Recycle TARP Repayments to Bolster the FDIC

| About: SPDR S&P (KBE)
This article is now exclusive for PRO subscribers.

The U.S. insurance fund for bank deposits is running out of money. At the same time, some of the big institutions that received federal bailouts last fall have repaid more than $70 billion to the Treasury Department, and more checks to the government may be in the mail soon.

Right hand, meet left hand.

Indeed, one way of dealing with this looming crisis at the Federal Deposit Insurance Corp would be to take all that repaid bailout money and simply inject it into the bank insurance fund. Such a move would instantly bolster the deposit insurance fund, which at the end of June had just $10.4 billion in the kitty.

Transferring the repaid bailout money to the insurance fund would permit bank regulators to move more aggressively in shutting down some of the 416 troubled lenders with $300 billion in assets on the agency’s watch list.

And the sooner the FDIC can dispose of the worst banks, the faster the nation’s financial system will be on the path to a real recovery.

Using money repaid to the Troubled Asset Relief Program would also save President Obama from the embarrassment of having to go to Congress to ask for another bailout if the FDIC exhausts a $100 billion line of credit from Treasury.

It’s far easier for Obama to get Congress to approve the reallocation of bailout money that’s already been appropriated than asking for a new round of government welfare for the nation’s banks.

Plus a transfer of TARP funds to the FDIC’s insurance fund could be spun into a political victory for the Obama administration.

Right now, repaid bailout money goes into the Treasury’s general fund waiting to be doled out to other troubled banks. By replenishing the deposit insurance fund with TARP money, the administration would be sending a strong message to the public that the year of the bailout is over.

A year after Lehman Brothers’ collapse, the government should no longer be in the business of pumping money into too-big-to-fail institutions to prevent a global financial meltdown.

Rather, the government should be reloading the deposit insurance fund, so that regulators have ample ammunition to take over failing lenders and return a bit of moral hazard to the banking world.

Recycling TARP money may also allow the FDIC to avoid having to draw on the $100 billion line of credit with Treasury. And the FDIC will get the job done faster than imposing a series of special assessments on banks to replenish the fund