FDIC Not Acting Very Sophisticated

[JimofPennsylvan]

The Federal Deposit Insurance Corporation (FDIC) the government organization which insures bank accounts for individual Americans money is in trouble they are running low on money to back deposits. Last year the FDIC had $45 billion dollars to back deposits now they have around $10 billion. This is because eighty plus backs had to be taken over by the FDIC this year because of insolvency issues. Before the banking crisis is over America could see another 100 to 150 banks be taken over by the FDIC. It is clear that the FDIC has to get its hands on a significant amount of money to pay for their bank takeovers or they won’t be able to do their job. The only options the FDIC has per the FDIC to solve this “need for cash” problem is to either assess fees on their member banks or tap the $100 billion credit line the FDIC has with the U.S. Treasury. In the past year, the FDIC assessed a special fee on banks and received $5.6 billion from such an assessment, there was a big public hullaballoo over this assessment so it sure seems like the realistic scale of future assessments wouldn’t be sufficient to solve the FDIC’s money problem; the FDIC faces losses of more than $21 billion with the 80 plus banks so far taken over this year. The FDIC borrowing big sums of money from the Treasury isn’t an ideal solution because one it triggers public anger over government bailouts and it lowers the reputation of America’s banking industry from a world wide reputation standpoint.

The FDIC has available to it another option which if they act like a group smart of people they will take advantage of. The FDIC made over $9 billion over the past twelve months guaranteeing borrowing by U.S. banks. The program was started in the past twelve months when the credit markets froze and banks had huge problems borrowing money especially at reasonable rates. This program is scheduled to end at the end of October of this year. The reasons for ending the program are understandable banks can now borrow at reasonable rates, some participating banks made huge and rather unseemly (considering their strong financial reports) profits off the program and concern about putting the FDIC on the hook for a huge amount of bank debt if respective banks default on the respective debt.

The reasons for ending the program don’t trump the reasons for continuing this bank debt insurance program. The single compelling reason for continuing this program is the FDIC can really use the fees from this program, the likely billions of dollars the FDIC would get in fees per year are extremely valuable to the mission of the FDIC at the current time, why throw this resource away now it doesn’t make any sense. Moreover, the FDIC could use this program to increase the capital reserves in banks which is a loudly publicly proclaimed goal of government officials for the U.S. banking industry. Plus, for those banks which are really hurting from commercial loan and other loan defaults, this program could be medicine for them to become financially strong again. Of course the FDIC should bar Goldman Sachs and the other big profitable banks from participating in the program, the unseemly profits they make considering their overall profits call for this conclusion. Also, the FDIC could get agreements from participating banks that they wouldn’t use the profits from their participation in this program to increase their dividends rather they would use it to strengthen the balance sheet of the bank. Lastly, having this FDIC program which is a tool to inject capital into banks facilitates banks being able to better lend to American families and businesses which helps the economy. Keeping this FDIC program seems like a multiple win situation, let’s hope the governmental officials don’t steal defeat from the jaws of victory here.

 

[waltky]

Gettin' away with runnin' a bank in the ground...

FDIC too slow to sue officers and directors at failed banks, critics say
March 14,`11: As the chief undertaker of the Great Recession, the Federal Deposit Insurance Corp. has briskly shuttered 345 failed banks since 2008, at a cost to the government insurance fund of about $76 billion.

But the regulator has sued only a handful of officers and directors to recover some of that money, despite a pattern of risky behavior by executives at many failed banks described by the agency’s own watchdog in a recent analysis. To date, the FDIC has sued officers and directors at only five of the 345 banks that have collapsed since 2008, or about 2 percent. The 39 former executives named in the civil lawsuits are fighting the FDIC’s accusations of negligence and mismanagement. And time is running out for the FDIC to file lawsuits in some of the early bank failures because of a three-year statute of limitations.

At this pace, critics say, the FDIC is falling short of what banking regulators did a generation ago in the U.S. savings-and-loan crisis, when they sued officers and directors at about one-quarter of the more than 1,000 institutions that failed. “In all areas, the FDIC has been far later and far weaker in terms of enforcement than during the S&L crisis,” said William Black, a University of Missouri-Kansas City law professor who was a top lawyer at the Office of Thrift Supervision and its predecessor when U.S. savings-and-loan thrifts were collapsing in the late 1980s and early 1990s. “The cases should be strong, given that they had so many warnings,” he said.

The FDIC said the criticism is premature. The agency typically takes 18 months to investigate a bank failure, FDIC spokesman David Barr said. If the agency finds evidence of wrongdoing by executives or board directors, it first holds settlement talks, which can go on for months, before suing. With the wave of U.S. bank failures not cresting until 2009 and 2010, Barr said the FDIC still has plenty of time to sue officers and directors whose misconduct led to a bank’s collapse.

On March 1, the FDIC sued four former bank directors and officers of Corn Belt Bank and Trust in Illinois for $10.4 million. It was the agency’s third lawsuit filed this year against a failed bank. But Barr cautioned that not every bank failure will result in a lawsuit. The purpose of the civil lawsuits, he said, is to hold bank leaders accountable if they did something seriously wrong. “We have to be careful and judicious before filing,” he said. “We don’t want there to be a chilling effect on open banks that are seeking to find qualified board members.”

Risky behavior

 

[waltky]

Sheila Bair leavin' FDIC...

FDIC Chairman Sheila Bair leaving agency
9 May`11 WASHINGTON (AP) — Sheila Bair is stepping down as chairman of the Federal Deposit Insurance Corp. this summer, ending a five-year term in which she helped craft the government's response to the 2008 financial crisis.

Bair will leave her post as one of the government's top bank regulators on July 8, the FDIC said Monday. Bair was among the first officials to raise concerns about the explosion in high-risk lending to borrowers with bad credit. Under her tenure, the agency closed 365 banks since the crisis began. That included Washington Mutual, the nation's largest bank failure. The FDIC is charged with maintaining public confidence in the banking system. The agency guarantees bank deposits up to $250,000.

Vice Chairman Martin Gruenberg is considered a likely candidate to succeed her. He will become the acting chairman if the Obama administration doesn't appoint a replacement before Bair leaves. Bair was appointed by President George W. Bush in 2006. Within a year, she went after banks that issued some of the riskiest subprime mortgages. In March 2007, Bair moved to shut down Santa Monica, Calif.-based Fremont Investment & Loan. The bank had been a major player in the troubled home-mortgage business, doling out high-interest loans to people with blemished credit records or low incomes.

By the end of her tenure, the agency closed the most banks since the savings and loan crisis. Bair also earned a reputation for taking on some of the nation's largest banks.She pushed for big banks to pay a larger share of the fees that the agency charges to insure deposits. In the past, banks paid based on the amount of deposits they held. Now, the fees are calculated based the loans a bank holds on its books. Larger banks tend to have more loans relative to their deposits. At times, she clashed with industry executives and other regulators. But on Monday, many praised Bair for leaving the agency stronger than when she found it.

"We had our moments of cooperation and moments of frustration with Bair," said Scott Talbott, a lobbyist with the Financial Services Roundtable, which represents the nation's largest financial companies. But he said she provided "strong leadership during a tumultuous time."

More FDIC Chairman Sheila Bair leaving agency - USATODAY.com