FDIC Epic Fail...

A few days ago, I was all....

And so, of course, today I discover this:

Whatever happened to the law (Title 12, Sec. 18310) mandating that banking regulators take "prompt corrective action" to resolve any troubled bank? The law mandates that the administration place troubled banks, well before they become insolvent, in receivership, appoint competent managers, and restrain senior executive compensation (i.e., no bonuses and no raises may be paid to them). The law does not provide that the taxpayers are to bail out troubled banks. Treasury Secretary Paulson and other senior Bush financial regulators flouted the law. (The Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) are both bureaus within Treasury.) The Bush administration wanted to cover up the depth of the financial crisis that its policies had caused.

Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth. He was supposed to regulate many of the largest bank holding companies in the United States. Far too many of these institutions are now deeply insolvent because the banks they own are deeply insolvent. The law mandated that Geithner and his colleagues place troubled banks in receivership long before they became insolvent. Why are the banking regulators, particularly Treasury Secretary Geithner, continuing to disobey the law?

Basically, when the FDIC was created to guarantee monies deposited by people like you and me in banks, this law was enacted to force the government to step in as early as possible so as to minimize the cost to the FDIC in paying back amounts guaranteed to depositors (remember, that amount has recently been increased to $250,000 per depositor).  Theoretically, banks have been paying the FDIC a yearly premium for this insurance, but the truth is, the premiums were not nearly enough and the coffers of the FDIC are drying up at a rapid clip.  If the money runs out, the guarantees will not disappear (as this would most certainly cause a run on the banks), instead, taxpayers will be expected to step in and pay for additional amounts necessary to make good on the FDIC guarantees.

The sooner the FDIC steps in and seizes a bank (or, technically, puts it into conservatorship), the sooner it is able to recover value.  Just think of it this way: if you are a bank, and you now know that all of your equity (or your ownership stake) in the bank is gone, you have absolutely nothing to lose.  You might as well continue to bet using the assets of the bank (which are not yours) maybe in the completely irrational hopes of making it back into black.

The FDIC, on the other hand, will try to recover as much value as possible by selling assets off as fast and for as much as possible, which minimizes the amount that it will have to pull out of its reserves to meet its guarantee obligations.

Where is the outrage that these banks, which everyone knows to be technically insovlent, are still allowed to continue to operate, without government intervention??

Srsly, stop getting hysterical over the $20k, $30k that the irresponsible neighbor down the street might be getting because he's going to be refinanced by the government under the homeowners bailout.  We are bleeding money from the wound that is the financial sector in America, and apparently no one is willing to do anything about it.  Not even the regulators whose job it is (and who are theoretically legally obligated) to do something about it.

Secretaries Paulson and Geithner [have] subverted the ["prompt corrective action" (or PCA)] law by allowing failed banks to engage in massive accounting fraud (which also means they are engaged in securities fraud). Treasury is telling the world that resolving the failed banks will require roughly $2 trillion dollars. That has to mean that the failed banks are insolvent by roughly $2 trillion. The failed banks, however, are reporting that they are not simply solvent, but "well capitalized." The regulators flout PCA by permitting this massive accounting and securities fraud.