THE PLANK MARCH 6, 2009
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Sen. Chris Dodd has proposed a bill to lend the Federal Deposit Insurance Corp. some $500 billion to fill the bank insurer's emptying coffers. There have been 16 bank failures already this year, on top of 25 last year, and the fund started out 2009 with a mere $19 billion (along with a $30 billion credit line from the Treasury). Of course, the FDIC can just raise the fees--aka premiums--that banks pay for coverage. But that's tricky these days: When FDIC Chair Sheila Bair proposed to do just that last week, the banking sector howled. (I know, they howl all the time--but it's a good bet the sector doesn't have $500 billion to spare. Or $50 billion.)
This isn't a new problem; Bair has been struggling to make ends meet since the banking crisis picked up speed last fall. And Dodd's plan would surely help. But still ... it's also yet another indication that we truly are staring into the abyss. If the perception spreads that the FDIC can't cover bank deposits, we'll see the sort of Depression-era bank runs the FDIC was designed to prevent. And with only $49 billion in place absent Dodd's proposal, that could come awfully soon.
--Clay Risen
22 comments
Didn't the same thing happen during the S&L crisis? I don't think anyone is foreseeing a future where the FDIC can't cover deposits.
- ratnerstar
March 6, 2009 at 12:40pm
The procrastination in dealing forthrightly with the decapitalization of the banking system is going to cost us both in lost output and in further declines in asset values. It is past time for fiat nationalization of the entire banking system in one fell swoop:
1. Declare that all deposits are Federally guaranteed.
2. Suspend trading of all bank securities, stocks, bonds, derivatives and any issuance or payment of same.
3. Declare that the Federal government will, after evaluation, provide to banks the capital needed to render them solvent.
4. Declare that no Federal money will be used to bail-out bank investors -- meaning anyone other than depositors and trade creditors -- as opposed to the banks themselves.
5. Announce a triage process that will immediately recapitalize the insolvent, return ASAP the clearly solvent to public trading and servicing of investments, and take whatever time is necessary to evaluate the balance sheets of the middle group before either re-capitalizing them or returning them to public trading in order to protect the public from unnecessary costs.
No management changes required in the short term.
- roidubouloi
March 6, 2009 at 12:48pm
Oh for god's sake, wipe out the banks' _shareholders_, not the banks' depositors.
Nationalize C BOA etc now, and preserve deposits.
- teplukhin2you
March 6, 2009 at 12:48pm
roiduboulot, please email me at t_thibaud@yahoo.com
tia, t
- teplukhin2you
March 6, 2009 at 12:56pm
Why won't they pass the Roi Act? Seriously. I would expect this of Dubya, on a bad day. What's keeping them?
- The Ignorant Populist
March 6, 2009 at 12:56pm
Yeah agree with above. What the heck was the first bailout for if not to make sure depositors are secure?
Roid for Treasury Secretary.
- acria multa
March 6, 2009 at 1:03pm
I third that nomination.
- Wandreycer1
March 6, 2009 at 1:11pm
No. Nyet. Nein. Nationalization would likely result in a further steep decline in investor confidence. Governments do not have good track records at running businesses. Roid for lecturer at the Kennedy School of Government at Harvard, where he would be out of harm's way.
- liberal reformer
March 6, 2009 at 1:24pm
Failure to deal with dysfunctions of the banking industry and Wall Street renders the stimulus packages worthless. Every report I have seen from those sectors indicate that, whether because of inertia or greed, executives and traders will not alter business as usual unless the public takes a stick to them. Roi's proposals are as good a starting point as any.
- nbarry
March 6, 2009 at 1:27pm
I was just reading somewhere, that the US gov't cannot legally take over the big banks. Is this true? And if so, then how can people be calling for nationalization when it would be illegal for the gov't to do so.
andrewsullivan.theatlantic.com/.../the-case-agai-1.html
- lamh31
March 6, 2009 at 2:15pm
I fourth the nomination
- teplukhin2you
March 6, 2009 at 2:22pm
lr, I agree it will result for a further decline in investor confidence, but since we are pretty much fast approaching a floor for banking stocks at zero I simply can't see how it would matter. The rest of the market might take a hit but it will bounce back without the banking sector dragging it down. Besides, you are ignoring the international investor who aren't subject to the same baggage. It is either nationalization or bankruptcy, I see no reason to throw good money after bad indefinitely.
