fdic

FDIC’s Pay Caps Will Keep Businesses on “Sidelines”

by John Berlau on February 7, 2011 · 1 comment

in Agenda for Congress, Bailout Watch, CEI Projects, Deregulate to Stimulate, Economy, Legal

At 11:30, in a much-anticipated speech at the U.S. Chamber of Commerce, President Obama used Super Bowl analogies to urge American businesses to “get off the sidelines,” “get in the game,” and “invest in America.” But some two hours later, an action by Federal Deposit Insurance Corporation proposing to slash bonuses at financial firms illustrated why so many private-sector players are reluctant to enter a “game” in which the referees change so many of the rules at mid-quarter.

The proposed rules issued by the FDIC would require banks, brokerages, and other financial firms to defer 50 percent of executives’ bonuses for three years. The FDIC, in coordination with other agencies, was given the authority to issue such a rule by Section 956 the of the 2,400-page Dodd-Frank Act that passed last year. But the law doesn’t require this action to be taken. If Obama really wanted to be true to his word about rational regulation, he would tell the FDIC — led by George W. Bush-holdover Sheila Bair — to shelve this rule that micromanages decision that should be made by private companies and their shareholders.

In a free market, it’s up to a company’s owners to decide how to reward those who run it. What is Facebook CEO Mark Zuckerberg worth given the value he has created? That is a hard question; but it is thankfully one government bureaucrats don’t have to decide. The owners of Facebook and every other companies.

The stated purpose of some of the other provisions of Dodd-Frank — such as say-on-pay and “proxy acccess” — is to give shareholders more of a say on how the amount of CEO pay and how it is structured. Whether these provisions actually do this — or whether they simply override state law and empower special interests — is another story.

But here the FDIC as nanny-state entity is overturning the entire justification of shareholder empowerment by dictating terms of a financial executives’ compensation. The argument is that pay practices can encourage “excessive risk taking,” but it simply isn’t borne out in the data that executives made the hazardous bets they did to reap short-term gains.

A study issued by the National Bureau of Economic Research (NBER) from finance professors at the Univeristy of Ohio and the Swiss Federal Institute of Technology found that “banks with higher option compensation and a larger fraction of compensation in cash bonuses for their CEOs did not perform worse during the crisis.” In fact, the study found some evidence these executive performed better than those at banks that had deferred long-term pay plans along the lines the FDIC is now proposing to mandate.

The NBER study and other evidence indicates that bank CEOs were just as caught up in the housing bubble as other players, such as home buyers, the real estate industry, and government-sponsored enterprise Fannie Mae and Freddie Mac — of which all members of the Financial Crisis Inquiry Commission agreed contributed to the crisis, but disagreed on the degree of this contribution.

Many financial executives, like the others, believed that housing would go up in the long haul and many invested accordingly. The authors of the NBER study conclude: “Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis. Consequently, they suffered extremely large wealth losses in the wake of the crisis.”

Regulations on CEO pay are a poor tool to address bank risk-taking. This should be addressed by reserve requirements, leverage rules, and above all reform of deposit insurance to reduce the moral hazard of taxpayer guarantees. The FDIC bonuses threaten to make U.S. financial firms — and the Main Street businesses who depend on financing from these firms — less competitive and put a crimp on job growth.

Bank Failures Rise; Banks Shuttered at a Faster Rate in 2010 Than in 2008 and 2009; Financial “Reform” Adds to Banks’ Woes

by Hans Bader on July 13, 2010 · 3 comments

in Bailout Watch, Deregulate to Stimulate, Economy, Legal, Nanny State, Personal Liberty, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Zeitgeist

“This past Friday, the Federal Deposit Insurance Corporation (FDIC) shuttered another four US banks,” notes Neil Hrab in the Washington Examiner. ”That makes 90 bank failures so far in 2010.  If bank failures continue at the same rate for the rest of 2010, you can expect perhaps 200 in total to fail this year. That would represent a jump over 2009, when the FDIC closed 140 failed banks.  In 2008, just 25 US banks were closed by the FDIC. (To keep the number of failures in perspective, we need to remember that the US has about 8,000 banks in total.)

The so-called financial “reform” bill that now looks certain to pass Congress will make matters worse.  It will impose useless, burdensome regulations on banks, while doing nothing to prevent another financial crisis.  The bill ”imposes race and gender employment quotas on the financial industry–at a time the job market is stalling and economic growth is slowing,” writes economist Diana Furchtgott-Roth in the Washington Examiner. Its ”Section 342 states that race and gender employment ratios must be observed by all government agencies that regulate the financial sector, as well as private financial institutions that do business with the government.”   This unconstitutional requirement is the brainchild of Los Angeles Congresswoman Maxine Waters, who earlier praised the Los Angeles race riots that destroyed scores of Korean-owned businesses as an “uprising“ against injustice.  Waters once told a CEO in a public congressional hearing, “This liberal will be all about socializing . . . .uh, uh . . . would be about, basically, taking over and the government running all of your companies.”

