Now I've said it before, and I'll say it again, Minnesota IS going to be one of the worst states in terms of bank closures and you will see it have its disproportionate share of bank failures compared to other states, adjusting for population. The primary cause is the likes of Riverview Community Bank, which was recently shut down by the Feds. "Community Banks" you must understand are these small town, local "community" banks that are basically the bottom of the barrel when it comes to the hierarchy of banks. While the likes of TCF and Wells Fargo were shooting down questionable real estate deals, there was no shortage of these second rate loser banks to sop up the deals and finance them while they played "imaginary real banker."
What's worse is that there are SCORES of these wanna-be-banks with wanna-be-bankers who financed "multi-million dollar real estate deals" so their impotent, inept middle aged bankers could say to naive 20 something girls, "Why I just finished signing off on a multi-million dollar real estate deal. I'm a multi-million dollar real estate banker!" (Little did the 20 something girls know they probably had a higher net worth as a waitress than these guys did with with their home equity line financed German car and overleveraged house.) Regardless, with so many of these petty, small time faux banks eating up the bad deals larger, more legitimate banks passed up on, you are going to see an increase in the number of Minnesota community banks come begging for a bailout.
But! Don't worry. Everything is going to be fine! The FDIC now assures us that they have the money to ensure our deposits at these Minnesota banks! (ht to Kate)
Of course never mind borrowing $500 billion would put the Federal government WAY over its debt limit already. And never mind we're already in the whole for $1.4 trillion this year anyway. The reason you should never mind is because Barack Obama is president and he's going to take care of everything.
Now you know why I installed my own wood burning stove and enjoy foraging for wood.
The FDIC isn't going to draw on any of that Treasury credit limit. They already have provisions from the deposit insurance fund set aside to cover much of the upcoming losses. Their current plan is to have banks pay assessments in advance which will raise over $40 billion which should more than cover the estimated $100 billion in total losses through 2012. The plan to replenish the DIF runs through 2017.
ReplyDeleteNow if the banking sector gets unexpectedly worse, say from a bad economy lasting too long or getting worse, then they will have to get funds somewhere.
They can issue special assessments to banks, borrow from banks, or draw on their Treasury line which will be paid back with interest. So no one gets a free lunch here. Ultimately, banks will pay for this out of their profits. Their ability to pass it off to the consumer is constrained by competition.
Deposit insurance is industry funded. It's a shame assessments weren't higher during the good years. But the FDIC not only has a statutory minimum balance, it has a statutory maximum. Excess must be returned to banks. So that's a Congress problem, not an FDIC problem.
The FDIC chairman Sheila Bair doesn't make these decisions on her own. There is a board consisting of the other bank regulators as well. This was well thought out and the pre-paid assessment was the best of several undesirable alternatives.
But the important point is that no one needs to fear losing any money from their bank accounts unless they exceed deposit insurance limits.
Minnesota was hit particularly hard by this crisis, as you say in your book, by incredibly poor decision making by banks which led to severe overbuilding. Commercial real estate is the next axe to fall.
If you want to know where the next government crisis is, it's with the FHA. FHA loan defaults are rising. They are bing paid back for mortgages and reverse mortgages with houses worth far less than the debt owed. And a large share of current home buying activity is with FHA loans.
After that, the Pension Benefit Guarantee Corporation will go belly up. It cannot afford to support all the defined benefit retirement plans after losing more than half their assets.
Obama has made this a bloody mess. He's wasted hundreds of billions of dollars and mortgaged our future. Now he wants to create several more expensive government entitlement programs. This flaming socialist has got to be stopped. Economic collapse is part of his plan.
What regulations and/or government actions do you think led to such perverse incentives in the financial sector? Or was it just the belief that the government would ultimately bail out any loser?
ReplyDeleteSo, they have $42B on hand — and don't panic, everything will be fine — but they are going to force pre-payment of 3 years worth of insurance premiums — and don't panic, everything will be fine — so they can raise another $45B... That sounds a lot to me like "Oh crap, we're screwed! We've got less than half of what we really need. Quick, scarf up some more money FAST!!"
ReplyDeleteIsn't Minnesota one of the states hit very hard by the Madoff Ponzi scheme? I read somewhre that he wiped out that state pretty badly.
ReplyDeleteAnon, as I said, the FDIC DIF wasn't permitted to be larger than it was. So if expected losses exceed the fund balance, they have to get funds somewhere to keep deposit insurance intact. That's not an "oh shit" moment. It's a time for cool headed decision making. The FDIC doesn't write its rules and it can't travel back in time and convince Congress to raise the DIF limit.
ReplyDeleteEarlier this year, the FDIC imposed special assessments which were in addition to regular assessments. Banks would much rather pre-pay assessments than pay more.
If the industry didn't have enough liquidity to handle this, they wouldn't be doing it.
Would you prefer the FDIC:
A. Abandon deposit insurance and let the banking system collapse from bank runs and depositors lose their money
B. Draw on the Treasury line of credit
C. Borrow from banks
D. Impose special assessments
E. Have banks pre-pay assessments
There are no other options. Take your pick.