Comments on: The FDIC and the socialization of banking losses http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html Finance, Economics and Markets Fri, 10 Feb 2012 00:37:00 +0000 hourly 1 By: The case against feeding the Fed more power » New Deal 2.0 http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html#comment-6228 The case against feeding the Fed more power » New Deal 2.0 Thu, 03 Sep 2009 16:22:00 +0000 http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html#comment-6228 [...] Promote smaller community banks. The Bush and Obama Administration’s policies during this crisis have favoured big banks. Meanwhile, community banks are being held to a disadvantage in access to cheap capital. Why doesn’t the FDIC spin off seized assets as small community banks with new leadership instead of gifting them to private equity or other banks? [...] [...] Promote smaller community banks. The Bush and Obama Administration’s policies during this crisis have favoured big banks. Meanwhile, community banks are being held to a disadvantage in access to cheap capital. Why doesn’t the FDIC spin off seized assets as small community banks with new leadership instead of gifting them to private equity or other banks? [...]

]]> By: Edward Harrison http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html#comment-56926 Edward Harrison Thu, 27 Aug 2009 08:04:00 +0000 http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html#comment-56926 I'd agree that this is significant. I had already been a bit leery after the BankUnited deal. Ultimately, what choice does the FDIC have? Either they staff up and essentially own the banks for a longer period or they pawn the assets off for a song to PE bidders. I would say that the enticement of commercial bidders, the lack of stomach/staff to own these assets and my contention that the FDIC will see large losses from the transaction are inter-related. I is the need to find viable bidders which creates a problem for the FDIC. This will only get worse as time goes on because there are only so many bidders available. To my mind, the real story is that the FDIC is forced into a position of weakness vis-a-vis commercial bidders because of an unwillingness to 'nationalize' i.e. have an RTC-like or equivalent resolution scheme. This is why they HAVE to open the process up to commercial bidders to begin with. I’d agree that this is significant. I had already been a bit leery after the BankUnited deal. Ultimately, what choice does the FDIC have? Either they staff up and essentially own the banks for a longer period or they pawn the assets off for a song to PE bidders.

I would say that the enticement of commercial bidders, the lack of stomach/staff to own these assets and my contention that the FDIC will see large losses from the transaction are inter-related. I is the need to find viable bidders which creates a problem for the FDIC.

This will only get worse as time goes on because there are only so many bidders available. To my mind, the real story is that the FDIC is forced into a position of weakness vis-a-vis commercial bidders because of an unwillingness to ‘nationalize’ i.e. have an RTC-like or equivalent resolution scheme.

This is why they HAVE to open the process up to commercial bidders to begin with.

]]> By: Anonymous http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html#comment-56925 Anonymous Thu, 27 Aug 2009 05:36:00 +0000 http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html#comment-56925 Here's what I wrote today http://www.butthenwhat.com/?p=6227 and this is a link to the first article of several that I wrote on the subject http://www.butthenwhat.com/?p=4108. That last link also contains a link to a very good post that John Hempton did on the subject. I see today's action as a desperation move simply because they're afraid of running out of bidders for what they know they have to pick up. I don't deny your assertion that the FDIC is or will be squeezed for money, but I still maintain over time that the taxpayer won't take it in the shorts. They will eventually be able to pay off their credit lines from the insurance premiums they pick up from the banks. I think the real story is opening up banking to commercial ownership. This was wiped out for good reason in the banking reforms of the 1930's and here we go again. Tom Here’s what I wrote today http://www.butthenwhat.com/?p=6227 and this
is a link to the first article of several that I wrote on the subject
http://www.butthenwhat.com/?p=4108. That last link also contains a
link to a very good post that John Hempton did on the subject.

I see today’s action as a desperation move simply because they’re
afraid of running out of bidders for what they know they have to pick
up. I don’t deny your assertion that the FDIC is or will be squeezed
for money, but I still maintain over time that the taxpayer won’t take
it in the shorts. They will eventually be able to pay off their credit
lines from the insurance premiums they pick up from the banks.

I think the real story is opening up banking to commercial ownership.
This was wiped out for good reason in the banking reforms of the
1930′s and here we go again.