- blackton
March 6, 2009 at 2:24pm
tep,
I have dutifully e-mailed you at t_thibaud@yahoo.com
R
- roidubouloi
March 6, 2009 at 2:33pm
lamh,
At the moment, I think a bank must first be "failed" by the FDIC to be taken over. But we do still have a Congress with the power to pass enabling legislation. Of course, this would have to be done rather deftly, negotiated in camera and with a Republican commitment not to filibuster so that there is zero time between introduction, passage, and implementation. Not trivial, but doable IMHO.
Blackton,
I would have said the same thing in response to liberal, but I thought it best to wait until someone else did. The further declines today, attributed to lack of confidence in financials and tech is but more evidence. I think the knowledge that the banking sector had been made sound by force majeur would more than offset the nervousness of markets about what sector might be next.
- roidubouloi
March 6, 2009 at 2:40pm
-- What the heck was the first bailout for if not to make sure depositors are secure? --
Get real. Probably the same thing with the auto bailout: securing still-high pay and generous retirement benefits first. I mean, look at every time the U.S. Postal Service raises stamp prices -- do you see more counterhelp assistance at your local branch? No. All that money benefits the employees only. Sad but true.
- kevincollins
March 6, 2009 at 2:55pm
"force majeur" IIUC is the legal equivalent of being nuked. It would relieve the affected party of its obligations, no? How would invoking force majeur affect the situation with Citi etc?
- teplukhin2you
March 6, 2009 at 2:59pm
My dear blackton, are you deserting your "fiat" stance? There are - or there should be - ways to recapitalize the banks without nationalizing them.
- liberal reformer
March 6, 2009 at 3:38pm
Some are staring into the abyss.
Meanwhile the folks who thought it up ex nihlo...along with those who keep digging it deeper and deeper...don't understand why they haven't reached the bottom yet.
And that's important because falling into the abyss pales next to the part where you hit the ground.
Thus, the deeper the abyss gets the harder the landing. And who wants to hit the bottom only to find the FDIC down there with you.
george walton
- iambiguous
March 6, 2009 at 3:51pm
To repeat:
The banks have incurred large losses. Only a fantasist believes that these assets are coming back. Apart from the dubious credit analysis on which many are based, the ability of debtors to service the obligations is in decline, and the markets for assets that constitute collateral have busted. Geithner seems to want to reinflate those asset markets. If we did that, the price we would pay in the end would only be worse. The return of those markets to some sort of normative pricing that is consistent with personal income is one of the essential elements of long-term recovery.
The losses have occurred, they will not be recouped, hence some real persons must bear those losses as corporations are ultimately shells. Who might bear the losses in this case? There are only three possibilities, singly or in combination, bank depositors, bank investors (including bond and stockholders and counterparties on derivatives contracts), and the Treasury. There are no others who can be made or induced to share in the losses.
It is or should be unthinkable to allow bank deposits to default as this would result in catastrophic deflation that would certainly turn the current recession into a major depression. That leaves only two: investors and the Treasury. In many cases, even the wipe-out of investor capital is not going to suffice to put the bank into positive net worth territory. Since investors can only be made to lose their stake, that means that inevitably the Treasury is going to put up a large piece of the money necessary to recapitalize the system. No private person is willingly going to put cash into something that has a negative net worth (leaving aside the very rare case in which the net worth is barely negative and the franchise or going-concern value gives the enterprise a positive market value). Whether this recapitalization with public funds happens sooner or later, it is inevitable because, as noted above, the only alternative would be deposit defaults. The longer we procrastinate, the bigger the tab.
