The news concerning banking regulators in the U.S., along with some of the bankers and their lobbyists, isn’t good, as now the idea is being thrown around by the FDIC to tap the healthy banks in the industry to shore up the Deposit Insurance Fund in order to protect depositors.
There are a couple of dynamics in this possible scenario, neither one of them good at all.
One, is the banking industry and government are trying to avoid the taxpayers bailing out the industry any more, as that’s already caused a backlash which has yet to fully run its course.
Instead they’re pondering the idea of getting loans from banks they’re already insuring. Think of that for a moment. The reason the FDIC needs to shore up its Deposit Insurance Fund is because the banks are failing, so in order to replenish the Deposit Insurance Fund and protect the deposits of consumers, the FDIC is proposing the possibility of borrowing money from banks that are failing in the first place. They say they want to do this in order to rescue the sickest banks; you know, the ones we’ve been talking about needing to have been allowed to fail in the first place.
Why is this economic insanity? The banks that have already been deemed to big to fail have received their loot from the taxpayers via the Treasury and Federal Reserve. Those that have not been regarded as too big to fail will now be tapped for capital to be paid into the Deposit Insurance Fund to save the zombie banks.
This would also prevent the FDIC from adding on more assessments to the large banks, having received the cash from others in the industry.
With the readily available credit line from the Treasury, why possibly jump through all these hoops to avoid using it?
Much of it has to do with ongoing need of the FDIC and direct reflection on Sheila Bair, of whom it has been said “would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help.” The reason being if the FDIC needs the Treasury to take care of funding the DIF, what possible purpose would the FDIC serve, other than simply being a conduit to send money through, i.e. Sheila Bair and other leaders at the FDIC would be not much more than puppets transferring other people’s money to where it needs to go, rather than being a self-sufficient depository for its protective purpose. In other words, what legitimacy it has left would be completely undermined by having to tap into the Treasury credit line.
If you don’t think this is true, ask yourself the question of why do they need to find another way to replenish the DIF when the credit line of an immediate $100 billion is available, and another $400 billion on top of that if it’s needed. This isn’t about whether they get the money to protect the deposits of consumers, it’s about where they get it and what the fallout would be from it. It’s classic, bureaucratic CYA, and it’s completely, economically insane. Of course the entire bailout of the banking and other industries have been already been that, but this just takes it to deeper, nuttier level.
The reason the general banking community and its lobbyists are pushing this is not because of the assertion from them that another assessment from the FDIC could cut into their profits and possibly cause more banks to get into financial trouble, or possibly be taken over by the government. They also say there would be a political fallout which could force politicians to push hard for limits on the pay of banking executives. Of course that part of it is already happening, so is nothing new. Rather the reason is because the banks could not only save themselves from further assessments, but they would also be receiving payments from the FDIC in the form of more the $500 billion credit line, guaranteeing repayment.
This hurts the smaller, not-too-big-to-fail banks because the larger banks simply transferred billions of taxpayer funds they received to held as reserves by the Federal Reserve, as they are borrowing very little of that money out. So all they have to do is take that bailout money and pay their part to the DIF, and then, as I mentioned, know they have a guarantee because of the $500 credit line the DIF can tap into in case they run out of funding, which they either already have, or are very close to.
Smaller banks didn’t get the bailout funds, so can’t compete at that level. No wonder the larger banks love the idea of healthy banks being tapped to refill the DIF, they didn’t have to run their banks well to get it, they just needed to fail. The other banks don’t have that luxury.
While this may never come to pass, and it’s probably a trial balloon thrown out there to see what type of feedback they get; yet the idea that it would even be thought of as a possibility, and one that could definitely become a reality, shows how far the banking and regulatory system has broken, and the panic and egos involved which will protect their territory and positions at any cost.
