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Punish the responsible and reward the irresponsible



May 12, 2009 – Comments (9)

One of the biggest reasons that we are in the economic mess that we find ourselves in today is the passage of the Gramm-Leach-Bliley Act in late 1999.  This act, co-sponsored by the idiotic Mr. "America is a nation of whiners and we're only in a mental recession" Phil Gramm essentially repealed the provision in the Glass-Steagall Act that kept bank holding companies from becoming too large by prohibiting them from engaging in other financial operations, like investment banking, etc...

We hear all of this talk railing against banks that are "too big to fail" lately, yet the more things change, the more they remain the same.  The government is doing nothing but rewarding the biggest banks with gobs and gobs of taxpayer dollars and essentially punish smaller, responsible banks that have been managing their risk properly. 

The Big Picture blog brought the latest example of this to my attention this morning.  The irresponsible banks that have gone bankrupt and the increased threat of bankruptcy at many others have driven up the cost of FDIC insurance for smaller, responsible lending institutions.

Here's an example:

“At DeMotte [State Bank, an 11-branch operation in the northwest part of Indiana, Bank President] Mr. Goetz is bracing for a steep increase in a crucial overhead cost: the bill from the Federal Deposit Insurance Corporation, which is basically an insurance fund underwritten by banks.

Last year, DeMotte paid $42,000 into the fund. This year, because of failures in other parts of the country and particularly among national banks, that sum will rise to $500,000 or more.

“Isn’t that the American way?” he says, folding his arms. “Whoever is left standing, whoever was prudent, is always the one who has to pick up the pieces.”

Small banks that have real deposits to back up the money that they lend have to pay a much larger percentage for FDIC coverage than large banks who take a lot of risk and lever up very small deposit bases.  Ahhhh, hello isn't excessive leverage and risk taking how we got where we find ourselves today?

The same exact thing is happening to small banks all over the country.  They're seeing the cost of their FDIC insurance double, triple, or worse even though they have acted responsibly throughout this entire mess.

Not only is the government punishing responsible smaller banks, but it is punishing smaller, responsible savers as well by essentially eliminating any interest that they receive on their savings.  Heaven forbid someone wants to save money without taking much risk.  Noooooo.  We must punish the savers lest they horde their money and protect themselves.  I know that low interest rates are necessary to prevent any more economic deterioration than necessary, but still the government never fails to reward the irresponsible and punish the responsible.

Grumble, grumble, grumble.  I need to try to find something positive to say later :).


9 Comments – Post Your Own

#1) On May 12, 2009 at 11:48 AM, OleDrippy (< 20) wrote:

hard to find a positive in this mess... sadly, +1..

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#2) On May 12, 2009 at 12:58 PM, angusthermopylae (38.26) wrote:

My favorite pattern for human endeavors:

--Enthusiasm (repeal Glass-Steagall)

--Disillusionment ("Hey, housing and subprime mortgages are in trouble!")

--Panic ("OMG!  We can't let them fail!!  Bailout, bailout, bailout...")

--Search for the guilty ("As members of  Congress, we must look into how TARP money is spent...over four months after we gave cate blanche...")

--Punishment of the innocent ("More bailout. Oh, yeah, we have to raise the FDIC rates...")

--Praise and honor for non-participants (TBD--I expect Bernanke to get a Medal of Freedom somewhere along the way; heckuva job, Bernie!)

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#3) On May 12, 2009 at 4:23 PM, starbucks4ever (86.68) wrote:

They will put Colonel Bernanke in charge of the 101 airborne division as a reward for all those helicopter missions, and decorate Captain Paulson with a Purple Heart for the salvation of the drowning :)

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#4) On May 12, 2009 at 4:34 PM, portefeuille (98.80) wrote:

the link (for future generations of readers ...)

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#5) On May 12, 2009 at 4:53 PM, portefeuille (98.80) wrote:

Small banks that have real deposits to back up the money that they lend have to pay a much larger percentage for FDIC coverage than large banks who take a lot of risk and lever up very small deposit bases. 

