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In a sad twist of irony, Shelia Bair is accusing blogs of being "out of control".

Sadder still is the fact that San Francisco Business Times writer Mark Calvey agrees. Please consider the incredibly inane article FDIC learns it ignores bloggers at its peril.

The federal agency insuring bank deposits learned that it can't afford to ignore the blogs following its seizure this month of IndyMac Bank, the largest bank failure since the 1980s.

"The blogs were a bit out of control," Sheila Bair, chairman of the Federal Deposit Insurance Corp., told the San Francisco Business Times after a speech in San Francisco this week.

That's putting it mildly. Following the FDIC's takeover of IndyMac on July 11, widely followed blogs were speculating on bank runs on some of California's largest banks based on nothing more than people waiting for their branch to open or large deposits moving between financial institutions.

The FDIC plans to pay closer attention to the blogosphere in the future.

"We're very mindful of the media coverage and blogs in controlling misinformation. All I can say is were going to continue to stay on top of it," Bair said. "The misinformation that came out over the weekend fed a lot of depositors' fears."

I would like to see the list of blogs Malk Calvey is referring to in this statement "Widely followed blogs were speculating on bank runs on some of California's largest banks based on nothing more than people waiting for their branch to open or large deposits moving between financial institutions."

The blogs I read (those that get high traffic) all looked at things from the perspective of 'it's ridiculous to pull money out of IndyMac after it went into receivership.'

Education? Think Again.

Here's an interesting statement from the article. "The FDIC also plans to begin airing public service announcements as part of a public education campaign on the nation's deposit insurance program."

Rest assured that "education" is likely to be extremely if not grossly misleading. I can write it myself. Here goes:

"The banking system is sound. No person has ever lost a dime in insured deposits".

There will be no mention of points 24 and 25 of You Know The Banking System Is Unsound When..... Here are those points:

24. There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.

25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.

Furthermore there is likely to be no mention by Shela Bair of the moral hazard of FDIC insurance in that "education" process. And make no mistake about it, FDIC insurance is an extreme moral hazard.

Many small and mid-size banks are enormously overleveraged in commercial real estate, construction of condos in Florida, Alt-A loans, and all sorts of other nonsense. How did those projects get their funding? The answer is by banks paying way above market rates on CDs and savings accounts, that is how.

So not only does FDIC insurance keep banks in business that should have been gone under long long ago, it deprives sound banks of capital to make better quality loans. It has also left the state of Florida in a mess of half complete condo towers that will never be occupied. That is just one horrendous example of the misguided nature of FDIC insurance.

In my opinion, here's what should happen.

1) FDIC insurance should be scrapped for all but checking accounts

2) On checking accounts, FDIC insurance should be unlimited.

3) Banks should not be able to lend out checking deposits, not a penny of it. After all, checking accounts are demand deposits. The money should be available on demand. It clearly isn't.

4) Automated sweeps programs that move money from checking deposits to savings deposits so that money can be lent out should be terminated.

5) Anyone that wants to chase yield in CD or high yielding savings accounts should have to pay the price if something bad happens. That would have shut off much of this insane lending spree right up front.

By the way, savings accounts should more accurately be called lending accounts. The reserve requirements on savings accounts is zero. Every penny is immediately lent out. The money that people think is in their "savings account" simply isn't there. I do not have a problem with this, except for the fact that "education" is lacking on this point, and there should be no government sponsored insurance on those in risky activities.

Shelia Bair should come out and say, "The money in your savings account, well none of it is there. By the way, only 10% of the money in your checking account is there either". Now that would be an education.

When I first saw the headline "The FDIC plans to pay closer attention to the blogosphere," I thought, WOW, the FDIC is going to watch the only people that have called the housing bubble and banking problems accurately: blogs.

Silly me. Instead, Shelia Bair wants to shut off the only source of information as to how unsound the banking system and FDIC is. Note to Sheila: Should I have any facts wrong in this article, I would be more than happy to clear them up.

Source: The FDIC: What Do Banks Really Do With Your Money?