Misunderstanding the FDIC
Bloomberg's Jonathan Weil has an uncharacteristically boneheaded column about the FDIC's money troubles. He begins:
The FDIC's insurance fund is going broke, and Sheila Bair is wondering aloud about how to replenish it. This means one thing for taxpayers: Watch your wallets.
I learned about the column from FT Alphaville, which notes that it inspired Chris Whalen of Institutional Risk Analytics to send an angry e-mail to Weil and others at Bloomberg declaring that:
If you can't get your collective minds at Bloomberg News around the nuances of federal finance and the workings of the FDIC, THEN STOP WRITING ABOU[T] IT.
Whalen's entirely valid point is that the FDIC can't run out of money—it's got a $500 billion credit line from the U.S. Treasury that it hasn't tapped yet, and would surely be able to borrow even more if it came to that. Weil acknowledges this in his column, but then writes:
if the FDIC starts tapping its credit line at the Treasury, there can be no assurance it would be able to pay back all the money through future assessments on banks.
Well, I guess there can be no absolute "assurance," but if we continue to have a banking industry that turns a profit, it shouldn't be all that hard to eventually pay back anything the FDIC borrows. Much of this cost will still hit Americans' wallets—but in our capacity as bank customers, not taxpayers (as banks are usually able to pass on the cost of increased deposit insurance premiums). There's not much solace in that, I know, but at the same time Weil's contention that the draining of the insurance fund is evidence that the FDIC "has been mismanaged, and its credibility as a regulator is in tatters," is silly.
As a regulator, FDIC supervises state-chartered banks that aren't members of the Federal Reserve system—that is, smallish banks that played little or no role in igniting the financial conflagration of the past couple of years. It also takes over and shuts down or sells off troubled banks supervised by other regulators such as the Fed, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision—but it's those other regulators that are supposed to tell it when there's trouble.
The reason the FDIC might soon have to borrow some money is because banks are caught up in their worst crisis since the 1930s. It was in the 1930s, of course, that Congress created the FDIC with the intent of heading off bank runs by insuring that small depositors wouldn't lose their money. It's been hugely successful in that; the problem is that we allowed the creation of a shadow banking system of securitization, money market funds and investment banks that was outside the FDIC umbrella and turned out to be pretty susceptible to bank runs. There's lots of blame to go around for letting this happen, but not very much belongs with the FDIC.
My main complaint with the FDIC, in fact, is that it seems to try too hard to structure deals for troubled banks that minimize the direct hit to the deposit insurance fund. It's usually better to acknowledge the cost now and move forward (making the entire banking industry bear the cost once it returns to health) than to saddle previously healthy banks with lots of bad assets. But the FDIC goes through all sorts of contortions to cut the up-front cost of bank failures precisely because it knows what kind of hell it's gonna catch from thick-skulled members of Congress and journalists if it has to use some of its credit line from the Treasury.
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1
"But the FDIC goes through all sorts of contortions to cut the up-front cost of bank failures precisely because it knows what kind of hell it's gonna catch from thick-skulled members of Congress and journalists if it has to use some of its credit line from the Treasury."
Technically at least you can do something about the thick-skulled member of Congress. But what do you do about the thick-skulled journalist?
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" . . . if the FDIC starts tapping its credit line at the Treasury, there can be no assurance it would be able to pay back all the money through future assessments on banks."
In other words, the government borrows from the government, and the government may have difficulty paying the government back. This government accounting mumbo-jumbo is similar the banks' accounting mumbo-jumbo that contributed to the recession.
Bottom line: The government assures that small depositors will not lose money. It can do this by creating money. It doesn't need your tax money or the banks' insurance premiums.
Neither the government, nor any of its agencies, ever can go broke. (As an aside, this also applies to Social Security and Medicare, both federal agencies.)
Rodger Malcolm Mitchell
http://www.rodgermitchell.com -
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What Roger said.
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oops that should be Rodger...(darn touch typing)...but nonetheless...what he said!
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But the question is knowing the coming tsunami of bank of failures, did FDIC plan for sufficient funds or not? Did they see need to replenish fund way back at start of the year when many folks talked about around 1000 bank failures in this cycle? (So far I guess we are down 100.)
Because if FDIC had talked, Congress would have been aware, public would have been more aware of what is happening.
