FDIC Insurance Limits: Eating My Humble Pie 14 comments
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Today I have to eat some humble pie.
I was wrong in my blog over the weekend about why we didn’t need an increase in FDIC deposit insurance limits. I clearly did not understand that such an increase is a good idea because it would provide the “grease” necessary to lubricate Congress and pass the Paulson plan.
Apparently, the price that the Administration had to pay to get approximately 8,000 small banks in the U.S. to support and lobby for the rescue bill is an increase in the FDIC deposit insurance limit to $250,000. And, with the support of small banks, passage of the rescue bill will probably happen. The New York Times had a great article today about the Independent Community Bankers of America lobbying effort and how they are putting together a grassroots effort to make sure that the bill is approved this time around (with the FDIC deposit insurance increase in the bill). When I wrote the blog this weekend I didn’t understand that it is still business as usual in Washington.
I was naïve about the Congressional political process when I suggested in my article that an increase in the FDIC deposit insurance limit wasn’t necessary because there were alternatives that depositors could employ that achieve the same result without the Federal Government taking on more financial liability. Also, I foolishly thought that the purpose of deposit insurance was to protect depositors (i.e., the beneficiaries of deposit insurance) and not the banks (i.e., the parties which deposit insurance is trying to protect the depositors against). I’m not sure why raising the insurance limits isn’t a little like increasing fire insurance limits on homes at the request of arsonists who are burning them down. But, then again, what do I know?
Clearly, I didn’t understand that the purpose of deposit insurance is to give a competitive boost to banks that otherwise can’t compete with better capitalized institutions.
And, it never occurred to me, as reported in the New York Times article and also in the Wall Street Journal, that there was a chance that the insurance limit would be raised without increasing the premiums paid by banks. If in fact fees paid to the FDIC for increased coverage are not charged, Congress and the Administration will be giving a direct subsidy to the banking sector and redefining the meaning of “free lunch”. Of course, sooner or later the taxpayers will pay, but in the meantime Congress will “kick the can” down the street until after the election. I guess it is OK to subsidize banks because this time it isn’t the bankers of Wall Street getting the benefit, but rather the bankers of Main Street.
Anyway, I am eating humble pie and apologize for not being “wise” to the ways of the world. I should have known better.
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"Of course, sooner or later the taxpayers will pay, but in the meantime Congress will “kick the can” down the street until after the election. I guess it is OK to subsidize banks because this time it isn’t the bankers of Wall Street getting the benefit, but rather the bankers of Main Street."
Yes, my friend. Sooner or later the taxpayers will pay for everything. Or will they? Sure you wouldn't want a hedge on that bet? People are really sick of this...
Someone tell me how FDIC protects deposits, when they don't have the assets to even protect a very small run on selected banks in our country at the current $100,00.00 limit.
It's not humble pie, it's pie in the sky.
For example the FDIC insurance fund is only one of those accountancy vehicles that measure only what banks have paid and what has gone out. In fact all cents and all dollars paid by the FDIC come from the US government.
There is no 45 billion in reserves at the FDIC; the money paid by the banks is spended a long long time ago.
With updating the 100.000 US$ rule to 250.000 thousand there is only a little bit more oxygen for small business.
Most citizens have not over 100.000 US$ in 'savings' on the account but small business often need to have over that kind of stuff in borrowed money.
To ensure this writer is as dumb as hell, let me quote his widom:
And, it never occurred to me, as reported in the New York Times article and also in the Wall Street Journal, that there was a chance that the insurance limit would be raised without increasing the premiums paid by banks.
Comment: It is very simple to understand why the premium is not raised, there is no real FDIC fund at all. If there would be a real fund, premiums would rise but this is not needed because we are only looking at some accountancy vehicle...
Well, the bailout pack 1 is $ 700.000.000.000, the potential closures
more or less 6.000.000 households, so bailout/potential closure
$ 116.667. Conclusion: $ 700b is enough if expended wisely, that is the key issue here.
the problem is of solvency, why they are focused in liquidity?
good banks are not supposed to collapse if their assets are
good, is Economics 101, or all the banks full of garbage debt?
Bad banks must die and their depositors needs to be bailed out
Ireland style by the rest of taxpayers, is not fair but the option is
unacceptable. There are some moral decissions to be taken now.
My advise?
The option taken by Chile in a similar situation in 1983 is a less costly option in terms of future economic growth. The Chilean Central bank took all the bad paper in exchange of cash to fund the deposits. The government was just requested to keep out of the deficit so no fiscal debt was issued.
