Remember that we were told when AIG (and the banks) were bailed out that "the taxpayer is unlikely to lose any money, and may even make a profit." Bernanke said this, Hank Paulson of Treasury said this, indeed, it was the mantra of the administration.
It was also untrue:
The prospects of recovery of capital and a return on the equity investment to the taxpayer ARE HIGHLY SPECULATIVE.
Crossed out by hand. The final presentation of this to The American People was missing this key disclosure.
The FDIC has repeatedly stressed that "nobody has ever lost a penny of insured deposits", to wit:
Finally, Mr. Evans' suggestion that the "government" could ever be "on the hook for uninsured deposits" demonstrates a misunderstanding of FDIC insurance. To protect taxpayers, we are required to follow the "least cost" resolution, which means that uninsured depositors are paid in full only if this is the least costly option for the FDIC. This usually occurs when a bidder for the failed bank is willing to pay a higher price for the entire deposit franchise. We are authorized to deviate from the "least cost" resolution only where a so-called "systemic risk" exception is made. This is an extraordinary procedure which we have never invoked. And again, any money we borrow from the Treasury Department must be repaid through industry assessments.
I am confident in the strength of the FDIC's resources to make good on our sacred pledge to insured depositors. And, remember, no depositor has ever lost a penny of insured deposits, and never will.
Note that bolded text.
See, this is the second lie. Yes, the FDIC is required to follow the "least cost resolution" process, but what's being left out is that the FDIC (along with OTS and OCC) are also required to follow "Prompt Corrective Action" which serves as a means of preventing losses from happening in the first place.
Yet the history of this crisis proves without a doubt that "Prompt Corrective Action" has been resoundingly, repeatedly and intentionally ignored.
The FDIC's SACRED PLEDGE required it to demand that Prompt Corrective Action be followed and accurate MARKS be taken by all banking institutions on all assets. This in turn would have required the FDIC to seize a whole scad of banks including some really big ones in 2007 and 2008, and that requirement would be continuing today. Instead the FDIC has practiced "extend and pretend" just as the banks are, taking their word on asset valuations even though they know these valuations are false, as they have recently been taking losses of up to 40% across ENTIRE ASSET BASES WHEN THEY CLOSE INSTITUTIONS.
BLUNTLY, THIS MEANS THAT THE BANKS ARE "VALUING" THESE ASSETS A FULL FORTY PERCENT ABOVE THE MARKET - A MASSIVE LIE THAT IS UNCOVERED WHEN CASH-FLOW FAILURES ULTIMATELY FORCE SEIZURE.
After the first couple of failures with this sort of loss nobody has an excuse for turning the other way instead of taking immediate enforcement action.
Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation's banking system. The FDIC insures deposits at the nation's 8,246 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed. The FDIC receives no federal tax dollars – insured financial institutions fund its operations.
Loans are tax dollars my friends. They may be paid back but consider this fundamental reality: you are paying for these failures to enforce Prompt Corrective Action in either event, either in the form of assessments against all banks, which will be passed on to you in the form of higher fees and costs (30% interest rates and outrageous "overdraft charges" anyone?), or directly as a taxpayer in the form of additional borrowing by the Treasury.
The fact of the matter is that we have this when it comes to "depositor insurance":
This is not as a matter of design or flawed intent, it is a matter of policy.
What policy? This policy:
In 1991, Congress changed the way FDIC premiums were assessed, requiring banks to pay rates based on how well capitalized they were for the risks they faced. As bank failures subsided to less than a dozen a year by 1995, the FDIC's reserves began to swell.
As a result, the agency cut to zero the premiums it charged to the 90 percent of the banks deemed safest. That free ride continued for 10 years.
But were they the safest? Or were these banks actually writing garbage paper to anyone who could fog a mirror? We now know the answer to that question, and its the latter.
None of the regulators involved did their job during these years, yet we are supposed to accept their statements at face value today?
Here is reality:
You will pay for the sins of these bankers, and they will not.
You will pay for the sins of the FDIC, OCC and OTS, all three of which have actively conspired to allow banks to claim valuations on "assets" that are demonstrably false. This in turn has led to massive violations of "Prompt Corrective Action" (PCA), the law that is supposed to prevent losses from occurring to the FDIC's "DIF" (Deposit Insurance Fund) in the first place. We know this to be an indisputable fact as a consequence of the losses that the FDIC has and continues to incur when it closes institutions. If PCA is followed and asset valuations are not fraudulent the loss to the FDIC's DIF when a bank fails WILL ALWAYS BE ZERO OR VERY CLOSE TO ZERO.
The FDIC can (and will) borrow from Treasury to fund its obligations, so long as Treasury can issue the funds. Today, Treasury appears able to borrow as much money from China, Japan and Saudi Arabia as it wishes to (it appears Treasury will in fact borrow $2 trillion in new funds this fiscal year alone.) How long this will remain true is anyone's guess.
Assessing additional fees on deposits from banks that did not make bad loans, that is, not charging the more risky institutions much larger fees, where risk is defined by both behavior and size, is idiotic. Yet this is what the FDIC has done and appears to intend to continue to do - punish the prudent.
It is clear that FDIC assessments will have to rise significantly to cover obligations and you will get the bill. The FDIC is LYING about who pays these fees just as Treasury LIES about who pays the "employer half" of FICA - you cannot assess a fee or tax on a company as it will immediately pass that fee on to its customers and/or employees.
YOU PAY - ALWAYS.
The FDIC, OTS and OCC could have seized Washington Mutual, Colonial, Corus and hundreds of others two years ago. I and others pointed out that under any rational accounting for the so-called "assets" on these bank's books, particularly including OptionARM, Second Lines behind an underwater first loan and construction loans on condos and other properties unlikely to be able to be paid in full these firms were all insolvent - back in 2007! The proof is right here on The Market Ticker in the archives - those calls were made and were ignored.
Instead, the FDIC, OTS and OCC sat on their hands and in fact they, along with Congress, pressured FASB to allow intentional and systematic "model-based" valuations to be re-instated earlier this year instead of insisting on the use of market prices and recognition that bad loans are in fact bad!
What's worse is that the lying continues today. Not content to rip you off by assessing your local community bank (who did nothing wrong) and forcing them to raise fees on you as a consumer to cover the sins of banks like Colonial and even IndyMac (which was tapped by the OIG for conspiring with the OTS to improperly backdate deposits!) the FDIC, OTS and OCC are STILL refusing to force these institutions to take REALISTIC marks on their assets and closing those that are headed underwater BEFORE their Tier Capital ratios go below zero and cause insurance fund losses.
As a consequence the FDIC continues to suffer huge losses compared to the asset base of these seized institutions.
The entire strategy of Treasury (including OTS and OCC) along with the FDIC has been one of "extend and pretend" - that is, look the other way for now and pretend that loans on severely-impaired assets will "come back" and either begin performing again or the asset valuation will improve so they can be sold without booking a crippling loss. That is, the strategy is to intentionally lie about the current valuation and status of these loans so as to avoid the necessity under the law of closing institutions that, on any rational basis, failed as long as two years ago!
Do not make the mistake of believing that these losses are "inevitable" or "an accident": They are the direct result of the FDIC, OTS and OCC allowing financial institutions to systematically lie about the value of assets they hold - lies that continue to this very day, are pernicious, and ultimately will cost you, the consumer, hundreds of billions of dollars - one way or another.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
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