On an interesting side note, in the quest for even more leverage, rather than opting for 40-1 ratios the FDIC voted that it's better just having more people offer 10x1 leverage ratios, essentially allowing most anyone to form a bank. As if we don't have enough mismanaged banks around these days?
The FDIC voted 4-1 Wednesday to allow private-equity firms with no history of bank management to maintain a 10% capital-asset ratio and open a bank fully backed and insured by taxpayers’ money. No wonder they warned Congress that they would run out of money and need up to $500 billion more to cover bad banks.
Sure, the FDIC gave their assurances no abuses would occur. After all, what could go wrong with unknown people clamoring to get virtually free government loans insured by the public for virtually nothing, and able to loan it to god knows who for who knows what type of unsavory interest rates. At least it will spur more shady credit cards you can apply to.
The FDIC realizing this is the exact same type of ruling that helped Japan end up with super conglomerates that couldn't make money and had loaned their portfolio out to all their friendly construction companies that had negative net worth, has tried to limit the damage by saying they will regulate it so there can't be this type of abuse. However, in light of the fact that no one can even regulate the banks, the likelihood of tracking squandered money and shady deals is almost zero.
This is not to say that private equity is all immoral, greedy, shady players, who like betting on just about anything as long as they have an edge on every other investor around or it is going back to themselves through some backdoor mechanism (preferably the honorable board of director’s position and stock options method). They just are, as the FDIC takes great measures to point out, inexperienced with banking, the conflicts of interest that can arise, and how to protect depositor’s money through risk prevention.
This is essentially the FDIC trying to get into the money printing debt infusing game the Federal Reserve has jumped into. It is not welcome. It is surely going to lead to allowing private equity firms to create banks which lend to their friends, relatives, affiliates, themselves, and every other type of crooked connected person they know. After all, that's what they do.
As a token restriction, realizing they could run these into the ground in the span of a year or two, the FDIC prudently required them to keep them running at least three years before dumping the public with the toxic aftermath. If you don't see the seeds of the next downturn in this type of banking structure, you must be blind.
It is a bit strange to see this ruling from the FDIC. All in all they have been one of the more sane players in this downturn. I suppose either it's hard not to go mad in a madhouse or in order for them to retain their political clout against the easy money Federal Reserve backed by the badmouth tax evasionist Geithner, they also must play the free money giveaway game.
I can hear the FDIC now, "Come and get your fresh hot money." I eagerly await Zero Hedges lambasting on this issue as well.