How to Replenish the FDIC's Coffers

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 (BAC), and Citi (C) bailouts — and we should be putting an end to such shenanigans.

Comments

[questioner5000:]

BAC would probably be glad to support FDIC's borrowing plan, if the government would stop coming up with an unending stream of prerequisites, (reconstitute your Board, give in to the demand for an exit fee from a tentative outline of a guarantee that the parties never agreed to or signed, stop pointing out the the Fed and Treasury overstepped their powers in order to save the country by sacrificing BAC shareholders, etc.), before BAC can repay TARP!

Sep 22 11:01 AM

[The Goy:]

The difference of them borrowing from the treasury which will issue debt or borrowing from the banks and issuing gov backed debt, is semantics. Our government is issuing massive amounts of debt, for which every US citizen is going to have to pay the bill. IMO, this is highly troubling.

Sep 22 11:01 AM

[Sean Ryan:]

Clearly both the government and the bank industry would prefer that the funds come from within the industry simply for the sake of optics.

The striking thing to me in the Times' report is yet further confirmation that Sheila Bair can't play well with others. She alienated the Bush financial team and has done the same with the Obama team; it seems clear that her rocky relationship with Geithner is not an aberration.

Sep 22 11:09 AM

[Harry Tuttle:]

Good for Ms. Bair!


On Sep 22 11:09 AM Sean Ryan wrote:

> Clearly both the government and the bank industry would prefer that
> the funds come from within the industry simply for the sake of optics.
>
>
> The striking thing to me in the Times' report is yet further confirmation
> that Sheila Bair can't play well with others. She alienated the Bush
> financial team and has done the same with the Obama team; it seems
> clear that her rocky relationship with Geithner is not an aberration.
>
>

Sep 22 03:31 PM

[L Moore:]

So FDIC borrows from Wells Fargo. 12 months later Wells is imploding. Does the FDIC shut it down? May be, maybe not. Best case: FDIC says screw you, we're not paying back the loan AND we are shutting you down. Case closed.

Sep 22 08:57 PM

[Moon Kil Woong:]

So far none of the major banks that should be closed down are. The simple fact is FDIC and the government can't afford it. All the better reason to start breaking them up rather than making them larger.

This pre-payment scheme will only save the FDIC until the tap runs out again, which it probably will, leaving it in an even worse financial position than now. Salmon is right, we should just face the facts and pay the piper. I suggest cut 5% off of federal agencies scheduled to benefit from the stimulus to pay for it. They shouldn't have gotten the money to start with.

As for Sheila Bair, I commend her moxie in standing up to Bernake and Geithner and would much rather finance FDIC than TARP. Using TARP money is not a bad idea either, but such a demand must come from Obama. After all, Geithner would much rather issue 4 letter words to her than actually solve anything. Shame on him.

Sep 22 09:49 PM

[Mark Bern:]

The biggest problem I see with this plan is that the "investment" made by the banks, given to the FDIC is siphoning money out of the economy that is needed to fund business and job growth. Whatever goes to the government will not be available to be lent to the private sector. The private sector, especially small and mid-sized businesses, are starving for credit already. This just spells the demise of even more private companies and the loss of more jobs.

The idea of government stimulating an economy is putting money into private industry, not taking it out. Or did all 12 of my university economics professor lie to me?

Sep 22 10:03 PM

[58robbo:]

government should move toward phasing out deposit guarantees! as a country we have to look at how we define risk. i believe that every single decision we make in life carries a certain level of risk and there are no guarantees. when we deposit our money with a banking institution in exchange for interest, what is the difference?

we should understand that our money is invested for profit and that those invesments carry a risk. the level of risk should be compensated with higher interest payments fro higher risk and lower interest for lower risk. for the truly risk averse, their money should be stored in safe deposit like accounts and they ought to pay accordingly for the service.

another thing we should understand is that once we commit our money, it's commited until someone else buys your position or the loan is paid back.

banks which operate with fractional reserves would tend to be greater risk for greater reward. unfortunately we cannot have our cake and eat for lack of a better term. reward entails risk. ie 1+1=2 not 3

Sep 23 03:37 AM

[bbro:]

Better study up on BAC....they have 150 billion in cash..many times the other banks...they could pay back Tarp and lend some money
to Madame Bair....

Sep 23 06:59 AM

[fed_alchemy:]

Bring back FASB 157 and run BAC like a corporation with shareholders that operates within the rule of law

Sep 23 07:21 AM

[LKofEnglish:]

Ahhhhhhhhh!!! Weeeeeeeeeee!

Sep 23 08:54 AM

[bottoms-up:]

Felix, Where have you been the last year? Easy... Just give Ben a call and print more money! Let the American people live with the consequences.

Sep 23 10:15 AM

[tripleblack:]

When disasters (like the financial meltdown) strike, say, Florida homeowners after a series of hurricanes, wow, their insurance premiums go up.

This helps to replenish the coffers of the insurance companies, of course.

Since one of the primary functions of the FDIC IS to act as the insurer behind the banking industry, it only makes sense that the premiums charged the banks go up in some measure commensurate with the recent disaster.

IE, the money should largely flow from those companies benefitting the most from the FDIC insurance.

While I am ALL for allowing (heck, ENCOURAGING) the banks to pay back the TARP monies to the taxpayer, it would seem that if they can afford to do this so rapidly, they can also afford to pay a larger, but reasonable, insurance premium.

Sep 23 11:50 AM