The FDIC to get credit from banks even while banks restrict lending

Submitted by Edward Harrison of Credit Writedowns

In the latest inexplicable move to extricate the U.S. banking system from crisis, the FDIC is reportedly close to asking the very banks it regulates for a loan to top up its balances. The plan is “strongly supported by bankers and their lobbyists” according to the New York Times.

Are you kidding me? This is the most preposterous thing I have heard yet.  How is the FDIC suppose to adequately regulate banks when it owes them money?  If your looking for a textbook route to regulatory capture, I present you Exhibit A. What’s more is banks are restricting lending right now.  How is this going to help that situation?

The New York Times, like the even-handed mainstream media outlet it is supposed to be, reports this story like it is something truly reasonable.

Tired of the government bailing out banks? Get ready for this: officials may soon ask banks to bail out the government.

Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.

The plan, strongly supported by bankers and their lobbyists, would be a major reversal of fortune.

A hallmark of the financial crisis has been the decision by successive administrations over the last year to lend hundreds of billions of taxpayer dollars to large and small banks.

“It’s a nice irony,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company. “Like so much of this crisis, this is an issue that involves the least worst options.”

Bankers and their lobbyists like the idea because it is more attractive than the alternatives: yet another across-the-board emergency assessment on them, or tapping an existing $100 billion credit line to the Treasury.

No, bankers like this idea because it makes the regulator beholden to the regulated. Am I wrong or is this the worst idea you have heard since this crisis began?

More here.

Tags for this post are Banking industry, Regulations and regulators and Banana republic.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. albrt

    This is a pretty bad idea, but not the worst I’ve heard since the crisis began. FDIC was supposed to borrow from treasury, which would in turn borrow from bankers. This just eliminates the middleman by taking treasury out of the equation and allows the bankers to take the entire spread.

    I don’t think it’s possible to isolate the worst idea I’ve heard since the crisis began. Pretty much every single decision by both the Bush and Obama administrations has been uniformly bad, and uniformly aimed at funneling taxpayer money into the pockets (and I do mean the personal pockets) of bankers.

  2. Anonymous Coward

    Yep, this is terrible. Not the worst decision, but its terrible, its pretty horrible as far as decisions go.

  3. Yuan

    “…from treasury, which would in turn borrow from bankers.”

    Ummm…no. You’ve got that part completely backwards.

  4. SArons

    There are at least three issues involved here:

    1) If FDIC borrows from Treasury, it loses its political independence. Every congressperson with a major contributor who happens to be a deadbeat borrower will be pressuring FDIC for forbearance. It happens now, but as a self-funded government corporation, FDIC can push back effectively.

    2) No doubt there are worries about the “signal” yet another bailout would send to the markets. While borrowing from the banks would (ahem) send a “signal” that the banking system is so very healthy now.

    3) Special insurance assessments do hurt smaller banks. On the other hand, banks such as Citi that get most of their deposits in Eurodollars do not pay insurance on those funds.

    FDIC is broke. The industry-funded deposit insurance system failed. The simple explanation is that banks were allowed to take on excessive risk for too many years.

    1. tradeking13

      “The simple explanation is that banks were allowed to take on excessive risk for too many years.”

      Were? As in past tense? I think not.

  5. AB

    1) The FDIC is borrowing from the firms whose debt it guarantees?
    2) The FDIC is borrowing from big banks (at presumably a non-zero positive spread to Treasuries) just so it doesn’t have to borrow from Treasury?
    3) The FDIC is borrowing from big banks to close small banks that it then sells to big banks?

  6. Name redacted to protect the innocent

    So..the FDIC is borrowing from the big banks whose debt it guarantees?

    So.. the FDIC is willing to pay big banks an interest rate above Treasuries to avoid borrowing from Treasury?

    So..the FDIC is borrowing from big banks to close small banks that they’ll sell to big banks?

  7. A healthy dose of what?

    So let me get this straight … banks want to throw their balance sheet at an income statement problem … I am sure leverage is increased to make this happen … sure, create bonds from thin air … sounds like a nice plan.

    Too bad these type of options do not exist for bank clients …

  8. RueTheDay

    This is absurd. The FDIC has a $100 billion line of credit with Treasury. Instead of tapping that, they want to take out a loan (WITH INTEREST) from banks? Come on. Either way, the federal government is taking the risk on the loan to the FDIC. Only difference is with the bank loan approach, the banks get guaranteed interest payments for taking on zero risk.

    This should be funded through higher assessments. The healthy banks will complain that they are being punished for the actions of the imprudent banks, but the reality is that ALL banks were staring into the abyss earlier in the year and we’d have had a repeat of 1932 save for government intervention.

    The truly sad thing is that idiots like Glenn Beck will spin this as heroic private sector banks bailing out “the government” (FDIC) when the reality is that the only reason the FDIC is in such sorry shape is the failure of the private banking system itself.

    What is going to happen to the financial system in this country when the Fed is no longer holding short rates near 0%, effectively giving banks a free source of funds, the FDIC is no longer guaranteeing bank debt, the Fed is no longer buying up all the crap MBS, etc.?

  9. Mike

    This is classic!! A regulator owning money to the very banks it is supposed to regulate!!

    The FDIC already has an established method of receiving funding from banks in the form of fees. Why borrow when they can increase the fees instead? There is no doubt who is in control here.

  10. S Brennan

    “every single decision by both the Bush and Obama administrations has been uniformly bad, and uniformly aimed at funneling taxpayer money into the pockets (and I do mean the personal pockets) of bankers.”

    Yep, in so many way these two administrations are indistinguishable.