That bill contains little “reform,” reinforcing the very features of the status quo that spawned the financial crisis.  Earlier, congressional Democrats blocked reform of the corrupt government-sponsored mortgage giants, Fannie Mae and Freddie Mac, and the Obama administration lifted a $400 billion limit on bailing them out.  (Even though administration officials admitted that they were at the “core“ of “what went wrong“ in our financial system.)  At the direction of the Obama administration, Freddie Mac ran up more than $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.

Meanwhile, the administration has backed a new tax on productive private banks that did not receive bailouts at taxpayers’ expense.

Government pressure on banks to make loans in economically-depressed neighborhoods was one of the causes of the mortgage crisis.  That pressure will increase under the financial “reform” legislation.  Legislators approved Obama’s proposal to create a new consumer “protection” agency. “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.” It would do so with little regard for banks’ financial safety and soundness, even though the Community Reinvestment Act was a contributor to the financial crisis.

“How many regulators does it take . . .?

by Fran Smith on April 29, 2010

in Odds & Ends, Politics as Usual, Regulation

On Bankstocks.com Thomas Brown has a clever piece about why a new consumer financial protection agency doesn’t make any sense.  He describes a commercial bank he visited where six FDIC consumer protection people were sent to examine the bank’s consumer loans.

Here’s the problem: the bank that the six regulators were planning to camp out in for two weeks doesn’t make consumer loans. It’s a business bank, whose consumer loan book consists of all of 20 loans that add up to a grand total of . . . . $1.3 million.

Do the math, and, per regulator, that works out to just over three loans of around $217,000 each. Two weeks! Thus you see the bureaucratic mindset at work. What in the world can those people be thinking?

I can’t think of a better illustration of why a new regulatory bureaucracy would be totally pointless.

As Brown notes, the U.S. financial system already has a myriad of regulators — and did that do anything to avert the financial crisis?

He cautions policymakers about hurrying to create a new regulatory watchdog:

But more regulation doesn’t equal better regulation-particularly when, under the current system, some bureaucrat somewhere thinks it’s a great idea for six people to spend two weeks poring over 20 loans. Before Congress creates any new agencies, it ought to have confidence that the existing ones are effective.

Check out his earlier piece on the same topic.

H/T Carl W.

Banks trying to recoup from bad loans and inadequate reserves urged to lend

by Fran Smith on February 24, 2010

in Economy, Regulation

There’s a juxtaposition in a Washington Post article today that deserves a “Wha?” The article focuses on the huge drop in bank lending in 2009 – 7.5 percent or $587 billion – a plunge that hasn’t been seen in more than a half century.  Sheila Bair, chairman of the Federal Deposit Insurance Corporation, is quoted:

“But Bair said that the vast majority of the lending decline was the result of cutbacks by the nation’s largest banks, which have tightened qualification standards for borrowers and increased the proportion of money that they hold in reserve against unexpected losses.

‘Large banks do need to do a better job of stepping up to the plate here,’ Bair said.”

Didn’t indiscriminate lending and inadequate provision for loan losses contribute to the financial meltdown?  In this uncertain climate, isn’t it a good idea for banks to tighten their lending standards and increase their reserves? But, no, stimulating the economy is the game du jour.

FDIC Prepares for “an even-larger number of bank failures” in 2010

by Daniel Compton on December 17, 2009 · 1 comment

in Bailout Watch, Deregulate to Stimulate, Economy, Employment, Politics as Usual, Stimulus to Nowhere, Zeitgeist

In a display of supreme confidence in the strength of the American economy, the Federal Deposit Insurance Corporation announced a 2010 budget increase of close to 54% earlier this week.  The FDIC’s annual operating budget grew from $2.6 billion in 2009 to $4 billion for 2010.  The largest portion of the increase is devoted to funding takeovers of failed banks.  The 2009 budget allotted $1.3 billion for this purpose, while the new budget devotes $2.5 billion—nearly twice the amount.  Also in the budget is an increased allocation for staffing.  The FDIC intends to bring on over 1,600 new employees, most of whom are to be hired on a temporary basis, increasing their total staff by about 24% to 8,653.

And what is the impetus for this greatly increased budget?  The press release accompanying the new budget makes it clear that the increase is intended to “ensure that [they] are prepared to handle an even-larger number of bank failures” in 2010.  A total of 133 banks have failed so far in 2009, up from just 28 the previous year.

Clearly, the FDIC must not have gotten word that the recovery has begun.

LibertyWeek 47: Persian Powder Keg

by Richard Morrison on June 15, 2009

in CEI Projects, Podcast

Your host Richard Morrison welcomes back guest co-host Jeremy Lott and special guest Greg Conko for Episode 47. We start with the new Obama-Geithner plan for expanding regulation of financial markets, the protests over the disputed presidential election in Iran and the Federal Trade Commission’s investigation of telemarketing robocalls. We then move on to the “beer bikes” of Amsterdam and some potentially scandalous investment choices made by Sen. Dick Durban. Finally, we talk health care with CEI Senior Fellow Greg Conko, covering President Obama’s address to the American Medical Association and the recent Forbes article in which Greg and Dr. Henry I. Miller describe what an ObamaCare plan might actually look like (hint: it won’t be pretty).