Couple of questions - Peter Orsazg had kept aside $200B as TARP extension in original budget blueprint in March 09 which were removed in August 09 considering improvements in finances of banks (most probably not covered by FDIC) to claim some political credit. Would it no have been prudent that money to have been set aside for FDIC? True that banks in the end will pay back to FDIC, but as your are saying FDIC monitors State Chartered banks only which were neither much responsible for the current mess (no contribution / impact of commercial real estate dynamo which is possibly building?) nor have much profits to cover higher premiums of FDIC; does it not mean some helping hand from Fed in this matter?
You need to come clean on this topic from journalistic point of view. Questions are - what is the exact hole with FDIC we are talking here? Are the assumptions correct? How many bank failures / size is planned for? What are the various options for funding explored? What are the pitfalls in each of them and what is the political feasibility for each one? At any point are we talking dangers to 'deposits of common Americans' ensured by FDIC?
(BTW on a different note - was there any talk about equivalent of FDIC at global level in G20 considering the fight going on between UK and Iceland for the safety of deposits of Britishers in Iceland? Is this issue not worth? If worth, how come no one talked?)
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What happened to my comment?
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6.1
Sorry here it is:
No. Weil is right. FDIC has been mismanaged by Sheila Bair.
Instead of being overly confident and blasting Bloomberg for doubting the strength of her agency, she should have tried to build up her reserve.
Its DIF ratio had fallen below the mandatory minimum since June 2008. The fact this requirement even existed proved that our Congress did not believe this agency had unlimited funding.
"The new powers would be sweeping... It would enable the government to come in, repudiate employment contracts, pick and choose who you want to keep, who you want to get rid of, what you want to pay them, replace the management, get rid of the boards and bring in better management" - Sheila Bair (MSNBC)
"FDIC can confiscate all of the net assets and earnings of all FDIC insured banks. That is trillions in total. FDIC can borrow from Treasury, the Fed and even from FDIC insured banks..." -Chris Whalen (Institutional Risk Analytics)
Demanding supreme power?
Confiscating assets, using our tax money, or stealing our credit lines to borrow our deposits to save itself?
No wonder FDIC would never go bankrupt.
"it's those other regulators that are supposed to tell it when there's trouble"
Wrong. FDIC should have told itself. Many, many banks (class NM) under its watch also failed because they engaged in risky business. Just because these banks were not systemically important did not get Bair off the hook for being an irresponsible supervisor.
In fact, the Office of Inspector Generals had already released several reports criticizing FDIC's poor effort.
How could you feel safe with Sheila Bair running an agency whose primary mission was to protect our lifetime savings?
When people became angry about AIG's idiotic swap guarantees with no reserve and trips and parties, few noticed that Bair was turning FDIC into a bigger and even more dangerous AIG.
FDIC did not even have enough money to pay depositors at failed banks in the future, yet Bair decided to offer billions of bond guarantees for a few elite institutions (hence billions of bonuses this year) and billions in sharing losses to help banks buy banks. She had stated multiple times in public that she was against too big to fail, so why did many of her actions end up favoring bank consolidation?
If, for instance, Citigroup were to fail, is Bair going to wipe out bondholders like she did with Wamu's? In that case, FDIC would be responsible for these bonds but if it can't even pay depositors, with what money does it plan pay these investors? How does it reconcile that with its treatment toward non-FDIC backed bondholders?
When Wamu and Wachovia shareholders and creditors were being mocked for questioning Bair's fairness and competence, few noticed that she helped destroy the bond market and made it practically impossible for companies in every industry raise capital. FDIC's seizure of Wamu due to liquidity pressure scared banks into hoarding their cash (exemplified by data from ECB and the FED showing a dramatic increase in central bank deposits), leading to a big drop in credit flow and lending. More and more businesses went bankrupt. More and more jobs were lost. When people lost their jobs, they also lost healthy and retirement benefits. When they lost their jobs, they also might lost their homes because they could no longer pay their mortgage.
If FDIC indeed had unlimited funding, why did Bair refuse to spend even a penny saving these two banks?
As for her constant pr campaigns to keep people in their homes, it was mostly talk, unpractical, and delusional. Check CNN and see what was happening at IndyMac now after FDIC dumped the bank to private investors while covering " a majority of the losses... in home loan portfolio."
