John McDonald

Blogging about politics, life, and the web

FDIC Bailout on the Way?

August 16th, 2009

How do you know its the weekend?  Well recently, the best sign is that news is popping up about bank failures.  See, there’s this trend in politics and all types of public relations that really bad news should come out on a Friday afternoon or Saturday.  As someone who runs websites and has access to all kind of traffic stats, I can attest that these are times that people aren’t sitting around reading the news. In fact, the busiest times for news consumption are the hours you’d think people are supposed to be working…

Anyway, the FDIC and Federal Reserve know how to play the public relations game, too.   In the modern economy, appearances are just as important as realities – so what better time to announce failure than when no one is listening?

And this year alone, there’s been 77 banks achieving failure status.  Ouch.  The good news is, the FDIC is insuring all those deposits up to $250,000.  The bad news is, the FDIC now needs to come up with some more money in order to do so.

Reuters analyzes the assets and recent expenses of the FDIC here and figures they’ve got a few billion left to cover the growing losses.  Other writers are less optimistic in their FDIC analysis.  The real question to ask is, how bad off were these failed banks?  In a world where regulations and accounting rules shift on a whim, it might be impossible to answer that question even if you had full access to all the books.

Of course, the FDIC funds its insurance operations with a small fee from the banks with insured deposits.  And this means they can’t just increase the fee directly, because it would contribute to even more banks going out of business.  Really, the last thing the banks need is for their fees to go up.  So what is the FDIC ultimately backed by?  That would be the “full faith and credit of the U.S. government” and that means Congress will be sure to raise someone’s taxes or beg the capital markets to buy more of our debt. The “sound” banks will acquire competition and increase their market share, even if they’d be bankrupt too had it not been for TARP & discount window action.

If we get through this crisis without seriously reforming the high profits and public risks of the finance and banking sectors, we’re going to be in for a “recovery” that’s as bad or worse as the crisis itself.


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