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Sheila to Charge a Fair Price for TBTF?
The FDIC came out with a New Rule Proposal for pricing the FDIC
insurance for the nations biggest banks. Basically the plan is to scrap
everything that has been done in the past and replace it with a new
methodology where the pricing of the insurance will reflect the risks
that the FDIC faces when insuring the depositors.
“The FDIC would replace the financial ratios currently used
with a scorecard consisting of well-defined financial measures that are
more forward looking and better suited for large institutions. The
proposal also includes questions about how to incorporate other risk
measures, like the quality of underwriting or risk management
practices, in the future.”
There is no doubt where this new “Scorecard” approach is headed; right
smack into the TBTF’s face. The objective of the new approach? Answer:
“To revise the deposit insurance assessment system for large
institutions, which pose unique and concentrated risks to the
Deposit Insurance Fund.”
I would love it if one of those “Well defined financial measures” were
to include CDS pricing. A recent look at the CDS pricing for BoA was
1.125% per annum. The average pricing by the FDIC for all banks is
approximately 30BP. One-third of what the Street charges.
So who exactly is going to get hit over the head with this? Answer:
Every big bank in the US, including our buds at Goldman.
"A highly complex institution would be defined as an insured
depository institution with greater than $50 billion in total assets
that is fully owned by a parent company with more than $500 billion in
total assets. The designation also would apply to a processing bank and
trust company with greater than $10 billion in total assets."
This sets up two interesting sideshows:
-The banks are going to be paying ~60-70BP for insurance. That is a very
big number to pass onto depositors when interest rates are less than
one percent. Possibly Sheila should speak with Ben about raising
short-term rates. That way the banks can screw the depositors for the
full hit and still pay 1/8% on deposits. As it is now, the banks will be
underwater on all those nice deposits they have.
There will be a 60-day comment period. Look for all the big banks to
respond. They will whine like children over this. Terrible
hardship and all that. I can’t wait. The sniveling we will get from
these responses will make great fodder for the Blogs.
Goldman will look at this and will have to ponder the wisdom of becoming
a bank holding company. A possible consequence will be that they
reverse once again and go back to being an investment bank. If they did
that they might as well go the whole route and just go private. Then
they wouldn’t have to take flack from the regulators or pay Sheila’s
vig.
I have to (once again) give some credit to Sheila Bair on this one. No
one else is willing to tackle the issue of TBTF and the systemic risk
that they create. This is potentially something that will force the
broader issue of TBTF to a resolution. The Banks will hate Sheila’s high
prices so much; they might actually change their ways.
Just a question, Does the new proposed pricing mean that they were
mispricing in the past and therefore encouraged speculation with
depositors money? I think so.
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The FDIC should just skip the whole middleman and go ahead and write CDSs against the banks. At least they could have market-based pricing and go ahead and scam everybody because they can just manipulate a bailout so they would never have to pay out for a default event. Perfect!
Tying the FDIC insurance rates to CDS would be a stroke of ironic brilliance!
No wonder GS is buying gold.
All charges will be equally passed on to the American Tax Payer. It is the American way.
Ever check on how the percentage of American men has climbed from 1% to 10% + between 1971 (Fed gets rid of gold standard and money supply accelerates) and 2009 ? Check these tragic graphs..
http://en.wikipedia.org/wiki/File:US_incarceration_timeline-clean.svg
http://en.wikipedia.org/wiki/File:Incarceration_rate_of_inmates_incarcerated_under_state_and_federal_jurisdiction_per_100,000_population_1925-2008.png
And then who will pay for the SSTF Bruce? The prison inmates ? BAH!!
The FDIC folks sound great. Until everyone remembers that they had no problem with WAMU and several others. How the heck will they demonstrate that they know where any troubles are? The idea that these regulators are able to supervise any bank larger than an ATM machine is silly. If the regulators had done their jobs the investing public that was relying upon them would be much wealthier. Now, after suffering the explosion, we will get to pay more for their regulatory incompetence.
Ever check on how the percentage of American men in prison has climbed from 1% to 10% + between 1971 (Fed gets rid of gold standard and money supply accelerates) and 2009 ? Check these tragic graphs..
http://en.wikipedia.org/wiki/File:US_incarceration_timeline-clean.svg
http://en.wikipedia.org/wiki/File:Incarceration_rate_of_inmates_incarcerated_under_state_and_federal_jurisdiction_per_100,000_population_1925-2008.png
Is she nuts, or is this just another magic show? I take this as just another piece of evidence of how out of touch the FDIC is. If they charged what the insurance was worth, and also taking account of leverage, as a group the TBTFs would be insolvent, game over. Furthermore, the Giant Vampire Squid would convert itself back to something other than a bank. That firm and other connected firms will never allow free and fair financial markets to reign (i.e., without the threat of pitchforks). She either has absolutely no clue of how levered spread machines work, and/or she is completely ignorant of her role in the banking charade/Potemkin village that is our current financial system.
I never cease to be amazed by that I should no longer be amazed at, but there it is.
Bruce,
Great post, don't worry, the banksters have armies of accountants and financial "engineers" looking at how they can "pass on" the extra insurance cost.
By the way, I was thinking the exact same thing here:
"Goldman will look at this and will have to ponder the wisdom of becoming a bank holding company. A possible consequence will be that they reverse once again and go back to being an investment bank. If they did that they might as well go the whole route and just go private. Then they wouldn’t have to take flack from the regulators or pay Sheila’s vig."
Thanks, Bruce! Let's see if anything comes of this.
Reference:
http://www.fdic.gov/news/board/april06.pdf
E-mail: Comments@FDIC.gov. Include the RIN number in the subject line of
the message.
Let's fill up their email! Who's going to send that little jewel on how exposed JPM is on silver?
Nice, thoughtful piece, Bruce.
Nice one Bruce, thanks.
DavidC