Tag Archives: FDIC

FDIC Sets Standards for Private-Equity Firms to Buy Shut Banks

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So why should capital ratios be a fuction of who the shareholders are?

FDIC Sets Standards for Private-Equity Firms to Buy Shut Banks

By Alison Vekshin

August 26 (Bloomberg) — The Federal Deposit Insurance Corp. approved guidelines for private-equity firms to buy failed banks, opening a growing pool of failing lenders to new buyers and limiting costs to the agency and the industry.

The FDIC board approved the rules today at a meeting in Washington, agreeing to lower to 10 percent from the proposed 15 percent the Tier 1 capital ratio private-equity investors must maintain after buying a bank.


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FDIC May Add to Special Fees

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This just serves to raise the cost of funds for banks

FDIC May Add to Special Fees as Mounting Failures Drain Reserve

By Alison Vekshin

August 20 (Bloomberg) — Colonial BancGroup Inc.’s collapse and the prospect of mounting failures among regional lenders may prompt the Federal Deposit Insurance Corp. to impose a special fee as soon as next month to boost reserves by $5.6 billion.

The FDIC board might act sooner than expected after the Aug. 14 failure of Alabama-based Colonial cost the agency’s insurance fund $2.8 billion, and as banks such as Chicago-based Corus Bankshares Inc. report dwindling capital and Guaranty Financial Group Inc. of Austin, Texas, says it may fail. The fund fell to the lowest level since 1992 in the first quarter.


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Daniel Berger piece

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>   
>   (email exchange)
>   
>   On Wed, Jul 8, 2009 at 7:24 PM, wrote:
>   
>   By the way, I forgot to mention it the other day, but I’m sure you all saw the front-page
>   report in Monday’s Financial Times. It seems that Goldman Sachs and Barclays are now
>   marketing “insurance” products that can help buyers dodge capital adequacy rules. You
>   can’t make this stuff up. The term that comes to mind is “impunity.”
>   
>   When are regulators in the US and EU going to put an end to this nonsense? Wasn’t the
>   collapse of AIG a sufficient example of the deliterious effects of using structured credit
>   to window dress corporate balance sheets?
>   

It is up to Congress to decide if ‘taxpayer money’ is adequately ‘protected’ by bank capital which takes the initial losses.

However, the public purpose of using the public private partnerships we call banks, rather than just have the government make the loans directly, is the notion that the private sector can better ‘price risk’ than the public sector.

Banks will price risk differently as a function of capital requirements.

With no capital required and all FDIC insured deposits they will take lots of risk! etc.

So I look at any new fangled notion of what constitutes capital from this perspective of public purpose and the pricing of risk.

>   >   
>   >   The film WALL STREET (in all its cheesy glory) happened to be on TV the other night,
>   >   and I was amazed to see how plainly some of the issues we now face are laid out.
>   >   
>   >   Dan Berger’s piece does a great job of illuminating this:
>   >   Link
>   >   


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Obama, the FDIC, and private capital

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The FDIC claims the banks are solvent, and valuing their portfolios as required by law, or they could close them down as they are charged to do, also by law.

If Obama believes his FDIC officers and bank examiners are liars, he should take action against them at once.

If he believes the FDIC to be capable and truthful, then what is this about:

Obama Says US Has ‘No Easy Out’ of Banking Crisis

by Edwin Chen

Feb 10 (Bloomberg) — Some banks haven’t been transparent about assets on their books, Obama said. Now they must “just be clear about some of the losses that have been made, because until we do that we’re not going to be able to attract private capital into the marketplace.”

And the emphasis now seems to be on attracting private capital, hence with this claimed reason banks aren’t raising private capital.


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Re: FDIC Emergency Idea

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Yes!

“There is a way to get money flowing through the banking system and financial markets almost instantaneously. The Federal Deposit Insurance Corp. has the authority to declare an emergency in the financial markets if the secretary of the treasury requests it. If an emergency is declared, the FDIC could announce that until the crisis abates, all depositors and other general creditors will be protected if an FDIC-insured bank fails.”

