The FDIC is nearly out of cash, the victim of almost a hundred bank failures this year and a few particularly large ones last year. Now, that shouldn’t be too big of a problem (it may be a symptom of a problem) in and of itself; after all, the FDIC is a government agency, and the Federal government is still solvent. As Sheila Blair put it in the dark days of March:
To be sure, we won’t run out of money. We’re 100 percent backed by the full faith and credit of the United States Government. No depositor has ever lost a penny on an insured deposit. And that is not going to change.
The only detail to be worked out is exactly how the FDIC plans on funding the shortfall to its fund:
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.
It is important to include the adverb “seriously,” because otherwise you might be tempted to think “yeah, I’m sure they talked about it between the sixth and seventh beer while watching the Redskins-Rams disaster.”
The plan, to put it in plain language, makes no sense.
Why would the FDIC borrow at all? The FDIC – the Federal Deposit Insurance Corporation – is funded by a levy charged to all banks. When the insurance fund runs low, the banks have a supplemental levy. It is the banks’ obligation to keep the FDIC fund topped up.
If the fear were that the FDIC needed money suddenly, before a levy on the banking industry could be processed, not only can the FDIC borrow directly from the Treasury, home of the lowest dollar-denominated cost of capital going, the banks from whom the FDIC would be borrowing are already themselves wards of the Treasury. Why would anyone possibly want to create a middleman?
One of Taunter’s Tips is that when you see a government action that makes no damn sense for the government, don’t assume it is being done for the government’s benefit. Sometimes the people who serve in the government have very different incentives from the government as a whole:
The Federal Deposit Insurance Corporation, which oversees the fund, is said to be reluctant to use its authority to borrow from the Treasury.
Under the law, the F.D.I.C. 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.
The FDIC is not going to borrow directly from the Treasury because Sheila Blair does not want to be beholden to Tim Geithner. Way to serve the national interest, Sheila. Oh, and there’s one other party who really likes the idea of the FDIC borrowing from the banks: the banks.
When the FDIC assesses a levy to the banks, it directly hits the banks’ cash and equity. The banks don’t like having their equity hit when they have been running around telling the world that everything is fine and they are ready to begin paying people again. When the FDIC borrows from the banks, the lending banks get an asset in exchange for their cash – a government bond. The interest and ultimately the principal is repaid by the banking industry as a whole, but it allows the banks to float their needs for a period of time.
Furthermore, the lending banks will be the banks deemed “healthy.” Once the deposit insurance fund gets in the habit of borrowing from these banks, it damn well cannot take a hard line with them – even if the banks no longer seem so healthy. Not only does the FDIC rely on the bank, it has something even more valuable in DC invested: credibility. If Sheila Blair borrows from First National Bank of Health, and FNBH fails, she’s going to look like a fool. It would be worse than going to Tim Geithner for money. So Sheila is going to do absolutely everything she can to keep FNBH in operation. Consider this TBTF insurance; participation is a mechanism for any bank to get itself regulatory cover.
Over the past year we have seen a steady trend in the direction of the socialization of risk and the privatization of reward. Some of this was a deliberate policy choice: Summers & Co. decided that they did not want the banks to fail, and with that off the table, the only way to return to normal economic times was to funnel profits to them until they were well-capitalized. But a great deal of it was simply a change in perspective. As the bailout went on and expanded and metastasized, the constraints to any individual act of tunneling diminished; why not make friends with the people you regulate, when no one outside the family is willing to do anything and everyone inside the family expects it?
We can have all the regulatory and institutional systems we want; if the people in power refuse to act for the public good, the public good will not be served. We have always been somewhere in the middle of the corruption world – far dirtier than the small nations of northern Europe, but cleaner than the global South. Each of these little chips drags us farther from where we ought to be.