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Taxpayers Punked By FDIC... Again!

Taxpayers punked again!

"Pursuant to these requirements, staff estimates that both the Fund balance and the reserve ratio as of September 30, 2009, will be negative."
“GMAC Sells $2.9 Billion in FDIC-Backed Debt”
“FDIC May Do Mega-Securitization Of Failed Banks”
Why is Sheila Bair still at FDIC?  Hasn’t she done enough damage to our financial system?
How many times do I have to write about this before the mainstream media will start covering her incompetence?
Is there something well-respected journalists know about this so-called heroine that I, as an average citizen and non-financial expert, don’t?
If there were, please tell me so I can issue my sincerest apology, because thus far I have seen nothing but ineptitude from Sheila Bair.

"Alex Pollack, a fellow at the American Enterprise Institute... pointed to the failures of the Federal Deposit Insurance Corporation (FDIC), 'a relatively simple banking regulator' as indicative that the establishment of a SSR with a far more extensive remit will inevitably fail in its mission to minimise systemic risk.

'The FDIC is hardly an impressive model at the moment. It is insolvent; its liabilities are greater than its assets and its net worth is negative. It is in the process of putting after-the-fact special assessments on banks at the worst time, when the banks are struggling, tipping the US banking system into an aggregate loss in the second quarter of 2009. In addition, depending on the forecast you consult, we're looking at another 500 to 1,000 bank failures, which hardly supports the success of banking regulation or the FDIC's ability to anticipate the losses or the trends in the market'"

To begin with, FDIC underestimated the severity of the current economic crisis. 
It was one thing for a government agency to exhibit poor foresight but another for it to criticize Bloomberg last September when the news agency tried to warn Bair about the inadequacy in her insurance reserve.
Fast forward to October, 2009.
If deposit protection were Bair’s top priority, as it should and mandated to be, then why did she bring more liability to FDIC when it was turning insolvent and could not even pay off insured deposits at future failed banks? In just over one year, she had agreed to back over $300 billion of bank bonds and overpay for toxic assets by financing PPIP deals.
By the way, stop blaming bank failures on only the Fed, OCC, and OTS.
FDIC was the federal regulator for four out of the seven banks that failed this past weekend (Class NM).  In addition, the Office of Inspector General had already released several reports criticizing the agency’s pathetic supervisory efforts.

"The FDIC's Office of Inspector General analyzed 23 lenders taken over by regulators... [and] found that for 20, the agency's examiners didn't identify the issue early enough or should have taken stronger supervisory action..."
So how did the regulators decide to solve this problem?

"Banks Get New Rules on Property"

In other words, 

" Banks Can Lie About Commercial Real Estate Loans... Instead of having to foreclose and take writeoffs, the new rules encourage banks to modify existing commercial real-estate loans, even when the value of the asset has fallen below the value of the loan"

No wonder Bair preferred "keeping Inspector General Reviews Private."

It was unfortunate that she often attempted to save her agency at the expense of “ the others.”   Her latest answer to FDIC’s insolvency was a 3-year prepayment, a move that would no doubt hurt healthy and responsible banks and further endanger the limited amount of credit lines for business owners.
“Edward L. Yingling, president of the American Bankers Association... this prepayment will decrease the ability to lend"
Throughout this economic meltdown, our current FDIC chairwoman made several poor and inconsistent decisions that brought very little stability, if not more panic and loss of confidence, to our financial system.
Bair’s seizure of Wamu based on liquidity pressure expedited deterioration of the credit market and helped freeze lending.  Deposits at Central Banks in Europe and the U.S. shot up as banks refused to even lend to each other, much less the general public.

She then practically destroyed the bond market when she decided to wipe out Wamu bondholders.