Could you elaborate on that?

I found this:

The Federal Deposit Insurance Corp. approved the proposal by its chairwoman, Sheila Bair, at a meeting Tuesday. It will raise the average insurance premiums paid by U.S. banks and thrifts to 13.5 cents for every $100 of their deposits from the current 6.3 cents.

For institutions deemed to be in strong financial condition -- 91 percent of roughly 8,500 insured banks and thrifts -- the average rate will be 11.6 cents.

Why do you think "small banks that have real deposits to back up the money that they lend" are not "deemed to be in strong financial condition" and therefore pay less?

I could "look into that" but maybe you can find that faster ...



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#6) On May 12, 2009 at 4:59 PM, portefeuille (98.80) wrote:

(link for quoted text)

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#7) On May 12, 2009 at 5:11 PM, garyc27 (< 20) wrote:

Although repeal of Glass-Steagal allowed banks to also acquire investment institutions, insurance company and the like.  Gramm's worst offense is the Commodities Futures Modernization Act.

For starters, the legislation contained a provision—lobbied for by Enron, a generous contributor to Gramm—that exempted energy trading from regulatory oversight, allowing Enron to run rampant, wreck the California electricity market, and cost consumers billions before it collapsed. By the way, Enron became a family affair. Since 8 years earlier, his wife, Wendy Gramm, as CFTC chairwoman, pushed through a rule excluding Enron's energy futures contracts from government oversight. Old Wendy joined the Houston-based company's board, and her Enron salary and stock income brought between $915,000 and $1.8 million into the Gramm personal coffers.

But that was nothing compared to what would happen with credit default swaps.

Because of the swap-related provisions of Gramm's bill—supported by Fed chairman Alan Greenspan and Treasury secretary Larry Summers—a $62 trillion market (nearly four times the size of the entire US stock market) remained utterly unregulated, meaning no one made sure the banks and hedge funds had the assets to cover the losses they guaranteed.

Thanks to Gramm's work on Glass-Steagl repeal Wall Street's biggest players were ruinning a secret casino.  Betting on the risk of any given transaction became more important—and more lucrative—than the transactions themselves.  There was more betting on the riskiest subprime mortgages than there were on actual mortgages.  The banks and hedge funds were betting the subprimes would pay off and they would not need the capital to support their bets.

in my opinion these unregulated swaps have been at "the heart" of the subprime meltdown.

Anyway you cut it, Gramm is a reckless deregulator.

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#8) On May 12, 2009 at 11:45 PM, kirkydu (90.63) wrote:

Deej and Morgan, great catches and spot on. 

How about this string of coinkidinks:

In 2002 the office of the comptroller of currency, a dept of treasury, ordered state attorney generals to not enforce their stronger state anti-predatory lending laws, in favor of watered down federal laws.  President Bush then announced his America's Home Ownership Challenge.

In early 2004 the big 5 (no longer existing as) investment banks led by Hank Paulson asked the SEC for and received permission to leverage up at much greater than the previous 12:1 rule.  The FBI in June 2004 pointed out that mortgage fraud was skyrocketing due to lack of anti-predatory lending enforcement.

By 2005 and into 2006, securitization of mortgage securities was up several hundred percent and real estate was bubbling.  A collapse became unavoidable.

Here's a great timeline with a punchline:


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#9) On May 13, 2009 at 5:56 AM, TMFDeej (98.37) wrote:

Hey port.  It's not that the small banks have to pay more per dollar to insure their deposit bases.  It's that huge banks are taking more risk and have capital ratios of something like 4%.  They are taking tons of risk on small bases, while many smaller, conservative banks have much, much higher capital ratios so they have to pay more on a percentage basis to insure themselves.

Plus it was the mega banking supermarkets and investment banks that helped create this mess and double the cost of FDIC insurance.  The small banks that ran their operations well now have to pay the price in more expensive coverage.  That's like all of your neighbors driving around like idiots in their cars, getting tickets and getting into accidents, and having the cost of your insurance go up.


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