This presumably can include Fed deposits at member banks, which opens the door for Fed unsecured lending which is currently illegal.

Now the trick is to get the word to the right people at Treasury!

Along with, of course, a payroll tax holiday to sustain aggregate demand.

Warren

>   
>   On Thu, Oct 9, 2008 at 12:32 PM, Jeff wrote:
>   

We need to get it right

by William M. Isaac

Political leaders told us last week that if the Wall Street bailout bill did not pass, the stock market would drop by 1,000 points and millions of people would lose their homes, jobs and credit cards.

Congress passed the bill, yet the markets have gotten worse.

I believe the problem is that the bailout package does not deal with any of the four fundamental issues that must be addressed immediately: fear, bank capital, fiscal stimulus and help for homeowners.

Fear: The financial markets are frozen throughout the world. Banks will not lend to other banks and, to the extent they do, the cost is exorbitant. There is a lot of liquidity but it is being hoarded.

Which banks will fail and how will their creditors be treated? Will the government protect just the insured depositors or will it protect the uninsured depositors, bond holders, and other general creditors? The government has handled these claims in different ways in the failures to date, so there is considerable anxiety in the markets.

There is a way to get money flowing through the banking system and financial markets almost instantaneously. The Federal Deposit Insurance Corp. has the authority to declare an emergency in the financial markets if the secretary of the treasury requests it. If an emergency is declared, the FDIC could announce that until the crisis abates, all depositors and other general creditors will be protected if an FDIC-insured bank fails.
What would this cost taxpayers? In my view, nothing — indeed, it should save taxpayers a lot. It will get the financial markets working, help put the economy back on track and reduce the bank failure rate.

We already have an implicit guarantee in place for the largest banks, which control the bulk of our banking assets. Making the guarantee official during this crisis and extending it to the rest of the banks is essential and reasonable.

As I write this article, Ireland has guaranteed its banking system and Denmark and several other European countries appear headed in that direction. If enough follow, the U.S. will have no choice but to act.

Bank capital: The Securities and Exchange Commission adopted fair value accounting in the 1990s. This rule required financial institutions to mark their securities to market. I have argued against fair value accounting for more than two decades because I know that we could not have contained the severe banking problems of the 1980s if we had to deal with fair value accounting rules.

A bad idea became highly destructive when the SEC decided to continue fair value accounting after the market for mortgage securities evaporated last year. In the absence of a market, the SEC forced banks to mark these assets to an arbitrary index.

Mortgage securities were marked to a fraction of their true economic value, which destroyed $500 billion of capital in our financial system. Since banks lend about $10 for each dollar of capital, the SEC’s rule diminished bank lending capacity by $5 trillion. Is it any wonder we have a severe credit contraction?

Even now, the SEC continues to fiddle while the financial system and the economy burn. The SEC needs to suspend fair value accounting — act now, study it later. This will begin the process of restoring bank capital so banks can start lending again. Instead of the Treasury and Federal Reserve taking over our lending markets, we need to help our private banks do the job.

Another readily available tool to restore bank capital is one that the FDIC used in the banking crisis of the 1980s to give capital-short, but otherwise viable, banks injections of capital to help them get through difficult economic times. The program was a big help in the FDIC’s resolution of the $100 billion market insolvency in the savings bank industry at a total cost of less than $2 billion. A precursor of the 1980s program was the Reconstruction Finance Corporation, created to provide capital to banks during Great Depression.

The FDIC should resurrect this program immediately. It will limit the failures of community banks and put them back into the lending business more quickly.

Fiscal stimulus and help for homeowners: The bailout bill will not solve our banking crisis because it is not attacking the right problems. Instead, we should direct a good portion of the bailout money to providing permanent stimulus to the economy and to helping families who are in danger of losing their homes.

I believe Congress should get off the campaign trail and get back to Washington to get the bill right this time. The world is looking to us for leadership.

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Where do we go after these toxic assets problem?

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Seems at this late hour the payroll tax adjustment is about all that can get the job done to immediately support demand.

Yes, the banking model is to make loans to individuals and business that become illiquid assets and match that with liabilities that are not at risk either.

