The wrong move for all the wrong reasons
From the so-dumb-only-a-genius-would-propose-it department comes the following tale of
Is this a real plan? Or just the dog chasing its tail?
Just wait ”til I get it!
Bailout is a term debased through overuse. Aside from its aura of undeserved relief, it tends to connote gift – or grant in a government context – rather than lending or simple liquidity.
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 distinction – writeoff dressed up as Potemkin-village debt and pre-refund gap loan – lies at the heart of why it’s being floated.
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.
Liquidity problems? Financially under water?
Not that the government is running out of money – for better or worse, we can always print more [Suppressing the hideous shudder accompanying that sentence – Ed.] – but that the FDIC insurance fund, a pot under particular control, might run dry.
Since January the Federal Deposit Insurance Corporation (FDIC) has seized 94 failing banks, causing a rapid decline in the deposit insurance fund. Despite a special assessment [Capital charge – Ed.] imposed on banks a few months ago to keep the fund afloat, its cash balance now stands at about $10 billion, a third of its size at the start of the year. (Another $32 billion has been set aside for failures that officials expect to occur in the coming months.)
Unlike the FHA, which as we saw is explicitly Treasury-backed, FDIC clings to its autonomy.
From the NYT: Sheila C. Bair, head of the FDIC, would prefer not to tap a line of credit from the Treasury.
The FDIC, which oversees the fund, is said to be reluctant to use its authority to borrow from the Treasury.
If the FDIC’s fund runs out, that would send the FDIC director running to Treasury to ask for an increase in her allowance.
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.
Like the GSEs, Fannie Mae and Freddie Mac. Like FHA.
Wonder what entity’s next?
Under the law, the FDIC 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.
Are we seriously hearing that personal pique may drive our banking policy?
You must have misheard
“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.”
Warning of bamboo shoots under the nails: Camden R. Fine
Previously I posted about the turf battle now playing out among Federal banking regulators:
In many ways our current banking regulation operates like the Articles of Confederation, where each regulator is akin to a sovereign state that can safely ignore what the others are doing, and may certainly ignore the dictates of any purported central regulator. Now what Mr. Geithner wants is to force through a new federal financial Constitution that makes the Federal Reserve the truly national supra-regulator:
The administration’s proposal would give the Fed broad discretion to supervise any major
One ring to rule them all, one ring to bind them.
One conference table to seat them all …
How power would be balanced between the Fed and this entity has emerged as a flash point, one that administration officials debated.
Signs point to political trouble
According to the story inspiring that post, Ms. Bair is angling for more FDIC power and her elevation into equality with Mr. Geithner of Treasury. Asking him for an advance on the funds under her control undermines both her policy logic and her political leverage.
Instead of asking someone with power over you, why not ask those over whom you have power? Maybe they’ll pass the hat!
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 –
The premise, therefore, is that this is real debt – just an advance. But here comes the stinger:
What stinger?
– and ultimately would be paid by the rest of the industry.
“Paid by the rest of the industry” = “tax on their profits.”
Translated into money-speak, which bankers understand, I regulate you, so lend me some money that I’ll pay back by taxing you.
Or even simpler, gimme some money.
Pound notes, bad checks, loose change, anything!
The bonds would be listed as an asset on the books of the banks.
Yes, we are.
The plan, strongly supported by bankers and their lobbyists, would be a major reversal of fortune.
Some bankers, some lobbyists.
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.
It’s all going around in circles anyhow; the question is whether the government (meaning us taxpayers) or the banks (meaning their shareholders) pays the bill.
Bankers worry that a special assessment of $5 billion to $10 billion over the next six months [A] would crimp their profits and [B] could push a handful of banks into deeper financial trouble or even receivership.
Risk A (profit-crimping) shouldn’t occur if the loan is a good loan, and if it’s counted as Tier 1 regulatory capital subject to nominal capital charge – all of which factors are within Treasury’s control, if not the FDIC’s.
Please can I have some money?
Risk B (submerging marginal banks) is subsumed in Risk A – if the loans are good, and counted as good capital, why does that change the lending bank’s health or liquidity?
By the way, here’s the political reason:
And 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.
What, like the industry’s already so popular?
Isn’t the political backlash risk not against the already-reviled banks but against the Administration?
Any populist furor could be avoided, the thinking goes, if the government borrows instead from the banks.
Just fantastic, double optics: two reasons, both optical rather than substantive.
I see right through your facades
“Borrowing from healthy banks, instead of the Treasury, has the advantage of keeping this in the family,” said Karen M. Thomas, executive vice president of government relations at the Independent Community Bankers of America, a trade group representing about 5,000 banks.
In case you’re wondering, the ICBA group is the little-banks-receiving-relief not the big-banks-providing-liquidity. In short, completely not disinterested.
“It is much better for perceptions than having the fund borrow from somewhere else.”
Never mind that it’s worse for reality.
Ultimately, officials say, the deposit insurance corporation could settle on a plan that replenishes the insurance fund by doing some of both: [C] Borrowing from healthy banks to shore up the shorter-term liquidity needs of the fund –
Option C is justifiable – if it’s good debt, that is – and feasible with powers already available to the regulators, or at least to Treasury.
– and [D] imposing a special fee on banks to increase the longer-term capital level of the fund.
Except that you can’t tax profits if you’re making losses, and if you tax a weak sector, you weaken the sector.
Officials say that the FDIC will issue a proposed plan next week to begin to restore the financial health of the ailing fund.
There is no consensus among the five board members, consisting of Ms. Bair, two other FDIC officials, and the heads of the Office of Thrift Supervision and the Office of the Comptroller of the Currency. Others may propose novel ways to replenish the fund, for example, by asking the banks to prepay the premiums that they were planning to make next year.
When in danger or in doubt, run in circles, scream and shout.
I’ll get it this time!
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