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FDIC Decision Due Out Soon
On September 29th the FDIC announced a plan to bolster its reserves.
There were three basic choices. A) Borrow from the Federal Financing
Bank, B) Charge a large special assessment on the banks and C) Have the
banks pre-pay three years of insurance premiums up front.
At
the time, the FDIC gave the public a thirty-day comment period before
the final determination. That time period is up. The letters are in. I
would expect an announcement on this by Ms. Bair before the end of the
week.
This is the link
to the letters. There are a lot of them. The FDIC may choose to ignore
all of the comments, but I think they will address some core issues
raised in their final ruling.
The FDIC went after this with a carrot and a stick. They said to the banks,” If you pay up front we will make the accounting work for you”. “If you don’t, we will charge you a ‘Special Assessment’. That would go through your income statement”.
Bankers
being bankers it is understandable why they would not want to recognize
an expense up front if there was another way around it. Therefore
almost all of the letters were in support of the pre-pay deferred
recognition approach.
There was some support for the FDIC to
tap its credit lines at the Federal Financing Bank. They have a blank
check at the FFB for $100 billion. So the pre-pay option isn’t really
necessary. But the easier FFB option had a significant cost. Ms. Bair
is acutely aware of the ‘anti bailout’ mentality. Her words on the
subject:
“It's clear that the
American people would prefer to see an end to policies that look to the
federal balance sheet as a remedy for every problem.”
This is why the FDIC made it easy for the banks to choose door (C). It’s cosmetics.
Not
surprisingly the Banks all wanted a bone thrown to them. They made a
good case. If they did not prepay they would have earned a spread on
the cash. So in effect the proposal has a negative impact on income. We
wouldn’t want that. A few examples:
Some thoughts on what may come:
-The $45 b prepay is a done deal.
-There
will be exceptions in a number of cases and categories of banks. These
banks will get a drawing from the FFB. That drawing will be guaranteed
by the FDIC. This is small beer. Maybe $5b. It will look like the FDIC
will have no borrowings however.
-There will be no special assessments.
-There
will be a discount on the pre-payment. The banks will be allowed to
take that as income. Top line benefit that has no substance.
-The
assumption that deposits will grow by 5% will be reduced. This will
have the impact of reducing the net amount that the FDIC takes in. (by
just a few billion)
-The statement will reaffirm that deposits are safe and that the FFB (and this cash) is backstopping that promise.
-This will be made to look like a great success. A true private sector solution.
-The ‘system’ will have created another $45 billion of off balance/income statement funding. This will not show up anywhere.
-If
a discount is awarded to the banks then that percentage should be
compared to the cost of tapping the FFB for the shortfall. Any excess
would be a measure of the Government's willingness to avoid the
perception of a bailout.
Congressman Latta was very supportive of the proposal in his letter. I thought his side comments were interesting:
Also of interest was this comment by the ABA.
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Let me see if I've got this straight:
The Gov't loans the banks money at Zero percent interest so the banks can buy Gov't guaranteed T-bills that pay interest. The banks use the interest to give fat million dollar bonuses to bank management. The FDIC charges all banks relatively the same 3 1/2 year upfront fee to backstop the big bad banks that are unprofitable and couldn't borrow a penny if anyone could see their books. FDIC uses the fee money provided by the banks at interest to buy worthless or near worthless real estate from some of the big bad banks, thereby putting the tax payers on the hook. The FDIC opens a US government auction web site in the year 2013 where the big bad banks can buy back for 1% on the dollar all the real estate it sold the FDIC back in 2010 for 75% on the dollar. Ok, this all makes sense to me, now.
This prepay proposal is kabuki theater. Even if it is implemented, it's just a brief prelude to printing up scrip wholesale to pay off depositors in failed banks. Lots of toner left at the Fed, so no problem. They should bring Madoff in to manage this clusterfuck.
Let's see what Failure Friday brings. I can't wait to see the spike in bank failures after the FDIC replenishes the DIF. What amazing timing! Wow, good thing we replenished *before* all these banks failed. Whew!
Aaaand, it's gone.
I think the regular old taxpayer should pony up. Heck many of them are out of work and just sitting on their duffs as it is.
Timmy vs. Sheila--Sheila wins
The banks lending funds to the FDIC is the least bad option from what the worst situation offers; an assessment is simply a loan to the FDIC by the banks without interest.
As more and more banks fail the assessment/premium issue will become academic. Depositors will eventually be 'supported' by borrowing from the taxpayers' grandchildren. Which means depositors will be supported by nobody in particular.
The banks' biggest problem is they cannot/won't make good loans. Talk about voting, 'No- confidence' with their feet!
Somebody has to lose in this game. No way losses cannot be taken. No free lunch.
Either destroy the currency by printing and debasement. Or allow bank runs until the money runs out. Or default on Treasury debt and defy globalism.
Or contract credit eventually to zero, call all loans, foreclose all collateral. Government then reallocates via whatever political system chosen, and human productivity moves ahead from there in varying degrees of efficiency.
Losses must be realized. Gov't won't allow that to be the banks whose lending errors conjured up this chimera. Treasury debt repudiation will damage foreigners in greater proportion. Dollar debasement will most universally distribute losses.
All else is an exercize in rhetoric and baby steps to collapse.
Extent of insolvency cannot be contained. All future efforts are to forestall the inevitable failure. Children of the future will experience a different "system" and currency, probably a different form of government.
Since the values were so immensely distorted on real assets which formed the basis for the loans in this "late stage" exponential usury debacle, the correction is the equivalent of a RESET. No amount of time dilation or dispensation from accounting integrity can make whole.
The fraud, inflation, distortions, prevarications exceed what can be covered up by even the most inventive means of Fed/Treasonry.