LibertyWeek 35: Dodd Man Out?

by Richard Morrison on March 24, 2009

in CEI Projects, Podcast

Your hosts Richard Morrison and Cord Blomquist welcome back special guest co-host Michelle Minton for Episode 35 of the LibertyWeek podcast. We begin with a celebration of human achievement and a peek into the realm of secret government documents. We then investigate how the White House is going to waste another $1 trillion of your money and how the British beer tax has managed to kill off 20,000 jobs. Finally we focus on the history of the scandal-addled Sen. Dodd of Connecticut and the future of U.S. Olympic glory.

BONUS BOOK FEATURE: We congratulate our good friend Steve Milloy on the publication of his new book, Green Hell: How Environmentalists Plan to Ruin Your Life and What You Can Do to Stop Them. The book is a one-of-a-kind, comprehensive takedown of the entire environmental movement that will open your eyes to a looming threat to our economy, our civil liberties, and the entire American way of life.

Sheila Bair’s Coddling of Mortgage Deadbeats Fails, Costing Taxpayers

by Hans Bader on December 10, 2008 · 4 comments

in Bailout Watch, Economy, Politics as Usual

Sheila Bair, the head of the FDIC, has been busy rewarding irresponsibility and punishing thrift by giving special breaks to deadbeat mortgage borrowers from failed banks taken over by the FDIC, like Indymac.

Delinquent borrowers have received reductions in the interest and principal on their mortgages, resulting in interest rates of 3 percent or less, way below the rates available to responsible people who pay their bills on time. Bair’s excuse for this has been that borrowers won’t default if their mortgages are made less onerous. But she’s wrong. Delinquent borrowers who have received new, easier-to-pay mortgages are defaulting in large numbers on the new mortgages, too, at enormous expense to taxpayers.

All the coddling in the world can’t make a deadbeat financially responsible, especially when the deadbeat lives in a State like California that allows a borrower to just walk away from a mortgage without facing any consequences other than the loss of the house (which is no loss at all when the house is worth less than the mortgage).

Sheila Bair should be fired. And federal bank regulators should preempt state no-recourse laws that allow deadbeats at failed banks taken over by the FDIC to just walk away from their loans without any consequences.

Amazingly, Fed Chairman Ben Bernanke, whose “solution” to every problem is a multibillion dollar bailout or “stimulus” plan, has suggested that the federal government sweeten the pot for mortgage deadbeats even further by reducing their mortgage payments from a maximum of 38 percent of their income (under current FDIC standards) to a mere 31 percent of income, less than many people who are current on their mortgages pay.

Another bad bailout idea — raising deposit insurance cap is regressive and counterproductive

by John Berlau on October 1, 2008 · 2 comments

in Bailout Watch

As the Wall Street crisis has expanded, politicians are falling all over themselves arguing on behalf of the “little guy” against “fat cats.” But in reality, the main elements of “rescue” plans receiving a bipartisan push would represent a massive transfer of wealth from little guys and gals to fat cats’ pockets.

First, there was Treasury Secretary Hank Paulson’s $700 billion bailout the House defeated on Monday, but to be revived in the Senate as early as Wednesday night. Then there is the upper-income wealth transfer that will now be added as the cherry on top of this bailout: raising deposit insurance to bank accounts of $250,000 or more.

According to the Associated Press, both Barack Obama and John McCain on Tuesday backed lifting the deposit insurance cap to $250,000 from the current $100,000 maximum. And Federal Deposit Insurance Corporation Chairwoman Sheila Bair wants Congress to give the FDIC “emergency” authority to raise the cap to any level she deems necessary to “restore confidence” in the banking system.

But wasn’t too much confidence in the banking system in large part what got us into this mess? Deposit insurance, even at current levels, encourages “moral hazard” as consumers assume their banks are totally safe and don’t look for quality as they do with investments and so many other products.

And I’m sorry, but if you were fortunate enough to inherit or sophisticated enough to accumulate more than $100,000, you don’t need the extra protection from other taxpayers. How hard is it, under the current system, for folks with $250,000 burning holes in their pockets to find three different banks to put it in?!

This could result in billions more liabilities now on the shoulder of the average taxpayer. And even if banks had to pay increased fees to cover this instead, that would be that much less they had to lend out during the credit crunch, defeating the whole purpose.

It also would be counterproductive in the sense that there would be that much less assurance a bank’s shareholders would get anything in a goverment takeover, because laws since the savings-and-loan crisis give insured depositors first priority of any money the banks have left. With shareholders being wiped out at the failure of Washington Mutual and Wachovia, giving depositors an even larger claim to assets would further scare off potential bank investors, just at the time that banks are issuing new stock to get further cash to lend.

In fact, some of the important credit crisis fixes being discussed, such as the mechanism used in Europe of “covered bonds” to finance mortgages, recognize the need to give at least some investors an equal claim with depositors to a bank’s assets. Raising deposit insurance without these measures would be a step backward and leave things even more precarious for the nation’s banks.