The latest freebie courtesy of our deposit protector, PPIP:
From Seeking Alpha- Last week FDIC "gave half the upside to an investment fund – 'Residential Credit Solutions of Fort Worth, a three-year-old company founded by Dennis Stowe, a veteran of the subprime mortgage industry – and kept all of the downside to itself"
Will the public not wake up until the showdown among depositors, bondholders, and private investors begin when FDIC runs of money?
*imho*
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By the way, FDIC's increase in credit line was a bill originally called “The Depositor Protection Act of 2009″ but for some reason got sneaked into the “Credit Card Accountability Responsibility and Disclosure Act of 2009.”
$500 billion of our tax money under the miscellaneous section of the credit card bill… shocked yet?
That money should only be used to pay depositors at future failed banks and is not meant for sharing losses in FDIC's current PPIP auctions.
Newamerica.net-
"That's the role the FDIC played for Goldman Sachs and other firms, which took advantage of $940 billion in FDIC guarantees to raise cheap money for themselves and another $684 billion of backing for their trading accounts as an additional perk"*imho*
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7
"Its DIF ratio had fallen below the mandatory minimum since June 2008. The fact this requirement even existed proved that our Congress did not believe this agency had unlimited funding."
Congress people, by necessity, must try to be expert in too many things. That's a major weakness of Congress. Congress also created the federal debt limit, which one would expect to have a limiting purpose. No. It simply allows each member of Congress to vote for any expenditure, while voting against increasing the debt limit, just to show how prudent he/she is.
"$500 billion of our tax money . . . " The $500 billion in question was deficit spending. By definition, deficit spending does not use tax money. That's what makes it deficit spending. See more on this at: http://rodgermmitchell.wordpress.com/2009/09/10/it-isnt-taxpayers-money/
Rodger Malcolm Mitchell
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7.1
"'Deficit' means spending beyond tax receipts"- Rodger's website
Very interesting. Are you saying that we can just keep on spending and spending and taxpayers never have to pay these trillions of deficits back?
Given this conceptually feasible unlimited spending without costing taxpayers much, the government then should have saved all the banks instead of making a few even bigger at the expense of consumer interests.
First Bank of Idaho was given until June 30 to raise capital and find buyers but was seized in April and sold to US Bank, even though the bank already had investors lined up.
Per Portfolio, Wamu was given until September 30 to find buyer but was seized on September 25 and sold to JP Morgan.
When officials can't even follow their own rules, how can they expect to bring stability and confidence back to the financial system?
How long does FDIC spend on each receivership to reach the least cost solution? No wonder Jamie Dimon said he could have gotten Wamu for $1.
The chaotic condition in the financial sector at the moment makes it even more important for regulators to follow rules and not confuse the public.
No matter how much money FDIC has, it should be protecting depositors and not backing bank bonds or sharing losses for toxic assets.
*imho*
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Papaya2121 asks: "Very interesting. Are you saying that we can just keep on spending and spending and taxpayers never have to pay these trillions of deficits back?"
Yes, so long as the government runs deficits it doesn't use tax money to pay for previous years' spending. The only time taxpayers pay for previous spending is when the government runs a surplus. Deficits do not cost taxpayers money. Surpluses cost taxpayers money. That's just arithmetic.
If the government never runs a surplus, your grandchildren never will pay for today's spending.
Note, however that I did *not* say the government should run infinite deficits. (I often am accused of that.)
Thirty years ago, the gross federal debt was $800 billion. Today it is $12 trillion, a 1,400% increase. We did not have significant inflation during that period. The same increase in the next 30 years would bring us a $180 trillion debt in 2039, an average deficit above $5 trillion. I suggest that is a good target, and it would not cause significant inflation.
During a recession, the economy is starved for money. There are many things the government could and should have done -- saving more banks is one of them -- to pump more money into the economy and end this recession sooner and faster.
The original effort of sending money directly to taxpayers actually was one of the best, though at the time I predicted it would be far too little and much too late. Even now, the money is dribbling out. It should have been gushing out.
You can find a summary of this at http://rodgermmitchell.wordpress.com/2009/09/07/introduction/ and also at http://www.rodgermitchell.com
Rodger Malcolm Mitchell
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