FDIC Walks a Tightrope
by Bill Sardi
Recently by Bill Sardi: Days Away From Economic Chaos?
The Federal Deposit Insurance Corporation’s chieftain, Sheila C. Bair, whose agency overseas and insures your bank accounts, had to paint a rosier picture of American banking than deserved as she delivered the FDIC’s 2nd Quarter 2009 banking report.
We would all want her to be an icon of stability rather than display panic since modern banking really relies upon faith. Banks have small reserves that anchor against their customer’s deposits which are loaned out to generate profits. So banking is a faith proposition that bankers are conservative, don’t take undue risks, and will manage your money while exercising good judgment. Of course, that isn’t the picture of modern American banking, and banked money is at greater risk now than it was months ago.
Stop those little old ladies from Pasadena
Bair’s first job is to dismiss any idea the public’s money is at immediate risk that would prompt a major run on the banks by depositors to withdraw their money. No little old ladies from Pasadena staged a mass bank run this time, though American banks are walking a tight rope in that regard.
Closing banks without making waves
Bair’s second assignment is to slowly put small insolvent American banks out of business, over a thousand of them, while fostering public confidence in the FDIC insurance company’s ability to insure the public’s money. The FDIC admits to only 416 on the agency’s "problem bank" list. Frankly, without bailout money, few banks would have adequate reserves. By collapsing small banks, depositors are likely to bank their money at larger institutions. So Bair is really a shill for the large bankers to rub out their smaller competition, though she may have no other option in this instance.
This past quarter American banks have set aside billions of dollars against non-performing home loans (foreclosures). One of the objectives is to have reserves that equal 100% of problem loans, but American banks fall far short of that goal.
Bair’s agency has $13.3 trillion of assets to protect. But her reserve treasure chest has shrunk to around $10.4 billion, certainly not enough to bear the brunt of a thousand failed banks. Any day the FDIC could deplete its insurance fund and have to tap into a line of credit at the US Treasury (which is also insolvent and needs $1.8 trillion to meet this year’s US budgetary obligations).
The FDIC has up to $500 billion at its disposal, but this is not likely to be money loaned from other sources but rather newly printed money that would fan the flames of inflation. So for now, the FDIC is holding off the inevitable.
If Americans discover the true dire state of American banks, this might trigger a massive bank run, so the agency plods slowly, taking over small banks, a few at a time, and announcing bank closures late on Fridays to blunt their negative effect upon the public. This buys time.
Not a true friend of big bankers
Bair is not a friend to the big banks, nor does she hold allegiance to the Federal Reserve that wants to be the sole cop that regulates banks. Bair promotes the idea of a council to regulate banks, doesn’t think big banks are too large to fall, doesn’t think big banks’ recklessness should be rewarded with bailout money, and promotes the idea that private enterprise should buy up problem banks rather than her agency. But she is forced to accept lower capital reserve ratios in an attempt to attract more investment groups to buy up failed banks.
But don’t get the idea that Bair is really on the public’s side. If you take a look at a geographical picture of failing American banks, they are primarily located in Georgia, Florida, California, Nevada, Texas and Illinois.
Bank depositors might want to switch to a less risky bank, particularly a bank that did not offer subprime and ALT-A home loans that are at greater risk of going into foreclosure. Farmers and merchants banks, commercial banks, credit unions and some foreign-owned banks like Union Bank of California (Mitsubishi) that didn’t make risky real estate loans, should be considered by bank depositors. Bair’s agency isn’t going to offer that advice.
How much banked money is at risk?
In the face of an economic collapse greater than the Great Depression, and with no true banking reform (they are still offering low-down payment, subprime "teaser" loans at reduced long-term interest rates), Bair says the FDIC has “ample resources” to protect depositors. “No insured depositor has ever lost a penny of insured deposits … and no one ever will,” she asserts. Of course, that is pure nonsense.
The FDIC doesn’t make it easy to determine how much banked money exceeds its $250,000 insured limit per depositor at one institution. At the end of 2008 about $1.06 trillion, or 17.43%, of deposits were in accounts exceeding $100,000, the FDIC’s old insurance limit. Many billions of dollars have been lost in recent bank failures, but the FDIC won’t publish that figure and it won’t demand that American banks send notices to their depositors who hold accounts greater than $250,000, warning them they are at risk. So the FDIC doesn’t earn a stamp as consumer protector.
Bair suggests that banks might be turning a corner, citing improvement among some real estate-related loans and a drop in the number of loans more than 30 days past due. But this is because banks are holding foreclosures off their books. A home mortgage holder who can’t make monthly payments is not even placed on the non-performing loan list for 3 months or more and the property often doesn’t go into foreclosure for 2 years. So this keeps the sour loans off the banks accounting books for an extended time.
Furthermore, banks post asset values that are completely misleading. The value of the collateral banks hold against loans, called assets on the banks books, should be marked down by at least 30%, probably to home values that existed in 2001—03. The over-appraised value of these homes was not prompted by greater public demand to own a home but rather by cheap money (low interest rates, and teaser rates, and low down payments), bad habits the industry can’t break.
The banking industry in league with the Federal Reserve created this economic bubble and its creators are still at the helm of banking and currency institutions and agencies. Timothy Geithner, Secretary of the Treasury, had the chutzpa to claim large American banks have already begun to pay back interest on TARP (Troubled Asset Protection Program) funds, but this is also an illusion.
The public has capitalized the banks
Real estate loans represented around 70% of American bank profits in the past few years, but this segment of income has been abandoned by bankers. Total deposits at banks have swelled, not only with Federal bailout money, but with Americans a bit unsure of the safety of their money in the stock market, have pulled their money out and deposited their funds in banks. So the bailout funds really weren’t needed as badly as first thought. It is likely most of the TARP funds were sent overseas. This may be why there is such resistance to the impetus to audit the Federal Reserve. Then the public will find out where the money really went.
The end result is that the federal bailout program for American banks has ended up creating a temporary fix in the bottom line at American banks, but it has not fixed the economy. As appalling as government give-away programs may sound, giving the money directly to the public to pay off their home mortgages and burgeoning credit card bills would have been a better strategy, though this would reward the irresponsible. But this again would have released new "confetti" money into the economy and fueled inflation.
So American bankers are flush with cash but they aren’t loaning money for real estate loans because they would then be forced to re-assess the true value of the properties they own, which would diminish the stated asset values on the banks’ accounting books. For now, banked money is being parked. In fact, the Federal Reserve is paying banks a premium on their parked money so it will not be released into the economy via the fractional banking system and fan the flames of inflation. So the economy can’t grow and unemployment will remain high. The banking industry is stuck in the mud and with it the American economy.
Playing fast and loose
American banks are now generating profits by playing the markets, or what the FDIC’s Sheila Bair calls "non-interest income." There is no collateral behind your banked money now. Yes, your American banker is playing more fast and loose than ever before, investing your money in the stock market, which is why the public sees the false rallies there in recent weeks.
There may be bargain stocks to buy, but many of these bargain stocks that are offered are for companies that are in debt and can’t meet current or future loan payments. The last man holding these stocks will be the loser. So don’t fall for your stock broker’s tip that he has a bargain stock for you! A few hundred major American companies are due to fall. Bargain-priced stocks may be an illusion.
News media keeps predicting a turnaround
The American news media buries horrid facts about the banking industry a few paragraphs into their news reports, hoping not to trigger that feared run on the banks. But there has to be a day, some time in the not too distant future, when America faces reality.
Public pays in the end