naked capitalism

Cat says:

I read somewhere that the smaller and regional banks are complaining that, while they kept their own lending in check and passed over easy profits because they saw the risk to depositors, they are being required now to pay premiums to underwrite the failures of larger or less well managed banks who were destined to fail for a decade due to known risky practices, regulatory capture and lax oversight.

They have a point.

The FDIC is a joke right now, like someone selling insurance to a block of lowland homes while a flood water is rising, as if everything is equal. Everything ai’nt. Better to forget “prudent investment in insurance” during a flood and just wait for the bailout after the flood takes you if it takes you, is what most must be thinking about now.

We can go back to “prudent” 20 years from now, when all there are left are local banks. Assuming we still have FDIC in 20 years.

Mara says:

I’m impressed the FDIC’s not broke already. The margin for error is so slim in our financial system, anything above a gnat’s fart will bring the house of cards down.

wintermute says:

FDIC will not go broke of course – it will go to the Fed for extra funding. Further, Bernanke will see this as an “opportunity” to do directed “quantative easing” – helicopter drop money right into regional deposit bases. It won’t help but will get done anyway.

Boss Tweed says:

So all of you financial wizards, where do you keep your money? Wampum? Barter system? How do you buy milk and eggs?

The FDIC is the only government entity that actually modified derivatives (see IndyMax) which is more than Hanky Panky or Tiny Tim did.

To hell with TALF and securitization. Hedge funds and private equity firms will not lend with the Treasury’s cheap money. Why should they? Why not buy up potential good companies at fire-sale prices?

Anonymous says:

The FSLIC recapitalization during the run-up to the S&L crisis was hotly contested by criminal bank management who wanted to suppress the regulatory function of the Bank Board. Keating applied unprecedented political power to keep the recap from happening, since until it occurred his bank Lincoln Savings could not be shut down safely (meaning insured depositors made whole).

At that time both the criminal and less-or-non-criminal banks were opposed to the recap. This was a complex and uneasy truce, but the public face appeared united.

Then, as now, the longer we go without shutting down the insolvent institutions, the worse the problem will become. Unfortunately, the corruption/regulatory capture that was then merely insidious and damaging appears now to have completely overwhelmed the host, with our highest officials enabling and expanding the fraud.

Insert outrage here.

mmdonner says:

Somewhere above, anony..asks, where will the 27B in fees come from if banks don’t make a profit? how about from dividend payouts?
otherwise, the 27B needed (and more of course) will come from the taxpayers..AGAIN.
to complain that well managed banks have to pay for misbehaved banks is certainly true..but isn’t the same for taxpayers??
and, will the idea ever come that banks, insurance companies and pension funds for example should put away even MORE during good times for such rainy days as now?? strange idea i know when the perspective is from quarter to quarter shareholder returns
where are all the private enterprise folks demanding that the banks stand or fall on there own merit within the ‘free capitalistic system’??
Michael

Anonymous says:

The FDIC surcharge on a particular bank should be proportional to their measured risk, even simply based on traditional metrics. Hit BoA, Citi, etc. with the consequences of their indiscretions and get some of that Tarp money back.

cent21 says:

It would be instruction to see something like Krugman’s diagram of common equity, preferred equity, debt, and liabilities, which also includes bank deposits and FDIC insurance obligations, bank by bank.

That is to say, do any bonds, preferred equity, common equity remain anywhere before FDIC pays out a penny? If so, why, and what banks?

Anonymous says:

“So all of you financial wizards, where do you keep your money? Wampum? Barter system? How do you buy milk and eggs?”

Easy. I keep the absolute minimum possible in the banks and put the rest in 4-week U.S. Treasury Bills. If I have to keep my cash in the form of IOUs (which is all that your money in a bank account is, i.e. a claim on the bank’s loans), I want it to be in the soundest, safest debt that’s out there. So my excess cash balances get rolled into T-bill backed money-market funds or direct purchases of T-bills via TreasuryDirect.

Robert Prechter and James Grant have been warning for years that all the FDIC will accomplish is to spread the weakness in the banking system to the healthy, strong banks, so that depositors have nowhere to hide.

Federal deposit “insurance” is an incredibly foolhardy idea, one that has already caused immense damage by encouraging depositors to keep their money in high-risk institutions offering high yields, backed, of course, by a government guarantee.

eh says:

Two words: quantitative easing.

beezer says:

During the Great Depression some banks actually closed up because they didn’t have anyone to lend to.

They just told depositors to come in and get their money.

As for what to do with your money. Buy some farmland. The last commodity, food, in a resource starved, overpopulated world.

Anonymous says:

Boss Tweev: So all of you financial wizards, where do you keep your money? Wampum? Barter system? How do you buy milk and eggs?

Because you asked, the Wiz Kid recommends the following diversified portfolio:
1. Small herd of goats for fresh milk for the kids
2. About 20 chickens for fresh eggs and fuel for your new SUV
3. Numerous guns
4. Lots and lots of ammo
5. Canned food
6. Piles and piles of physical gold
7. Mucho cold, hard cash in hand
8. Daily fervent prayer

Regarding point (7) above, the Wiz Kid recommends you pull your cash out of the banks now, not when everybody else wants to do it.

Regarding the "fuel" in point 2, you convert the chicken sh*t into low octane gasoline using the process depicted in the excellent movie "Road Runner." That will get you enough fuel for your new SUV (a second hand 50 cc moped) to take you to the flea market and back.

Truly yours,
Vinny GOLDberg, Wz.K, Mk.E.E. (Wiz Kid & Maverick Economisto Extraordinaire)

Anonymous says:

Looks to me like gold will converge with the SP500 level in the near term as banks, institutions, and sovereign governments delever. Remember, there are 3000 tons of gold in circulation and 30,000 tons in central banks.

Luke says:

When I started looking into the FDIC Insurance Fund for my blog I found that there really is no money in the FDIC Insurance Fund. Instead it’s a bunch of IOUs like the Social Security Trust Fund.

Here is Bill Isaac’s testimony from 2000:

http://financialservices.house.gov/banking/21600isa.htm

Here is the 2nd question asked of him and his reply:

Please discuss the adequacy of the statutory designated reserve ratio of 1.25%. Is it appropriate in light of subsequent legislative changes such as prompt corrective action, national depositor preference and Gramm-Leach-Bliley?

It is important to understand that there is no deposit insurance “fund.” The FDIC collects premiums (taxes, to be more precise) from banks and thrifts and turns them over to the Treasury. If the FDIC collects more taxes than it spends, the surplus is counted toward a reduction of the federal deficit (or an increase in the surplus).

The Treasury computer duly records the payments made by the FDIC. The money itself, being fungible, is spent on welfare, defense, education, and the like. Should the FDIC need money to handle a failure, the Treasury borrows the funds in the market.

The outlay by the FDIC counts as an increase in the federal deficit. The object in collecting premiums from banks and thrifts is not to build a “fund,” but to ensure that over time the deposit insurance program pays for itself.

The so-called “fund” is simply a running scorecard to determine whether banks and thrifts have paid in more than they have taken out.