FDIC's Creative Financing Ideas Are a Red Flag 15 comments
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The Federal Deposit Insurance Corporation is running out of money, and is thinking of ways to get it, like getting banks to prepay future deposit insurance premia and special assessments.
I know we’re not quite there yet, but this brings to mind events of 20+ years ago, during the S&L crisis. In the late-1970s and early-to-mid 1980s, many S&Ls were insolvent, and the Federal Savings and Loan Insurance Corporation (FSLIC) didn’t have the money to seize them, and pay acquirers to take them over. (An insolvent thrift’s deposit liabilities exceeded its assets. To get somebody to take over the deposit liabilities, FSLIC had to pay the difference between liabilities and assets out of the insurance fund.)
Congress steadfastly refused to provide the money needed to replenish the FSLIC fund, so FSLIC resorted to various measures to keep going. Mainly, it created “regulatory capital” out of thin air to permit insolvent thrifts to keep operating. A bad thing, that, because such “zombies” had an incentive to double down and gamble their way out of insolvency. Many didn’t, and lost even more money, thereby increasing the size of the financial hole FSLIC had to fill.
Another thing FSLIC did was sell off insolvent thrifts and instead of giving the acquirers a lump sum to cover the hole in the balance sheet of the acquired thrift, promised them a stream of payments (”yield maintenance,” for instance) that covered the difference between the cost of funding the deposits and the earnings on the bad assets. It did this in a slug of deals in December, 1988.
Problem was that FSLIC grossly underestimated the cost of this financial support to the Treasury. The assistance was tax advantaged, but FSLIC didn’t take this into account. Moreover, in calculating the costs of the deals, it assumed that the acquirers would work out and sell the bad assets quickly, shortening the time that the government had to provide the support. But since (due in part to the tax advantage) the assistance effectively paid an above market rate of return as long as the bad assets were on the books, the acquirers had the incentive to milk the assistance for as long as possible, thereby inflating the costs far above what the government estimated.
(Along with three colleagues, the late Vic Bernard and Roger Kormendi, and current dean of the U Chicago B-School, Ted Snyder, I performed an evaluation of the December ‘88 deals that showed how badly the FSLIC blundered. In retrospect, the numbers–in the billions–seem like chump change compared to what’s gone on in banking recently.)
A big part of the problem is that middling level government folks, well meaning to be sure, were matched up against heavyweights like the Bass brothers when negotiating these deals. It wasn’t a fair game, by far. The financial sharpshooters had no problems structuring deals that were very profitable to them, and very costly to the government. It was an asymmetric information problem writ large.
Moral of the story: when government guarantors run short of money to cover their obligations in a timely, final way, they can do very stupid, costly, things. Starved of the necessary funds by Congress, FSLIC fed moral hazard problems, and entered into hasty, cash-conserving transactions that provided benefits to acquirers that proved very hard for the government to value, and which wound up being very expensive. These measures made the insolvency problem worse, and inflated the cost of resolving it.
FDIC doesn’t appear to be in such straits yet, but the fact that it is looking for “creative” ways to fund itself raises red flags. The FSLIC experience suggests that it would be better to provide FDIC with the funds it needs today to meet its obligations to insured depositors, rather than rely on creativity which, in the stress inherent in these circumstances, can lead to decisions that make sense to FDIC in the short run, but which are very costly in the long run (and in present value terms). That is, just as with businesses, cash flow problems can lead government guarantors to make inefficient, costly decisions. Better to grasp the nettle now, give FDIC the wherewithal to meet its obligations, and figure out how to claw back the money from the banking industry later.
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Do the US government want to see a systematic bank run and bank failure or what? With their savings in the bank earning virtually no interest and the FDIC looks like running out of money and the federal government leave it up to FDIC to figure out what to do, what do you think an average American will think and act?
The US government need to immediately extend the assurance that they will provide unlimited amount of funding to the FDIC when necessary, so the operation of FDIC is absolutely guaranteed. Anything short of that, a future systematic bank run can not be avoided when enough people realize what a situation FDIC is in.
With this plan, the banks will still fall undercapitalized and they still will not be lending money to the job creators and families. Great farkin plan.
My savings account earns less in interest than the bank charges in FDIC fees. Wonder how long people are going to continue to play this losing game with the banks.
Insanity is running our country and apathetic fools are drinking the kool-aid. This check kiting scheme is destined to crash, question is when. This year (doubtful-the government will get its tax revenues scheduled at year end) or one of the few following it.
Good luck to us all.
It's them or us.
Now the banks are crapping out left and right and the FDIC needs more money, which of course they will get through the taxpayer.
Running an insurance program for the banks should be EXTREMELY easy, yet the FDIC can't do it correctly. How do we expect our governement to run anything)health care, economy, GM FRE/FNM) when something as easy as insuring banks can't be done correctly. Why give them more money to incorrectly run?
FDIC: Fools Doing Incompetent Crap
The government continues to beat the Crap out of us citizens who were have little or no debt. This is nothing more than a scheme to tax in another way, hidden under the guise that the banks are paying the tax. No! In the end their depositors are paying this tax. And this tax is going to fund mis-managed banks, that will likely fail anyway?
All these trillions of Uncle Sammy money for this and that is only delaying the eventual global reset.
One government program after another failing including Fannie, Freddie, Ginnie and the Federal Pension Guarantee Fund is not far behind. Another bubble furiously being inflated by the government in housing under FDA loans with no underwriting standards and low interest loans.
Will there be another tillion dollar plus bailout to prop up these government entities? No bail-out in sight for the taxpayer?
"Friday, September 25, 2009
Problem Bank List (Unofficial) Sept 25, 2009
by CalculatedRisk on 9/25/2009 07:36:00 PM
This is an unofficial list of Problem Banks.