Given that the public is going to pay a huge price, is there any reason to make the price even bigger by not only bailing out the banks but bailing out their investors, that is allowing the investors to continue to own their claims against the recapitalized entity even though, without public money, they were underwater? I don't think so. For what reason? The bet their capital and lost. They have no claim to preference, at public expense, over the millions of others who will have suffered investment losses in other industries. Is it necessary to rescue these investors to recapitalize the banks? Clearly not. The only justification for not wiping out the investors is the fetish against "nationalization." By this theory, government ownership is so terrible, even if short-term, that it is better simply to hand the recapitalized bank back to its former owners as a gift, at huge public expense, than allow the public to recoup its losses by retaining the equity and then re-selling it into the market. I find nothing whatsoever to commend this argument other than a reflexive dislike for the in fact inappropriate word "nationalization." Nationalization really means taking something of value, with or without compensation It does not mean taking something bankrupt and injecting money until it is solvent again with a view to returning it to market ownership. Indeed, the FDIC does this all the time with failed banks. We just don't hear about it because it is not normally news. The sky has not fallen because failed banks were taken over by the Feds, refurbished, and returned to market ownership. Just the reverse.
If there is really some desperate need for the Treasury not to own a failed bank even briefly, it would be better just to auction of the stock of the recapitalized entity for whatever it would fetch than leave it in the hands of existing investors, both from the standpoint of morality and for the purpose of minimizing the public cost of restoring the banking system. Against the possibility that the Treasury, in recapitalizing failed banks, is even accidentally divesting investors of some portion of their value, it is a simply matter to offer them the right to participate in the recap pro rata with the Treasury on identical terms. I can predict with confidence that there will be few if any private takes for the shitty deal that the public is going to have to accept in order to clean up this meass.
So, in answer to your question, liberal, the anser is that there are no ways to recapitalize the banks without nationalizing them other than simply returning them as gifts to the people who ruined them in the first place.
* * *
As for tep's question: Yes, the force majeur of government takeover is going to relieve the institution of the claims of non-depositor creditors, to be paid later from whatever residual value, if any, may emerge after the government has recouped its investment in that institution.
- roidubouloi
March 6, 2009 at 4:21pm
Walton: I think that at some point in your life you suffered an existential head-trauma injury. Regards.
- liberal reformer
March 6, 2009 at 4:22pm
Watching the folks in New York and Washington tiptoeing around nationalization is like watching contestants on Who Wants To Be A Millionaire tip toeing around their life lines. They're down to the last one now and are agonizing over whether to use it...or roll the dice on their own best guess without it.
If they hold it in reserve and guess wrong they [and lots of us] may be out of the game. They will be cursed for not choosing it. And If they use it and get the answer correct they're winners. They will be lavishly applauded for choosing it.
Yet unlike Millionaire there is not just one correct answer to resolve the economic crisis. Instead, there are hundreds of crucial varibles all interacting to create thousands and thousands of possible permutatiuons.
Also, when some lose others will win.....no matter the outcome.
But win or lose Obama and his economic team will be judged as though there really was only one correct answer.
That's the kind of reductionist world we live in now: Yes or no, right or wrong, good or bad.
We are on the USA Titantic....iceberg dead ahead. And there are only so many people who can fit in the lifeboats.
george walton
- iambiguous
March 6, 2009 at 4:42pm
nbarry:
Failure to deal with dysfunctions of the banking industry and Wall Street renders the stimulus packages worthless.
george:
All this reminds me of "playing chicken" on the road in your car or "bluffing" with your hand in poker. The Wall Street crowd [and their bakers in the media] may be pumping up the dire straits in order to steamroll Obama into caving in on a deal that better protects their interests. Or the government may be bluffing about nationalization in order to steamroll the folks on Wall Street to get their act together.
And smack dab in the middle of it all are the "toxic wastes" in the "Zombie banks" that can be used to either prop up or tear down any argument.
But we don't know which one because we don't know exactly how much toxicity there is...or how exactly it has become entangled in financial instruments that are spread around the globe.
Most of us in fact barely understand any of this at all. At least not at the intersection of micro and macro economics.
george walton
- iambiguous
March 6, 2009 at 5:10pm