Why shouldn’t the FDIC borrow funds to replenish its reserves from healthy banks, rather than from Treasury? After all, the banks will end up repaying the money, with their insurance premiums, in one form or another, and this solution gives them a bit more of a financial interest in each others’ health.
That said, the main reasons for this happening are a bit depressing: The banks don’t want any more money from Treasury, in any form, since they hate the extra oversight which tends to come with it. And Sheila Bair, personally, “would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help,” according to the president of the Independent Community Bankers. Which hardly speaks to a smooth-running regulatory infrastructure.
There’s one more problem with the proposal, under which, according to the NYT, “the lending banks would receive bonds from the government at an interest rate that would be set by the Treasury secretary and ultimately would be paid by the rest of the industry.” If the bonds are coming from the government, that’s likely to mean they’ll be treated as government debt, and it certainly means that there’s an implicit government guarantee there. Once again, the FDIC is using government guarantees, rather than real cash, and pretending that doing so doesn’t cost the government anything. We’ve done that too many times already — including in the Bear, BofA (NYSE:BAC), and Citi (NYSE:C) bailouts — and we should be putting an end to such shenanigans.