Changes and comments from surferdude808:
Another week with significant changes to the Unofficial Problem Bank List as the FDIC released its enforcement actions for August. We will not get another release from the FDIC until the end of October.
The Unofficial Problem Bank List grew by 23 institutions to 459 and aggregate assets total $297.2 billion, up from $294 billion last week. During the week, we added 25 institutions to the list while we removed 2 because of failure. The failures were Irwin Union Bank and Trust Company ($2.8 billion) and Irwin Union Bank, F.S.B. ($518 million).
The largest asset additions include First Mariner Bank ($1.3 billion), Baltimore, MD; Anchor Mutual Savings Bank ($657 million), Aberdeen, WA; and NexBank ($560 million), Dallas, TX.
For the other 23 additions, the average asset size is $178 million. The additions are concentrated in handful of states including Minnesota (5), California (4), Washington (4), and Georgia (3), which all continue to see banks with large CRE or C&D lending concentrations come under enforcement action.
The list includes 2 new Prompt Corrective Action orders the FDIC issued against American United Bank ($112 million), Lawrenceville, GA; and Bank 1st ($109 million), Albuquerque, NM. It is long overdue for the agencies to start issuing more PCA orders.
The list includes 2 new Prompt Corrective Action orders the FDIC issued against American United Bank ($112 million), Lawrenceville, GA; and Bank 1st ($109 million), Albuquerque, NM. It is long overdue for the agencies to start issuing more PCA orders.
One other interesting item this week is that the FDIC issued a Cease & Desist order on August 31st against Georgian Bank ($2.2 billion), Atlanta, GA, which was closed today. We typically remove failures from the subsequent week’s list but, in this case, we did not add Georgian Bank otherwise aggregate assets would have been $299.4 billion.
The list is compiled from regulator press releases or from public news sources (see Enforcement Action Type link for source). The FDIC data is released monthly with a delay, and the Fed and OTC data is more timely. The OCC data is a little lagged. Credit: surferdude808.
See description below table for Class and Cert (and a link to FDIC ID system).
For a full screen version of the table click here.
The table is wide - use scroll bars to see all information!
Go here and you can see the list of bank that are unofficially on the bad list. Estimates of upwards of 1000 banks.
calculatedriskblog.../"
reason.com/blog/show/1...
On Sep 29 11:04 AM bearfund wrote:
> Let's just get the whole thing over with quickly. Tell the FDIC
> it's on its own with no help from the Treasury (spin it off into
> a private corporation and cancel its government charter). Let the
> bad banks suffer runs and fail immediately; the new PDIC can cover
> what it can and then go under. A few very bad months would be far
> better than 20 or 50 years spent slowly bleeding away our productive
> capital, which is how this is shaping up. The size of the bad banks
> and the amount of leverage they employ ensures that they will need
> decades to "earn their way out" (read: have the Fed force savers
> to subsidise their yield curve out) of trouble. It's not worth it.
> Let them die.
>
> It's them or us.
This is fundamentally different from bailing out the wall street crooks and allow they to pay themselves billion dollar bonuses. We are talking about bailing out the average Joe whose money is in a bank saving's account. So that's tax payers bailing out tax payers.
That's the right kind of bail out, when the American people leave their money in a bank, they expect a full guarantee that they can get their money back. The US government needs to throw its full faith and credit (although I do not know how much of that is left) behind that guarantee. If they can not do that much, then people should withdraw their money, purchase precious metals, and put them into their own pillow banks.
On Sep 29 10:54 AM David White wrote:
> Good Article. I agree with both of you guys. The FDIC should get
> the money it needs as soon as possible. I disagree with one thing
> Mark said. The Congress would never give carte blanche spending power
> to any government agency. That leads to too much possibility of abuse.
> For instance, money could be funnelled to wars or the CIA or pet
> projects, etc. Congress would never agree to do such a thing. Overall
> I agree the FDIC should be given the money they need by Congress
> though (if incrementally).
online.wsj.com/article...
"Through more than 50 deals known as "loss shares," the FDIC has agreed to absorb losses on the detritus of the financial crisis -- from loans on two log cabins in the woods of northwestern Illinois to hundreds of millions of dollars in busted condominium loans in Florida. The agency's total exposure is about six times the amount remaining in its fund that guarantees consumers' deposits, exposing taxpayers to a big, new risk.......So far, the FDIC has paid out $300 million to a handful of banks under the loss-share agreements."
"In June, Wilshire State Bank, a division of Wilshire Bancorp Inc. in Los Angeles, agreed to buy $362 million in deposits and $449 million of assets from failed Mirae Bank, also of Los Angeles. The FDIC agreed to assume most future losses on roughly $341 million of those assets, largely commercial real estate and construction loans in Southern California."
"After we understood how [the loss-share] works, we were literally overjoyed," says Joanne Kim, chief executive of Wilshire State Bank.
**********************...
Yes, indeed, making a deal with any agency of our federal government often leads to the emotional condition known as "overjoyed".
The linked WSJ story quotes another participant in the FDIC's "negotiations"......
""From a turnaround guy's perspective, I've never had this kind of downside protection"
W.L Ross, chairman and CEO of W.L. Ross & Co., estimates that as many as 1,000 banks will fail during this cycle.
So where does that leave the FDIC, which has run out of money and is on the hook for billions more with the 'loss share" agreements ? Because Congress and the administration are fearful of the repercussions from continuing to be seen as just throwing more money at the problems, the FDIC assesses bank fees in advance. But this is just a short term fix, if 1,000 banks are really going to close.
While there may be a limit to what voters will tolerate in additional spending, there apparently is no such ceiling on the financial games being played by our government. In the meantime, our "leaders" feed us 'happy talk" about how they "saved the world".
Just another way to give the "finger lickers" more of our honey, my Man....