China To Bailout U.S. Banks?
By: Guest Authors
By: Chad MacINNES
As I turned on my computer and saw this headline, â€œFDIC may borrow money from U.S. Treasury,â€ glaring at me, I thought, â€œWow! This just keeps getting better and better!â€ The article at forbes.com stated, in part, that, â€œFederal Deposit Insurance Corp (FDIC) might have to borrow money from the Treasury Department to see it through an expected wave of bank failures, the Wall Street Journal reported.â€ Isnâ€™t that just great?
So, let me see if I have all of this right: Fannie Mae and Freddie Mac, you know the government-sponsored-public-private partnerships that you and I are required to financially back via our contributions through the IRS in an enterprise that is able to take on the riskiest of loans without fear of loss because it is all guaranteed by Uncle Sam, are essentially broke because they took on too many risky loans. They also sold many of these loans to other banks that took them, presumably, because they are guaranteed through Freddie and Fanny to be backed by the government. So, the mortgage bubble bursts and banks begin to fail, but thatâ€™s OK because theyâ€™re just the smaller Mom & Pop banks â€“ Oh. Wait! All, that is, except IndyMac in California and Silver State in Nevada. But thatâ€™s OK, because there are only a few that failed and FDIC can take care of it, right?
Wrong. Although there have been eleven bank failures thus far, the dollar value has apparently exceeded the $45.2 billion FDIC Deposit Insurance Fund used to repay insured deposits at failed banks has been drained. What this essentially means to you and I is this: you choose a bank to deposit your money in and then deposit it. The bank takes your money that you deposited and loans it out to other parties and entities in various ways in order to make more money for itself, all the while giving you â€“ the people who make it possible for the bank to make more money in the first place by entrusting them with your money â€“ a small percentage in interest. The bank makes more, likely because it can pool more money together to loan out than you can as an individual. So, then the people or entities default on the loans they took out from the bank â€“ again using your money. The bank loaned them your money and now it no longer has your money because those who took out the loan couldnâ€™t pay it back. So, the bank no longer has your money. It no longer has any money with which to repay those who deposited money there in the first place. This is a problem â€“ especially when it is your money and you show up at the back to collect it, wait in a line for over eight hours and then see the manager put up a sign in the window â€“ from behind locked doors of course â€“ that the bank is closed and will re-open under the control of the Federal government as soon as the FDIC figures out what to do.
FDIC is the Federal Deposit Insurance Corporation. According to the FDIC website, â€œThe FDIC receives no Congressional appropriations â€“ it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities. With an insurance fund totaling more than $49 billion, the FDIC insures more than $3 trillion of deposits in U.S. banks and thrifts â€“ deposits in virtually every bank and thrift in the country.â€ Receives NO Congressional appropriations â€“ thatâ€™s good, right? On the surface, yes, butâ€¦
Now Iâ€™m no economist, but to me this is a bit misleading. FDIC says it â€œis funded by premiums that banks and thrift institutions pay for deposit insurance coverage, and from earnings on investments in U.S. Treasury securities.â€ [Emphasis mine] This is, I think, a more intelligent sounding way of saying that the banks themselves pay for the FDIC insurance. Hereâ€™s where I get confused, I think: â€œWith an insurance fund totaling more than $49 billion, the FDIC insures more than $3 trillion of deposits in U.S. banks and thrifts â€“ deposits in virtually every bank and thrift in the country.â€ See my point? They have $49 billion to cover $3 trillion. I guess they donâ€™t think it possible for much more than $49 billion to go into default. I hope theyâ€™re right, but I think theyâ€™re wrong, as evidenced by the very fact that FDIC needs a bailout.
FDIC Chairman Sheila Bair said that with a rise in the number of troubled banks, the FDIC’s Deposit Insurance Fund used to repay insured deposits at failed banks has been drained.
According to Forbes, Bair had said that â€œthe FDIC will consider a plan in October to raise the premium rates banks pay into the fund, a move that will further squeeze the industry. The agency also plans to charge banks that engage in risky lending practices significantly higher premiums than other U.S. banks, Bair said.â€ This hasnâ€™t been done since the savings and loan crisis in the 1990s.
According to the Wall Street Journal, â€œThe fact that the agency is considering the option again, after the collapse of just nine (now eleven) banks this year, illustrates the concern among Washington regulators about the weakness of the U.S. banking system in the wake of the credit crisis.â€
This is the way I see it: Freddie and Fannie get away with doing what they want, investing in riskier loans for increased profits because their original private funding is guaranteed by the government â€“ so why not take the risk. They can then sell those loans to other banks that also understand the risk involved â€“ and the potential payout. If the loans are defaulted on, no problem for Freddie and Fannie â€“ Congress to the rescue! For everyone other than Freddie and Fannie, they count on FDIC. Obviously a problem arises when the FDIC fund is spent and lots more money is needed to stabilize the banks, so FDIC NOT being funded by Congress goes to the Treasury to borrow money. That would be the same Treasury that has to auction off U.S. debt to anyone who is willing to hold it in order to keep the government running. So, now we are at the point to where the agency that insures our banking system â€“ a rather important aspect of the overall economy- is broke and needs a bailout from a Treasury that doesnâ€™t have any money.
Who will pick up this debt? Who knows? Undoubtedly the lowest bidder. At present, over 25 percent of our entire debt is being financed by foreign interests, and of that, the Communist government of China holds over 20 percent. Suffice it to say that there is indeed a rather high probability that the Chi-Coms will pick up the tab for this one too â€“ at least for now.
So, what will happen? I canâ€™t say for sure, but if Washington has anything to do with it, it probably wonâ€™t be good; and no matter what the â€œtemporary fix,â€ we all know who will ultimately suffer and pay â€“ we, the people. But, I guess what will be will be. So for now, can I get some rice with that?