They allowed it to grow far too large. This is the Chernyobl of high finance in a new millenium.
The fullness of time will reveal all things. Until then will be an incomplete discovery and step disclosure of the systemic corruption of capital and allocation of productive mankind.
Now comes the slow slide.
What is the FDIC going to do for next year's shortfall?
That is the scary question. They really need about 300B. Some alternatives are:
All the strong banks say FU and unplug from national charters and form theirown private insurance program.(maybe they could start a central bank too!) This would at least keep the A-holes from taking everybody down.
Repeal most of Gramm, Leach, Bliley and solve TBTF.
Get the rules changed where insured limits go way up but put in a 2% co-pay for investors-thus making the hot gatherers pay 200 bps over the well capitalized market.
Dissolve the FDIC and just make it all Treasury guaranteed with a co-pay.
Institute a material risk based premium system.
Let me see if I've got his straight:
The Gov't loans the banks money at Zero percent interest, so the banks can buy Gov't guaranteed T-bills that pay interest. Use the interest to give fat million dollar bonuses to bank management. Charge all banks the relatively same 3 1/2 year upfront fee to backstop the big bad banks that are unprofitable and couldn't borrow a penny if anyone could see their books. Use the fee money provided by the banks at interest to buy worthless or near worthless real estate from some of the big bad banks, thereby putting the tax payers on the hook. Open a US government auction site in the year 2013 where the big bad banks can buy back for 1% on the dollar all the real estate it sold the FDIC back in 2010 for 75% on the dollar. Ok, this all makes sense, now.
Let me see if I've got his straight:
The Gov't loans the banks money at Zero percent interest, so the banks can buy Gov't guaranteed T-bills that pay interest. Use the interest to give fat million dollar bonuses to bank management. Charge all banks the relatively same 3 1/2 year upfront fee to backstop the big bad banks that are unprofitable and couldn't borrow a penny if anyone could see their books. Use the fee money provided by the banks at interest to buy worthless or near worthless real estate from some of the big bad banks, thereby putting the tax payers on the hook. Open a US government auction site in the year 2013 where the big bad banks can buy back for 1% on the dollar all the real estate it sold the FDIC back in 2010 for 75% on the dollar. Ok, this all makes sense, now.
How long will $45 billion last the FDIC anyway? How much have they gone through this year already?
What a cheek!!
Takes the biscuit that does completely
The ironic thing is that any special assessment or prepayment penalizes the banks that did it right. In essence, the strong banks pay for the failures of the weak banks. And, of course, the TBTF banks continue to be rewarded.
The only observation I wanted to make was that the whole FDIC system is a kind of scam anyway. It is an insurance policy every bank has to have in order to run their business, so every bank is at the mercy of the FDIC for "premiums" and "assessments". You can't cancel your insurance, or you go out of business because the general populace doesn't believe their money is safe unless it is FDIC insured. (Ironic, isn't it?)
This forum makes a number of blanket statements about the banking industry and how evil it is, but the fact of the matter is that many banks are worth doing business with and stand on their own two feet, no thanks to the FDIC.
I work for a well-capitalized and profitable Thrift, and sometimes I think that we wish the FDIC didn't exist at all. Then strong institutions would be rewarded for their strength, and weak institutions would be penalized by the market.
You should read some history. When a panic comes, depositors won't listen to your explanation of how strong your bank is, the will withdraw first and ask questions later. Without deposit insurance, bank runs destroy all banks, weak or strong. That's why it was created in the first place.
Go back to 1996 to 2006 when no premiums were paid thanks to the ABA lobbying congress. They felt that the 52 billion in the FDIC account was more than sufficient. The payments resumed when Bair took office in 2006 after she convinced congress that the amount really wasn't sufficient.
Or put another way, imagine if they had paid the premiums during the years they were flush.
Banco Festiva!!!!!
Why not redirect some of the TARP repayments into the FDIC fund and also use them to retire FDIC bank guarantees?
The response I would like to see from Bair to the whining bankers.
That is the funniest post today by far, totally priceless!!!
Did the ABA just suggest that the FDIC take the pre-pay money and buy RE bonds? The plan: take three years worth of premiums for insurance to backstop decapitalized banks (so take more money from already undercapitalized banks), pay interest on the pre-paid premiums, then take the premium payments and buy real estate off the books of the banks (effectively giving the money right back to banks). Wonderful. Except the banks you buy the RE bonds from are not all the same banks you took the premiums from. So you decapitalize the smallest banks to buy the assets of the largest banks. Bruce, I need a flow chart.
You just nailed it.
R.I.P. Moral Hazard (1231 B.C. - 2007)
Somebody know some good commercial real estate stock to start shorting right now? :)
Fortress Investment Group LLC still looks like a money maker to short I guess :)
anybody have any good ideas?
GBE - Grubb and Ellis
* this recommendation should not be construed as financial advice.
Keep a hair trigger on the buy button if you do. This market has not shown one ounce of decency to us bears. It hates us.
These are the same banksters that made these imploding loans. Why are many of the same mgts in place running the show now?
These bloodsuckers need to be booted into the unemployment lines. And these banksters should pick up the tabs for years to come.
I still vote for special assessment on Timmay G's Aunt Lloyd and Uncle Jamie whether the prepay is a done deal or not...
Disclaimer: I hope none of the above violates any of Marla's new rules crackdown...
NSA messing with my internet connection again...
Ha Ha! When the DVD drive on my lap top cranked up all by itself the other day I decided that maybe I should dial back the rhetoric a tad.
Your mouse arrow moving non fluently, you know herky jerky out of the blue, is a sure sign of remote access...
I just can't figure out, exwife, exgirlfreind(s), suspicious tech savy exgirlfreind(s) insecure boyfreind(s) or the NSA...