Tom

]]> By: Edward Harrison http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html#comment-56923 Edward Harrison Thu, 27 Aug 2009 00:49:00 +0000 http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html#comment-56923 Any thoughts on this article?: http://dealbook.blogs.nytimes.com/2009/08/26/fdic-eases-some-rules-for-buying-banks/ By softening its stance on private equity, the F.D.I.C. is hoping to turn up additional buyers and reduce the number of failed banks that its insurance fund will have to support. But the new rules may fall short in encouraging a flood of participation. It seems in line with what I am suggesting the FDIC wants to do. Any thoughts on this article?:

http://dealbook.blogs.nytimes.com/2009/08/26/fdic-eases-some-rules-for-buying-banks/

By softening its stance on private equity, the F.D.I.C. is hoping to turn up additional buyers and reduce the number of failed banks that its insurance fund will have to support. But the new rules may fall short in encouraging a flood of participation.

It seems in line with what I am suggesting the FDIC wants to do.

]]> By: Edward Harrison http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html#comment-56922 Edward Harrison Wed, 26 Aug 2009 17:41:00 +0000 http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html#comment-56922 I'll wait until the dust has settled. In the meantime, we can all see that BBVA is getting a good deal. At a minimum, you are taking losses that the acquiring entity, in this case BBVA, would have to pay and spreading it out to the banking system as a whole via increased premia. And I certainly do NOT think our undercapitalized banks can afford to pay $500 billion in additional premia. $15 billion in 1990, yes. hundreds of billions in losses in 2009-2011, no. You have to think this will fall on taxpayers. The losses are too large. I’ll wait until the dust has settled. In the meantime, we can all see that BBVA is getting a good deal. At a minimum, you are taking losses that the acquiring entity, in this case BBVA, would have to pay and spreading it out to the banking system as a whole via increased premia.

And I certainly do NOT think our undercapitalized banks can afford to pay $500 billion in additional premia. $15 billion in 1990, yes. hundreds of billions in losses in 2009-2011, no. You have to think this will fall on taxpayers. The losses are too large.

]]> By: Anonymous http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html#comment-56921 Anonymous Wed, 26 Aug 2009 17:26:00 +0000 http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html#comment-56921 I appreciate your skepticism and generally share it with regard to government, however, historically the FDIC is one of those rare exceptions to the rule. The last time the FDIC had to come hat in hand to the government was in 1990 when it exhausted its reserve. It borrowed $15 billion and repaid the money next year. Though that recession does not match this one in terms of severity, as a banking crisis it is certainly on a par. I don't think it's unreasonable to assume that history could repeat itself in this case. I appreciate your skepticism and generally share it with regard to government, however, historically the FDIC is one of those rare exceptions to the rule.

The last time the FDIC had to come hat in hand to the government was in 1990 when it exhausted its reserve. It borrowed $15 billion and repaid the money next year. Though that recession does not match this one in terms of severity, as a banking crisis it is certainly on a par.

I don’t think it’s unreasonable to assume that history could repeat itself in this case.

]]> By: Edward Harrison http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html#comment-56920 Edward Harrison Wed, 26 Aug 2009 16:56:00 +0000 http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html#comment-56920 The $500 billion is the question. Will this money ultimately come from taxpayers or the banks themselves via higher insurance premia in the future? I am saying that it will be a taxpayer-financed recapitalization of the FDIC. Are you saying you believe the FDIC is going to pay the money it draws down on its line of credit via money it earns from the banks? Another pertinent question is: will the money be repaid? If you think it will, you have a lot more faith in government than I. The $500 billion is the question. Will this money ultimately come from taxpayers or the banks themselves via higher insurance premia in the future? I am saying that it will be a taxpayer-financed recapitalization of the FDIC.

Are you saying you believe the FDIC is going to pay the money it draws down on its line of credit via money it earns from the banks?

Another pertinent question is: will the money be repaid? If you think it will, you have a lot more faith in government than I.

]]> By: Anonymous http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html#comment-56919 Anonymous Wed, 26 Aug 2009 16:41:00 +0000 http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html#comment-56919 Ed, If I'm not mistaken, the FDIC has to date funded the losses on bank seizures through the reserves it accumulated from bank assessments. It is likely that they will have to tap the Treasury for upcoming losses but I believe that comes via a $500 billion line of credit for which they are charged. I think they are contemplating an increase in bank assessments to cover future losses as well as repay their borrowings. If all of that is true then it isn't unreasonable to postulate that there might be no negative effect on the taxpayer at all. Let me know if I have my facts wrong. Ed,

If I’m not mistaken, the FDIC has to date funded the losses on bank seizures through the reserves it accumulated from bank assessments. It is likely that they will have to tap the Treasury for upcoming losses but I believe that comes via a $500 billion line of credit for which they are charged.

I think they are contemplating an increase in bank assessments to cover future losses as well as repay their borrowings. If all of that is true then it isn’t unreasonable to postulate that there might be no negative effect on the taxpayer at all.

Let me know if I have my facts wrong.

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