Bailing Out Banks

Just a year ago, the market was completely upside-down, with everyone watching big banks line up for bailout money from the US government.  Now, in a surprising turn of events, banks that have made it through in relatively stable shape are lining up to lend the FDIC money to cover its guaranty obligations. 

The FDIC is in trouble.  Having closed 94 banks so far this year, and with 416 banks and $300 billion on its "Problem List," according to ABC News,FDIC Chairman Sheila Bair is looking for a funding source.  The FDIC guaranty fund is down to just over $10 billion.  Borrowing against the FDIC's $100 billion line of credit with the Treasury is a controversial proposition, with the nation already on edge about all of the public money that's been spent to save the banks from a failure that many think they brought upon themselves.

The other option is for the FDIC to make a cash call on the surviving banks, raising their fees.  The banks are already reeling from the assessments they've paid into the FDIC this year, which, according to the Wall Street Journal, brought in $5.6 billion.  In return for those payments, banks don't get much.  They would rather lend the FDIC money, and get a return for the risk they take in doing so. 

In a story reported by ABC News, the FDIC was said to be considering borrowing billions of dollars from banks.  According to the New York Times, this would be in the form of prepaid fees, representing three years of bank fees, collected up front. The plan has its appeal, because it would be nonvoluntary and it would not require interest to be paid. 

The idea of banks bailing out the entity that bailed them out just a year ago has great public appeal.  It seems like a turnabout that's fair play.  I like the idea, too, because I think it puts responsibility back onto the shoulders of the institutions whose interests are at greatest stake, and who have the greatest ability to hold each other accountable. 

The downside, though, is that the money banks put into funding bad banks is money that could have been pumped into the economy in the form of loans.  Until lending returns, the economy is going to remain stagnant.  More homes will default and move to foreclosure, because people can't get loans to buy homes from the people who need to get out from under them.  This country is facing a wave of foreclosed properties of mammoth proportions.  We need buyers to have financing behind them if we want move those properties.  We have a lot of real estate tied up right now because people are hanging on by a shoestring, in the form of mortgage modification or foreclosure moratorium.  But when those properties do become bank-owned assets, they will be pushed out to the market for sale.  This country will see a flood of properties on an already stressed housing market, and prices will plummet, unless we get loan dollars into the hands of buyers and investors before the onslaught hits.

Banks bailing out banks is a great idea, and it does solve part of the dilemma we're facing.  But nobody should overlook the fact that it stifles the already-slim prospects that we'll be able to absorb the backlog of foreclosed properties without more pain.