Tuesday, September 22, 2009

Robbing Peter to Pay Paul

The FDIC's insurance fund, which it uses to pay off despositors in failed banks, is getting low. One way it can bolster its reserves is to draw on a $100 billion line of credit from the Treasury. Instead, however,

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 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.

A brilliant scheme to avoid another taxpayer bailout? Not really.

The banks are willing to lend because the FDIC will pay them a good interest rate. Repayment is virtually guaranteed because the FDIC can always draw on its line of credit. Thus the banks are getting a better deal than they would in the marketplace (that's why they are doing this), so the scheme is a backdoor way of further bailing out the banks.

Why go through this charade? Apparently, using the Treasury credit line

is said to be unpalatable to Sheila C. Bair, the agency chairwoman whose relations with the Treasury secretary, Timothy F. Geithner, have been strained.

“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.”

Instead, the FDIC will con the taxpayers. The FDIC has no choice under existing policy, of course, but to pay off depositors of failing banks. They should just be honest about how who is paying for it.

15 comments:

Anonymous said...

Isn't the FDIC's policy contractionary, because the policy reduces the amount of money that banks lend to the public? Like the Fed paying interest on reserves?

I realize the FDIC is not the Fed and not in charge of monetary policy, and its only $100,000,000,000, but shouldn't the agencies pull their oars the same way?

dheigham said...

This is just off-balance sheet finance for the Federal Government. As usuel, the true cost will be greater than for straightforwrd finance, and calculating the true cost to the taxpayer of the support for the banks will be that much harder.

But has Congress given the FDIC authority to pledge Federal credit?

Anonymous said...

Under capital reserve regulations banks can only lend so much. So if they lend to the FDIC does this not limit the amount of commercial lending? And does this not in effect allow the FDIC to compete with and partially supersede the Fed's reserve requirements regime? The FDIC ends up looking like a mini-discount window?

Anonymous said...

Funny thing, another nobody wrote in a May, 1989 AER article that it is a tax: Larry Summers, head of Obama's NEC.

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