FDIC Needs a Bailout from Banks This Time

Because propping up failing banks is tough

FDIC borrowing back from banks – coming soon! (Photo: Ryan McFarland)

FDIC borrowing back from banks – coming soon! (Photo: Ryan McFarland)

It would appear that the FDIC is in need of payday loan lenders these days. Maybe they’ll need something even stronger. But here’s a possible scenario that could be in store for the federal organization that has helped insure customer deposits in failed banks: banks will bail out the FDIC.

Scrounging for cash

When you or I need money, payday loan lenders can help. For the FDIC, billions of dollars are necessary to continue to hold the safety net. This recession has been tough, and according to a New York Times story at http://www.msnbc.msn.com/id/32963393/ns/business-the_new_york_times/, senior regulators are considering asking healthy banks for billions. Bankers and their lobbyists are strongly behind the potential deal. It should go without saying that most taxpayers support a plan that doesn’t involve them giving up more money.

Remember when there were people who viewed the bank bailout with clear eyes?

Why do banks like this idea?

They don’t want to have to undergo more Treasury stress tests (they’re very stressful). They also don’t want to have to continue to operate on lines of credit from the Treasury. That’s no way to dig out of financial quicksand.

Why does the FDIC like the idea?

FDIC Chairwoman Sheila Bair doesn’t want to have to ask the Treasury for another line of credit. Apparently, Bair and Treasury Secretary Timothy Geithner aren’t on great terms, so you can imagine how such a thing would go over as well as a meeting between a polecat and a gerbil farm.

Sure, the FDIC does have the right to tap into a credit line of up to $100 billion from the Treasury without permission. That’s by current law. But Bair finds the prospect “unpalatable.” Not only is it unpalatable, but Camden Fine of the Independent Community Bankers organization said that “Sheila Bair would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help.” Not needing permission wouldn’t mean she wouldn’t have to deal with Geithner.

For the record, the law allowing the FDIC to borrow from the Treasury without permission was put on the books in 1991 during the savings and loan crisis. Banks received government bonds at an interest rate set by the Treasury secretary, and they would be paid by other businesses in the industry.

Why should the American people like this idea?

It keeps the money “in the family,” so to speak. More money from the Treasury would be construed as more taxpayer money going toward bailing out irresponsible institutions. Independent Community Bankers of America Executive VP of Government Relations Karen Thomas agrees that “It is much better for perceptions than having the fund borrow from somewhere else.”

Policy officials see this as a two-step process

By borrowing from healthy banks, the FDIC could very well take care of its short-term liquidity issues and preventing the need for payday loan lenders. For long-term needs, an increased fee imposed on banks to help keep the FDIC stocked with cash is under consideration. Considering that the FDIC has seized 94 failed banks since the beginning of 2009, they have to increase their cash stores considerably. They currently have about $10 billion in a general store and $32 billion set aside for the failures that are predicted over the next few months. However, if one large bank goes down, the FDIC is in trouble.

That means bank customers would be in trouble

[get started_button float=”right”]

While no consensus has been reached yet on what direction the FDIC will go, expect a decision soon. Calling for banks to prepay their 2010 premiums is another idea, but let’s hope the country is out of the recession spiral by then. If it isn’t, we’ll need more than payday loan lenders to fix our financial problems. We’ll need body armor.

Other recent posts by bryanh