"By its unwillingness to liquidate WaMu now, a move that might have salvaged something for bond investors, the FDIC potentially could have set up further problems down the road. If investors are unwilling to risk investments in floundering financial institutions, additional bank failures could follow. The losses to the insurance fund potentially could be even greater"

This unprecedented action immediately tanked Wachovia and dealt a near-fatal blow to our already fragile economic state, because it cut off the most important source of funding for not only financial institutions but also companies across all sectors.

Without a single word of apology or explanation for this catastrophic misstep, she launched and took credit for the bond guarantee program TLGP.
The problem was, she turned TLGP into a BONUS guarantee program for Wall Street, instead of using it to improve liquidity and lending.
Since when did Goldman Sachs start servicing small business loans?


Amazingly, although Bair continued to make statements to please the general public and in direct contrast to her actions, her popularity remained strong with the mainstream media.

"FDIC Bair: Suspend some Wall St. bonuses"
What a joke.

Why didn't the article include this important piece of information?
“Participation in the TLGP does not require compliance with the executive compensation requirements under the Emergency Economic Stabilization Act of 2008 and the related TARP programs"

Because she failed to impose any restriction on the capital raised from these FDIC-backed bonds, the few elite beneficiaries ended up using the money to engage in risky bets and to devour their rivals.  As banks grew bigger, they began to monopolize their markets. 
Admittedly, we had nobody to blame but ourselves as we watched these institutions hand out of billions of dollars in bonuses, for we had victimized ourselves by electing representatives who prioritized the interests of these financial giants over ours.

Despite all that, we, as responsible and law-abiding citizens, obediently continued to pay higher banks fees and credit card interest rates that were slapped onto us by the very same banks we saved with our tax dollars.
Under her leadership, FDIC also entered into loss-sharing agreements and took on bigger and bigger losses because the agency had failed to follow Prompt Corrective Action.  Even more shocking, some of these deals ended up producing more profit for new bank owners if they foreclosed homes, while undermining short sales and Bair’s own effort to keep people in their homes via loan modification.
The latest:

"Bair says Secured Creditors Should Pay For Failures"
My problem here, why should bondholders share the blame when they invested in or loaned banks money based on misleading information or criminal action abetted by our regulators?
“Regulator Let IndyMac Backdate Infusion”
Or when their banks were told to find buyers or raise capital but our regulators ignored their self-imposed deadlines?  Why were First Bank of Idaho and Wamu seized earlier than promised?  How did “rapidly deteriorating condition” coincidentally happen in both September 2008 and April 2009, or whenever it was convenient as an excuse for regulatory intervention?
This statement also made no sense considering FDIC currently backed billions of bank bonds via TLGP.  This was totally counterintuitive because it meant if Citigroup, for example, were to fail today and put into receivership, Bair would force those FDIC-backed bondholders to take a cut but then she would use her insurance reserve to make them whole.

Brilliant logic here, wouldn't you say?
There was also this rule change:
“The Interim Rule provided that the FDIC would make payments under the guarantee if a bank participant failed or if a bank holding company participant filed for bankruptcy… FDIC changed the Final Rule to provide that the FDIC’s obligation to pay holders of FDIC-guaranteed debt issued by a participating entity shall arise upon the uncured failure of such entity to make a timely payment of principal or interest as required under the debt instrument (Payment Default).”
I thought deposit protection was FDIC’s top priority.
Then again, what else was new? 
Bair continued to do whatever she pleased because most people were under the impression that she was the only regulator who cared about “Main Street.”  On March 4, 2009 Sheila Bair rejected small banks' argument on being charged the same fee as the big, corrupt banks, claiming such action was against FDIC statute but on May 22, she openly violated that restriction, one she herself had used earlier in defense of charging all banks equally.

How could it not be a serious ethical concern when FDIC could influence rating agency because it was unhappy with the bank management, especially when Bair originally deemed Citigroup strong enough to "rescue" Wachovia merely weeks before C received a huge government bailout? Where was the accountability?