  11. Skippy

    Whats next the LA-PD approaching the drug cartel for a pallet of coke to cover overhead, until their court cases against the cartels small time dealers finalize and they can seize monies and property to be liqidated, making themselves and the cartel hole again.


  12. D

    The FDIC is broke. Scary stuff indeed. This is one of the most, if not the most, damning thing about this financial crisis. In the end I predict the FDIC will not be able to make good on deposit insurance without printing money up. The lessons of the past (Great Depression, 80s S & L Crisis, etc.) were not learned and we are going to go through this all over again. I’m truly amazed that the powers that be have been able to keep this runaway train on the tracks for so long.

  13. john bougearel


    Never occurred to me the banksters would seek to put the FDIC in its back pocket.

    No telling how far regulatory capture can go now.

  14. K Ackermann

    This is so stupid that I have to wonder what the real deal is.

    Let’s see… when the FDIC needs some REAL money, not the amounts they might borrow from banks, but real money to deal with the backlog of banks they let through the gate every Friday, then the government can come to the rescue with big, big bucks because to do otherwise might put at risk the banks that lent FDIC money. We simply couldn’t have the government defaulting on payments to banks. Yeah.

  15. Chris

    How generous of these banks, who have received trillions in non-recourse “loans” in secret, and who are borrowing billions for free from the fed at 0% on the fed over-night rate that they roll over daily, to loan the FDIC “their” money. The oligarchy is truly benevolent. What an exciting time to be alive!

  16. Average

    Any chance I could stop making car insurance payments, and instead, structure the targeted payments as a loan to the government and let them insure me. I’ll offset my interest revenue to reduce my annual payment and structure a balloon payback of my receivable when I trade “old betsy” in?

  17. psychohistorian

    So what happens when the music stops? I guess we get to find out. This insanity can’t go on much longer, can it?

    Is there the possibility of an assemblege of adults coming to the fore or will America just blow everybody up and let Gawd decide?

    I am not optimistic about societal future much anymore. We no longer love our children and want a future for them, IMO.

  18. Richard Kline

    Lesse: Banks borrow from the Uncle Feddy at 0%. Banks lend to Auntie FDICa at cost plus. Thus Auntie FDICa is ‘self-supporting’ rather than on Guvmint alimony. Thus Bankers make a private profit taking taxpayer money and lending it for personal return. Ain’t corporate fascism grand?

    The FDIC was going to go bust in any Big One. This is not a result of management, and is absolutely not a surprise to anyone, least of all the regulators involved. What is truly worrying to me, however, is that there is absolutely a lack of will in the Congress, the Treasury, and the White House for presenting a responsible and appropriate government bailout of this essential agency. Instead, feckless fakery is the default option; nay, the order of the day. Feckless fakery does not a resolution make, only leaving funding problems to mortify and spread putrification from the zombies to the sound. And this is all about ideology. “Government MUST not take over (quasi)private institutions. That’s democratic socialism, and we can’t have that.” So in the interest of appeasing economic yahoos and winning elections, the most preposterous, contemptible, macrophagic non-solutions are repeatedly embraced, bedded, and passed on to the public as family- and society-friendly.

    What we really have is the rot of our political class, a network based on nothing now but ticket-punching and fee-shaving. Our leaders don’t lead, they lie and spackle plaster on the rot. The inefficacy of present government intervention shows our pols as the saddest of sacks, ready, willing, and only to able to sell the public to private Big Money at any and every opportunity. Every crisis is an opportunity, right?

  19. bhan

    Whatever happened to the FOIA suit brought by Bloomberg against the Fed? I know they won, but where or when will we see the results ( bank names)? The Bloomberg article stated the Judge was giving the Fed 5 days to handover documents revealing which banks received loans. That has long since passed. This would seem to be relevant information to have before the banks pocket the regulators.

  20. Neil

    Where are banks getting this largesse when so many of them were teetering on death’s door only a year ago? The Times is also silent on that little detail. Here’s the answer: The banks are making tens of billions of dollars in fees on mortgage loans that are backed by the government (read: we taxpayers). Three big banks, Wells Fargo, Bank of America, and Chase, earned $14 billion in the first half of the year, up more than threefold from $4.1 billion in the year-earlier period from these fees alone.
    Here’s an idea: Let’s cut out the middleman. Get the government aggressively involved in modifying the toxic residential loans the way Marty Feldstein suggested in his WSJ op-ed piece a while back. Force the banks to mark their toxic residential and commercial loans to market. By one measure, almost 1 in 10 residential loans are currently delinquent. Marking these toxic assets to market is a lot like bombing Iran: it is a horrible scenario, but waiting for things to somehow get better is a fool’s errand.

  21. Edward Harrison Post author

    I understand from CNBC that the NYTimes ran with this story as if it was a ‘serious’ consideration. However, CNBC says it is not a serious plan and I reckon the FDIC will back away from this given the negative reception it has received.

    I have been having some difficulty posting video on NC, so I have only added the video on my site here:

    And I have to agree with those of you who thought it odd that the FDIC has to pay a rate of interest to the very banks it regulates when it could just make a special assessment.

    I am a bit speechless about this one because it seems like such a bad idea, I don’t understand how it could even be considered. Can someone explain the reasoning?

  22. Diana Prince

    um…this is so deeply stupid that I think my head is going to finally explode

    Now-needy FDIC collected little in premiums
    With fund going strong, banks didn’t pay for decade

    By Michael Kranish
    Globe Staff / March 11, 2009
    WASHINGTON – The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006. […]

  23. ANY1!

    But the real question is why not borrow from the failing banks? That way the banks get a huge new infussion of capital because they have a great asset in the money they created to lend to a very truthworthy institution which now has to play back that bedt. Problem solved in an even simpler way :)

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