Federal Deposit Insurance Corporation

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.

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.

Why Not a Wal-Mart Bank?

by John Berlau on December 15, 2008 · 2 comments

in Bailout Watch, Economy, Legal, Politics as Usual, Precaution & Risk, Regulation

Seems like every business these days is becoming what’s called a “bank holding company” — seeking the shelter of the federal government’s deposit insurance and the ability to balance risks with more diversified lending and consumer deposits. Firms quickly granted “bank holding company” approval from authorities over the past few months range from the brokerages Goldman Sachs and Morgan Stanley to credit card company American Express.

So many businesses are suddenly getting BHC approval that columnist and blogger Michelle Malkin has joked: “MichelleMalkin.com is no longer a blog. I am putting in an application to the Fed to become a bank holding company, too.”

But ironically, many barriers still exist to legitimate retailers starting their own banking operations. Ever since Wal-Mart Stores Inc. filed an application a few years back seeking approval to form a limited banking facility to process its own credit and debit card transactions, the anti-Wal-Mart forces and much of the established banking industry led a revolt against not just Wal-Mart but any retailer forming its own bank.

House Financial Services Committee Chairman Barney Frank sponsored a bill that would have curtailed the abiility of retailers to form industrial loan corporations (ILCs), specialized banks that had existed in the retail industry since the ’80s. The bill didn’t clear Congress but in reaction, The Federal Deposit Insurance corporation put a moratorium on new and pending ILC application for more than a year, and has been slow-walking ILC approvals ever since. Wal-Mart withdrew its application in 2007.

But the recent financial upheaval and lingering recession have thrown many of the arguments against a Wal-Mart bank — even a full-service one — out the window. In fact in his column today in the financial forum Minyanville, Jordan Stein predicts that “by 2018, we’ll be banking at Wal-Mart (WMT), investing with Wal-Mart financial advisors, and applying to Wal-Mart for our mortgages.”

There have been two main arguments against a Wal-Mart bank. One is that allowing retailers like Wal-Mart to have their own banking operations would greatly add systemic risk to the deposit insurance fund and financial system in general. The other is that allowing Wal-Mart to get into banking would mean ruinous competition for Mom-and-Pop community banks.

Let’s look at these arguments in the context of the financial crisis. It’s now kind of hard to argue that a Wal-Mart bank would add any significant systemic risk to the banking system, given the incredibly stupid risks that many of the biggest established banks have taken.

Wal-Mart, by contrast, looks like an especially prudent company. Not only are consumers flocking there for bargains, but so are investors, as the company’s stock price hasn’t tumbled nearly as much as other firms of its size. (Full disclosure, like millions of other Americans, I shop at Wal-Mart and also own shares of its stock). As Stein writes in Minyanville, “as we enter the Age of Austerity, where prudent spending replaces conspicuous consumption, Wal-Mart’s latest slogan — ‘Save money. Live better.’ — will be adopted in practice by vast swaths of the population.”

As an industrial loan corporation, Wal-Mart would be covered by deposit insurance, and the deposit insurance system, as CEI has long argued, needs overall reform. But retailer-owned banks would be paying premiums that would shore up the insurance fund and, according to experts, would not be adding any significant risk.

As American Enterprise Institute scholar Peter Wallison has written: “If there is any risk to a bank’s solvency, it is greater when a bank is affiliated with a securities firm–a permitted affiliation under GLBA [the Gramm-Leach-Bliley Act passed in 1999]–than when it is affiliated with nonfinancial firms such as retailers or manufacturers. … They are subject to the risk of loss, of course, but in the absence of fraud, they are not subject to the kinds of quick implosions that occur in the financial industry when there is a loss of market confidence.”

As for the populist argument, would allowing a Wal-Mart bank any more of a threat to community banks than allowing Wall Street behemoths Goldman and Morgan to open branches and take deposits, as the Federal Reserve recently did when it granted them BHC status? And the most important populist argument for policy makers should be the consumers and small businesses that would benefit from the choice and competition in banks for their saving and borrowing.

As MSN money coumnist Liz Pulliam Weston wrote a few years back: “Imagine for a moment if the world’s biggest retailer put the pricing squeeze on one of the world’s more profitable businesses: financial services. Who would pay the price? Perhaps: Mortgage lenders who surprise their borrowers with last-minute junk fees. Banks that nickel and dime their small account holders to death.”

Over the years, CEI certainly hasn’t been crazy about everything Wal-Mart has done, particularly some of its so-called green initiaives. But there’s no doubt that a Wal-Mart bank would make the open market that much more “open.”

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.

Investing in Communal Failure: The Current Economic Crisis as a Result of Regulation

by Michelle Minton on September 29, 2008 · 11 comments

in Bailout Watch, Economy, Precaution & Risk

Unfettered greed is the suspect many point at to explain the current economic crisis. To some extent, they are right, but it isn’t irrational greed on the part of bank managers or fat cat CEOs. It is the unwieldy bank regulations that forced the entire industry to walk the proverbial plank and then blame it for drowning.

Critics have alternately claimed that over-regulation and under-regulation are the causes for the current crisis. I believe one specific regulation, the Community Reinvestment Act (CRA), should shoulder a lot of the blame for creating an environment where a lending institution’s short-term survival hinged on it making the decisions that in the long-term would likely cause its demise.

As I noted in my paper The Community Reinvestment Act’s Harmful Legacy, one of the effects of the CRA was the creation of a weapon that has been effectively utilized to extort money from lenders. When lending institutions wish to open a new branch, expand, or merge, they must apply for permission from one of the four governing bodies (Federal Reserve, Office of Comptroller of the Currency, Federal Deposit Insurance Corporation, and Office of Thrift Supervision). Their request can be postponed or outright denied if any community group files a CRA protest. Lending institutions can of course fight these protests, but CRA investigations can take months and cost large sums of money.

[click to continue…]