FDIC Vows to Sacrifice Small Banks

Includes: KBE, KRE, RKH, XLF
by: Jeff Nielson

It's easy to see why people have such extremely negative attitudes toward government – when we watch a bloated, broken behemoth like the Federal Deposit Insurance Corporation (FDIC) in action. While most organizations look for ways in which they can perform their functions better, the FDIC spends its time looking for ways to perform its duties in a worse manner...and when you're already doing as lousy a job as the FDIC, it takes a lot of effort to get worse.

Let's review the performance of the FDIC over the last two years. After assuring the world that it had more than enough capital to weather the failures of large numbers of U.S. bank, the FDIC quickly burned through those billions – and now operates with a balance sheet drowning in red ink.

The FDIC keeps a list of “problem banks”, which supposedly allows it to stay on top of U.S. bank failures. In fact, none of the large, U.S. banks which failed ever appeared on the FDIC's “list”? Remember the names Merrill Lynch, Wachovia, Washington Mutual, Indy Mac, Countrywide Finance and others? We are left to believe that either the FDIC knowingly left all those troubled, big-banks off of its list, or is so incompetent it didn't know that all those institutions were at the point of bankruptcy.

Meanwhile, with respect to the smaller U.S. banks – of which the FDIC (supposedly) keeps better records, the size of the losses which the FDIC has “eaten” with these bank failures has gone from an average of 5% of assets to 25% of assets. In other words, at the same time that the FDIC's list has grown to over 700 – the highest total since the last wave of U.S. bank-bankruptcies – the banks now being shut-down are (on average) five times more insolvent than those banks which were closed down at the beginning of the collapse in the U.S. financial sector.

Of course, we all make mistakes. What matters most is how we respond to our mistakes. So, how has the FDIC responded to its past incompetence? By getting less vigilant.

It has been FDIC policy to conduct an “official review” of all U.S. bank-failures where the institution in question had assets of $25 million or more. In May of 2009, just after the U.S.'s corrupt “accounting watch-dog” brought in the new mark-to-fantasy accounting rules (which have allowed Wall Street Oligarch's to pretend to be “profitable”), the FDIC stated its intention to raise the asset-level necessary for a mandatory review from bank assets of $25 million or greater to those with assets of $300 million to $500 million (or more).

In other words, at the time of (arguably) the worst financial-sector crisis in U.S. history, the FDIC wanted to drastically reduce its own investigations to only those bank-failures of banks ten to twenty times larger than previous bank failures (see “U.S. Bank Watch-dogs Want to be Less Vigilant”). However, at the same time, it refuses to even put large, troubled U.S. banks on its watch-list. Like a confused “Goldilocks”, the FDIC wants to ignore the problems of banks which are “too large” or “too small” - and only actually “regulate” those banks whose size is “just right”.

Of course, FDIC-head Sheila Bair has occasionally grabbed headlines with some impressive rhetoric. Remember when Bair claimed she was fighting for the powers to close “systemically important” financial corporations (“FDIC Declares “War” on Wall Street Oligarchs”)? Apparently that “fight” didn't go very well.

The point here is that, like all bureaucrats and politicians, if Bair thought she was being prevented from doing “the right thing”, she could do what all honourable people do in such circumstances: resign – and then go public with her criticisms and frustrations. This is what the U.S.'s former chief-accountant, David Walker did. Alarmed by the combination of fraudulent White House accounting and reckless spending which is sure to lead to U.S. bankruptcy, Walker resigned – and then literally began a cross-country tour to try to get Americans to open their eyes with respect to their fiscal betrayal by Washington politicians.

He failed, but at least he did what was right. Bair, on the other hand, like most politicians/bureaucrats has decided that keeping her prestigious, highly-paid position is much more important than doing the right thing.

This pretty much brings us to today, where once again the FDIC is in the headlines for vowing to be less vigilant. In this case, her misguided policies are supposedly aimed at “helping” U.S. small businesses. How will the FDIC “help”? It's promising to “look the other way” with respect to any/all “small business loans” where the borrowers' credit makes them a poor risk.

Thus, at the same time that the Obama regime has created an entire, new “sub-prime” sector – with U.S. taxpayers guaranteeing 100% of this bubble-debt, the FDIC wants to jump on the bandwagon by getting small U.S. banks to throw out their lending standards – in order to provide badly needed capital for small businesses.

We know that Bair is only targeting small banks because a) “community” bank lending was specifically cited in a CNN article on this latest trial-balloon; and b) in fact the FDIC has ceased to be a “regulator” of large U.S. banks several years ago.

The problem is that it is the betrayal by the Wall Street Oligarchs with respect to small business lending which needs to be addressed. For those who have forgotten, let's quickly review the “picture” here. When the banksters' came to Washgington to mooch their $10 TRILLION in loans/hand-outs/guarantees (to prevent all the Oligarchies from collapsing into bankruptcy), they promised to use that money “to increase lending” to U.S. businesses – claiming that they were the key to any U.S. “economic recovery”.

In truth, we don't know what the banksters did immediately after they got their trillions – because the U.S. government made no effort to keep track of their activities. When it finally started keeping records of big-bank lending in 2009, what it has reported is that big-bank lending to U.S. businesses has fallen every month.

More recently, as I wrote just days ago, new data released shows that U.S. bank-lending is currently falling at the fastest rate in U.S. history (see “Bank Lending Plummets as Wall Street Strangles Economy”). With U.S. big-banks getting 100% of the “free money” from the Federal Reserve (in addition to their $10 trillion in loans/hand-outs/guarantees), and with U.S. big-banks being 100% responsible for this entire mess, and with U.S. big-banks promising that they would fix the mess they created (by increasing lending), all the Oligarchs want to do is foreclose on American homeowners, “starve” American businesses of capital, and make fat “trading profits” through trying to destroy entire economies (see “U.S. Economic Terrorism the NEW Winning Trade”).

And what is the response of banking regulator, the FDIC, to this situation? It wants to push small U.S. banks into making dubious loans – 'throwing them under the bus' while the Wall Street banksters continue to rape and pillage not only the U.S. economy, but the economies of nations all over the world.

In a government full of failures, Sheila Bair manages to stand out. Enough said.

Disclosure: No positions