More Spanking in Banking: The FDIC Versus Financial Reform?
WSJ has an interesting piece on Sheila Bair's headache that is recommended in its entirety, made more interesting by Obama's recent declaration that he's coming for Wall Street's speculative ass.
Part of the agency's shifting standards may reflect conflicting views inside the FDIC, according to people who have worked closely with the agency. In one camp are those skeptical of private equity firms. They view them as profit driven and risk takers -- a threat to the banking system. In the other camp are those who recognize that the epidemic of bank failures and lack of funds will require private equity help. They believe private equity funds can bring new ideas to bank management. Judging by the traditional bank model's recent track record, they say, why not?
Since the start of August, when the guidelines were finalized, 75 banks have failed and the FDIC's watch list has grown to include 552 institutions. Private equity firms have been effectively shut out, or have passed, on the process.
In most cases the FDIC has brokered agreements with stronger banks to take over deposits, but in some cases the fund has taken the hit directly such as when Barnes Banking Co. in Kaysville, Utah, failed earlier this month making the FDIC responsible for $827 million in assets and $786 million in deposits with it. This state of affairs runs counter to the FDIC's mission and Ms. Bair's charge to find the lowest-cost option for resolving bank failures.
Without private equity investors, the FDIC continues to bleed cash. The insurance fund was running a deficit of $8.2 billion at the end of September, forcing it to tap into the $45 billion in cash collected when banks were required in November to prepay three years worth of premiums.
For buyout firms, confusion reigns. Asked for clarification, the FDIC on Dec. 11 issued a "frequently asked questions" memo on the new regulations. It was almost immediately withdrawn without explanation. It then reappeared Jan. 7 after a substantive edit.
Bank auctions have become blind affairs where bids are sealed, arguably undermining potential bidding wars. Potential bidders have backed off by onerous non-disclosure agreements and vague guidance from the FDIC.
Interesting. Of all the bumbling regulatory agencies out there, the FDIC is the only one that seems to have half of an idea of what the hell it needs to do.
Anyway. In totally related news, not sure if you heard but a year into his term, our darling OMGObama has chosen to keep a campaign promise and reign in Wall Street. How could this affect the FDIC's attempt to unload crap "assets" and bank carcasses? I guess we'll see.
The president said he would work to change the current rules for financial institutions "in which hedge funds or private equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could pose a conflict of interest."
"We cannot accept a system in which shareholders make money on these operations if the bank wins, but taxpayers foot the bill if the bank loses," he said.
Thus, the president said, he was proposing a new rule he was calling "the Volcker Rule, after this tall guy behind me," he said, referring to the brobdingnagian [what the fuck does that word mean? Anyone?] former Federal Reserve Chairman Paul Volcker, lurking to his right.
"Banks will no longer be allowed to own, invest or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit unrelated to serving their customers," the president said. "If financial firms want to trade for profit, that's something they're free to do. Indeed, doing so responsibly is a good thing for the markets and the economy. But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people."
Was Sheila copied on this memo? It may help her for this year's contingency plan.
Oh, and what's this about a raging conflict of interest, Sheila? Here I thought you were cool. *sigh*