"Bair Wants to Shake Up Management, Sought to Cut Ratings of Bank's Health"

I am going to side track a bit and dabble in some conspiracy theory.  Was Wachovia allowed to fail so it could be used to save Citigroup?  We could assume our regulators knew (because anyone with any common sense would) that by wiping out Wamu bondholders, Wachovia would fall almost immediately due to soaring insurance costs.  By refusing to help Wachovia stay independent and giving other banks barely any time to do due diligence on a potential deal, FDIC could simply gift Wachovia to Citigroup without any question asked, even appearing chivalrous.

OK.  Back to topic.  Recently, the manangement even received positive reviews by the very same consulting firm approved by the FDIC.

When everyone was angry about the AIG bonus in March, Congress was writing up (originally named the Depositor Protection Act of 2009) to give FDIC up $500 billion.  Not that many people noticed the mess she had created with order of payments in the Wamu seizure either.
“JPMorgan Chase acquired the assets, assumed the qualified financial contracts and made a payment of $1.9 billion. Claims by equity, subordinated and senior debt holders were not acquired… The FDIC (NYSE:USA) has made the claims of the counter-parties of all the swap contracts, futures contracts senior to those of the bondholders in the capital structure.  This is a HUGE deal.”

Speaking of Wamu, our Congress was now considering a “legislation [that] would permit the government to impose tough new capital requirements on the largest companies as well as take them over, making their shares virtually worthless, and remove management when they fail.  It would also provide new authority for the FDIC, which seizes weak commercial banks, to take over other large financial institutions like insurance companies or hedge funds, when they run into trouble.”

Our Founding Fathers believed in the checks and balances of power.  This was the reason for the creation of the Judicial Branch.  Washington Mutual Holding, JP Morgan, and FDIC have been fighting over about $4 billion in deposit at Wamu.  Without the bankruptcy court, we would not have found out that FDIC seized a well-capitalized and solvent Wamu, or that WMBfsb, with allegedly $17 billion in cash, was also declared a failure and then seized and sold to JP Morgan in the same fire-sale.  Even more interesting, unlike Lehman's auction that priced its bonds at 8.625 cents, Wamu's were actually valued at 57 cents.

“Attorneys for JPMorgan and the FDIC argued Thursday that a full evidentiary record and trial are needed before the court can determine the rightful owner of the assets…  JPMorgan has suggested that the money was included in the assets sold to it by the FDIC, and that WMI's transfer of $3.67 billion from WaMu to WaMu fsb, a subsidiary, was a capital contribution, not a deposit transfer, and thus belongs to JPMorgan”
If the deposit did belong to Washington Mutual Holding, then instead of declaring the bank a failure and destroying thousands of jobs and billions of investments, why didn’t our regulators allow the parent company to use that money to keep Wamu afloat until TARP passed?
If this were “a capital contribution,” then how in the world did Wamu fail on that Thursday due to liquidity pressure?
Besides, since when did it become legal for FDIC to steal deposits and ignore the ruling by the judge?
“The attorney for the agency said it could, as receiver of the banks, demand a return of the deposit to itself under the agreement to sell the banking operations to JPMorgan”
While you focused your disbelief and frustration on Paulson’s $800 billion TARP or Goldman’s $20 billion in bonus this year, trillions were handed out by the FDIC.
"That's the role the FDIC played... $940 billion in FDIC guarantees... and another $684 billion of backing for their trading accounts"
Bad and corrupt managements, along with reckless business practices, no doubt helped bring down Wamu and Wachovia.  Yet poor, unfair, and inconsistent decisions and actions by our regulators also played significant roles in the fall of these two institutions which further destabilized our financial system.  You can read about the details here:

"The downfall of Washington Mutual"
"A Fall to Remember: An Inside Look at Wachovia's Last Days"

Dear America, it is time to realize that if FDIC wants your bank to fail, it can make it happen while looking like a hero.  So the question is, are you not going to demand accountability until your savings and investments are taken away, all in the name of deposit protection, taxpayer interests, and systemic risk prevention?