So if markets put a discount on bank assets due to liquidity, implied is a premium on the liability side of banking due to its unlimited ability to fund itself.

And yes, it’s when, via securitization, for example, relatively illiquid assets are not ‘match funded’ to maturity, liquidity risk is there.

This same liquidity risk is also there when banks are not provided with secure funding due to errant institutional structure that misses that point regarding the banking model.

Beyond that is the risk of default which is a separate matter.

In the banking model this is determined by credit analysis, rather than market prices.

This is a political decision, entered into for further public purpose, and requires regulation and supervision of asset quality, capital requirements, and other rules to limit risks banks can take with their government-insured deposits.

When banks are deemed insolvent by the FDIC due to asset deterioration, they shut them down, reorganize, sell the assets and liabilities, etc.

When it’s due to excessive risk due to a failure of regulation, regulations are (at least in theory) modified. It’s all a work in progress.

I see this crisis differently than most.

We had two thing happening at once.

First, by 2006 the federal deficit had once again become too small to support the credit structure as financial obligations ratios reached limits, all due to the countercyclical tax structure that works to end expansions by reducing federal deficits as it works to reverse slowdowns by increasing federal deficits.

At the same time, while the expansion was still under way, delinquencies on sub prime mortgages suddenly shot up and it was discovered that many lenders had been defrauded by lending on the basis of fraudulent income statements and fraudulent appraisals.

Substantial bank capital was lost due to the higher projected actual losses reducing the present value of their mtg based assets. This is how the banking model works. The banks were, generally, able to account for these losses due to projected defaults and remain solvent with adequate capital.

Outside of the banking system (including bank owned SIV’s – one of many failures of regulation) market prices of these securities fell, and unregulated entities supported by investors (who took more risk to earn higher returns) failed as losses quickly exceeded capital. And with this non-bank funding model quickly losing credibility, all of the assets in that sector were repriced down to yields high enough to be absorbed by those with stable funding sources – mainly the banking system.

But the banking system moves very slowly to accommodate this ‘great repricing of risk’, and all the while the fiscal squeeze was continuing to sap aggregate demand. The fiscal package added about 1% to gdp, but it hasn’t been enough, as evidenced by the most recent downturn in Q3 GDP, which is largely the result of individuals and businesses petrified by the financial crisis.

So yes, there are both issues: the financial sector stress and the lack of demand. While they were triggered by two different forces (loan quality deteriorating due to fraud and the budget deficit getting too small), it is the combination of the two that is now suppressing demand.

The TARP may eventually alleviate some of the lending issues but only addresses the demand issue very indirectly and even then with a very long lag. Just because a bank sells some assets (at relatively low prices) doesn’t mean it will suddenly lend to borrowers who want to spend. Nor does it mean they will want to fund euro banks caught short USDs that have no fiscal authority behind their deposit insurance and bank solvency, and now appear to be in a worse downward spiral than the US. The slowing US economy has reduced the world’s aggregate demand, which was never sufficient to begin with due to too small budget deficits, via reduced exports directly or indirectly to the US.

In other words, I don’t see how the TARP will restore US or world aggregate demand in a meaningful way.

Yes, the US budget deficit has been increasing, but not nearly enough. It’s only maybe 3% of GDP currently, while the US demand shortfall is currently maybe in excess of 6% of GDP.

Cutting the payroll taxes (social security and medicare deductions, etc.) is large enough (about 5% of GDP) and returns income to the ‘right’ people who are highly likely to immediately support demand as they spend and also make their payments on their mortgages and other obligations to thereby support the financial sector in a way the TARP can’t address.

It is the ‘silver bullet’ that immediately restores output and employment. But we all know what stands in the way – deficit myths left over from the days of the gold standard that are now inapplicable with our non-convertible currency.

The line between economic failure and prosperity is 100% imaginary.

And not to forget that if we do restore output and employment (without an effective energy policy) we increase energy consumption and quickly support the forces behind much higher energy prices, which reduces are real terms of trade and works against our standard of living.


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