Wednesday, September 23, 2009

FDIC to Be Bailed Out by.... Banks? The Surreal Life Continues

Some of my predictions from 2008 in regards to the FDIC (despite their denials at the time) are coming true.

In August I said

At some point the FDIC will run out of money to guarantee the $100K per account so they will have to raise the fees on the remaining banks to raise more money to fund their bailout fund.

Bingo. Done.

In November I said

Again, please don't worry - if we cannot raise fees on banks to pay for their own failures, we always have your grandchildren's fund aka the Great Printing Press. Helicopter Ben stands at the ready. Look for the FDIC to borrow from the US Treasury for insurance funds by this time next year.

Hold on let me look at the calendar - yep, under a year - the FDIC needs a bailout.

Even as the FDIC denied it then we said these things would come true, and we are nothing but a hapless blogger who deals in truth not hand waving, distortion, and happy time lies. Or "mathematical models" that have done nothing but been wrong for a good 2 years.

Despite many maneuvers done to "shotgun marriage" banks by handing assets from weak to strong(er), which reduced SOME of the losses to the FDIC - we've been watching the reserves of the FDIC drop quarter by quarter.
  1. [Aug 28, 2009: FDIC Troubled Bank List (Yawn)]
  2. [May 27, 2009: FDIC Troubled Bank List Now 305]
  3. [Feb 26, 2009: FDIC Troubled Bank List Up to 252]
  4. [Nov 25, 2008: FDIC Troubled Bank List Grows 46% - Is Your Bank Safe?]
  5. [Aug 26, 2008: FDIC Troubled Bank List]
Now there is technically no way the FDIC can ever go bust as its backed by the "full faith" of the US government, which means as long as their is full faith in the ability of the country to print ever more worthless US pesos, there never can be a default. I also profess to no longer being able to understand what is real and what is Memorex in our economy or financial markets. Apparently all our problems went away once the US government said there would be no large bank to go bust as long as the taxpayers money had anything to say about it (I believe this is called free market capitalism), but just to prove it - they'll throw a sham test at us; one in which the banks could negotiate the terms. [May 9, 2009: WSJ - Banks Won Concessions on Tests] And we'll finish it off with this accounting rule change over here (waves hand in air) which no longer requires banks to mark assets at values that would be achieved on the open market - and most of our problems disappear.

It's sort of like when your credit card shows a balance of $62,000 which with income of $40,000 and expenses of $57,000 each year you have no chance of paying. But you change an accounting rule to make it say $12,000 instead of $62,000 because while the free market values your debt at $62,000 - that's simply unfair and your lobbyist group was able to change the rules. And, your fellow taxpayer will backstop that $12,000 in case you can't pay it. While you can borrow money at the Fed at 0.0 to 0.25% and pay off your credit cards.

It's a tough life being a bank in Cramerica.

In fact it is so tough, Sheila Bair - who has some personal issues with Timothy Geithner - wants to get her bailout not from Treasury .... but from the banks. And why not - running a bank today for profit requires a few steps... (1) walk in the door, (2) turn on the light. As long as you don't care about what is on the balance sheet (remember that was all washed away in the accounting rule changes), you're good. So good you can bail out the FDIC... who is the entity which is supposed to be backstopping you, as a bank.

Confused yet? Don't worry - we're living the surreal life. My best advice is to reattach yourself to the Matrix and just let this all play out. It will all work out in the end - just takes a little hocus pocus. Abracadabra! All fixed!

Via NYTimes
  • 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.
  • 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.”
As we know, there is only 1 group that matters anymore in America. Corporate lobbyists. We need to make sure all legislation to "help the people", fulfills their needs. This one is a win-win-win for them, so it surely will be the path we follow. Whew - I for one, am glad. The middle class.... err, (sic) corporate lobbyists ... are the fabric and backbone of our nation.
  • 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.
  • ... any new borrowing from the Treasury would be construed as a taxpayer bailout that could open the industry to a political reaction, resulting in a wave of restrictions like fresh limits on executive pay.
  • Any populist furor could be avoided, the thinking goes, if the government borrows instead from the banks.
I don't need to hear anymore - anything that would even potentially restrict oligarch pay I am against. The last thing we need are "unmotivated" oligarchs who threaten once more to move to other countries. If oligarchs are for this, I am for it - end of story.
  • The Federal Deposit Insurance Corporation, which oversees the fund, is said to be reluctant to use its authority to borrow from the Treasury. Under the law, the F.D.I.C. would not need permission from the Treasury to tap into a credit line of up to $100 billion. But such a step is said to be unpalatable to Sheila C. Bair, the agency chairwoman whose relations with the Treasury secretary, Timothy F. Geithner, have been strained.
Nothing like the "leaders" of our country running things like a 3rd ground playground. "Timmy hit me!" "Sheila said bad words!" "Ms. Smith, Timmy pulled my hair!" "Sheila kicked me in the shins Ms. Smith!!"
  • Sheila Bair would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help,” said Camden R. Fine, president of the Independent Community Bankers. “She’d do just about anything before going there.”
  • Despite a special assessment imposed on banks a few months ago to keep the (insurance) fund afloat, its cash balance now stands at about $10 billion, a third of its size at the start of the year.
  • The fund, which stands behind $4.8 trillion in insured deposits, could be wiped out by the failure of a single large bank, although the deposit insurance corporation could always seek a taxpayer bailout by borrowing from the Treasury to stay afloat.
  • Borrowing from the industry is allowed under an obscure provision of a 1991 law adopted during the savings and loan crisis. The lending banks would receive bonds from the government at an interest rate that would be set by the Treasury secretary and ultimately would be paid by the rest of the industry. The bonds would be listed as an asset on the books of the banks.
As long as the bonds pay anything over 0.25%... it's money in the bank (ahem). (1) Walk in the door, (2) turn on the light, (3) receive bonds from the US government that pay anything over the rate Ben Bernanke hands us money - to bail out an institution of said US government. Win. Laugh all the way to the... well... bank.

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