The local currency depreciated significantly, increasing the competitiveness of the exports and attracting a huge flow of foreign investment so real state market was ready to grow next year. Government debt traded in the secondary market with a big discount,
and debt to equity swaps created opportunities for foreign investment in most of the economic sectors. The economy was growing China style 2 years after. Pain now, gain tomorrow matbe Obamacaine have the guts, I recognize that it was POW lifestyle for a while, but it worked.
For monetary economy lovers:
mv=pq,
more m, given v/q constant, means only more p,
we all know q is collapsing in the US
because of (g - t) caused too much (m - x)
as m-x was funded by b*
now the foreign holders of b wants a lot more i
you can get domestic b with a low i
but as p is going to the moon,
your i/p will go to hell if you not fix
g - t = 0 with a very positive x-m
Yen and swiss francs by now, common sense and public interest must prevail.
Forget the FDIC, I'll cover any losses you may occur. After you lose your money, just shoot me an email and I'll cut you a check; problem solved.
------------------
Anyone seen McCain? We need a Maverick to step and fight for us against this waste and corruption!
Oh, never mind, I found him. He's on TV telling the Congress to get it passed.
So much for reform...
Oh wait! Obama will save us!
Carp, he want to pass it too...
Welp, we're screwed!
I'm not much on linear equations to formulate or define a serious problem that is in a constant change state. By the time your computer give you a number, the input will be different and you'll be wrong. You've got to estimate where the duck will be, aim at the estimated position, then shoot.
Obamacaine... I supported M-P ticket. Now I don't know. When I see these guys voting for a porked-out bill to shove the bail-out plan down the throat of the American people via the U.S. House of Representatives I think they should all modify their slogans to:
The more things change, the more they stay the same. Vote (Obama/McCain) 2008.
the $250,000 limit expires at the end of 09. don't expect these bastards to give the public anything they aren't forced to give them. wall street comes first and if you believe otherwise you haven't lived long enough.
Your OPINION as to where the fiat aspects of the monetary system begin and end is noted, but it is just that. No more. As are all opinions of same, including mine.
There are several middlemen in the market place that exploit this construct to profit themselves. Examples are the brokered CD desks of several investment banks, The Reserve (whose money market funds were the first to break the buck), and Promontory Interfinancial Network.
These middlemen's business model arbitrages the credit rating of a US Government Agency (FDIC) and increases FDIC's overall liability by increasing the size of insured deposits in the banking system. Wealthy and institutional customers benefit immensely because they are able to obtain Bank CD type rates on up to hundreds of millions of their money while taking US Government credit risk. Indeed, historically they have been able to pick up hundreds of basis points over Treasury rates.
The increased liability to the FDIC is paid for by the banks in the form of higher FDIC premiums. Banks, in turn, pass on the FDIC premium cost as well as the cost that the middleman charges to their customers in the form of lower interest rates and/or fees. Again, wealthy and institutional customers have more leverage with banks and are more sensitive to rates and fees, therefore the cost is disproportionately transferred to the average customer. And if FDIC runs out of its fund, then the taxpayer will be stuck with the cost.
The net result is that these middlemen significantly increase the liability of FDIC as well as transfer wealth to wealthy and institutional investors from average bank customers. Given that there are hundreds of billions of dollars in these programs, it is significantly increasing FDIC's liability and creating a substantial burden for average bank customers that don't keep more than $100,000 at banks.
The middlemen also have a significant 'moral hazard' problem because they are likely to provide funding for banks that are most desperate and thus willing to pay highest rates in the market place. However, unlike normal credit extension, there are no credit checks or collateralization because the risk is borne by FDIC. Promontory sells funds in an auction where the highest bidder is awarded the funds. And it boasts on its website that there are no credit limits and no credit checks or collateralization is required. It also charges $30 annualized per $10,000 for a 4-week CD, a maturity where it does the majority of its business. Astonishingly, these entities (except for brokered deposit desks) are not even regulated by any banking regulator. And you frequently find Alan Blinder on CNBC and other media trying to shape the policies of FDIC as an unbiased commentator when he is pitching CDARS on Promontory's web site.
This is another clear cut case of "Public Risk, Private Gain". Anyone remember Fannie, Freddie?
I wish this issue would be brought up in the discussions now because it has the potential to grow into a huge problem down the road.