enough cash to deal with the problem.

What to do? According to a plan floated in the New York Times, FDIC may borrow from the banks themselves in order to replenish its Deposit Insurance Fund.

The optics may be good, but don't be fooled. The plan would be another balance sheet gimmick to paper over losses.

from Commentaries:

Time to get tough with AIG

It's time for someone in the Obama administration to read the riot act to Robert Benmosche, American International Group's new $7 million chief executive.

Since getting the job, Benmosche has spent more time at his lavish Croatian villa on the Adriatic coast than at the troubled insurer's corporate offices in New York.

And in the short term, Benmosche's vacation strategy appears to be paying dividends.

from Rolfe Winkler:

For FDIC, a long tunnel and little light

There's good news and bad news in the FDIC's quarterly profile of the banking sector. The good news is that FDIC has more resources than you think to handle the problem banks on its radar. The bad news is that the too-big-to-fail banks aren't on it.

The balance in the FDIC's deposit insurance fund ended the quarter at $10.4 billion -- its lowest since the savings and loan debacle -- but it isn't the only security blanket protecting insured depositors. The agency also has a "contingent loss reserve."

If you add the loss reserve to the deposit insurance fund balance, the FDIC's total resources were $42 billion at the end of the second quarter. Despite 24 bank failures during the quarter, that total actually increased by half a billion dollars.assessments

from Rolfe Winkler:

Colonial, gone … Did FDIC tip its hand?

FDIC will seize Colonial and sell its assets to BB&T.  This is the largest bank failure since WaMu last fall.  Reuters:

The Federal Deposit Insurance Corp is taking Colonial BancGroup Inc into receivership and will sell the struggling lender's branches and deposits to BB&T Corp, Dow Jones said, citing a person familiar with the situation.The deal was approved by the FDIC on Thursday night and is expected to be announced later on Friday, the news agency reported.

Colonial, based in Montgomery, Alabama, operates 355 branches in Florida, Alabama, Georgia, Nevada and Texas and has over $25 billion in assets.

from Commentaries:

CIT is a warning sign

agnes1If it's not a risk to the financial system, let it fail.

That's the message from the government's reluctance to swoop in and bail out one of the nation's biggest commercial lenders, CIT Group Inc, as it struggles to stay afloat. But even though CIT doesn't have the firepower to take down the global financial system, its failure would certainly be felt by some of the struggling small businesses that rely on its financing.

CIT is negotiating with its regulators to find a solution to its near-term liquidity problems, but speculation that it will file for bankruptcy has intensified after the Wall Street Journal reported that it was preparing for a possible filing.

Not that you can blame the Federal Deposit Insurance Corp and the tough-minded Sheila Bair for thinking twice about supporting a junk-rated lender that has already sucked in more than $2 billion of government funds.

from Commentaries:

Failing upwards at BofA

goldsteinThe ouster of Bank of America's chief risk officer, Amy Woods Brinkley, should not cause anyone to shed any tears.

Even though Brinkley was one of the few top female executives working on Wall Street, her departure is well deserved and has nothing to with gender inequality in the world of finance as some might suggest.

It's all about failure, and there's been plenty of that at BofA, in light of the more than $150 billion in bailout money and loan guarantees U.S. taxpayers have had to float the nation's largest bank by assets.