"Most every Friday, now, the FDIC seizes several banks"

March 9, 2009 8:39 PM

60 minutes goes along with the FDIC to take over a bank. Via calculated risk.

Also - related post recently that discusses the FDIC's reserve fund.

posted by jourman2 (24 comments total)

Fascinating segment. I thought FDIC Chariman Sheila Baer's suggestion that having banks as big as Citi and BoA poses a systemic threat to the economy as a whole was spot on. The FDIC has the means to take over small banks, but when banks become "too big to fail" the situation changes. How feasible and desirable would it be to get a law in the future that limits the size of banks?
posted by ornate insect at 8:59 PM on March 9, 2009

How feasible and desirable would it be to get a law in the future that limits the size of banks?

I don't think you need a law that limits the size of banks, so much as you need more regulations as to what a bank can and can't do with its (and by extension, your) money. The word "leverage" is going to go down in history books as, ultimately, the reason we're in such dire straits. Should a bank be allowed to use the value of your mortgage, and the value of future negative amortization on your mortgage as assets by which it can leverage itself to buy up more assets?

Ultimately, the regulation needs to be threefold: 1) appraisals need to be standardized across the entire country, with multiple/anonymous (unknown to the loan officer or real estate agent) appraisers coming to a consensus of a home's value. 2) limitations upon how much you can borrow based upon your credit score and how much you can document in income. 3) regulations as to how mortgages can be packaged or used as assets or income streams for banks.

Only after those conditions are met, will we see a rational marketplace. Otherwise, we're only going to keep repeating the shadiness and greed that caused this mess.
posted by mark242 at 9:07 PM on March 9, 2009 [1 favorite]

HALT!! THIS IS THE FDIC!! STEP AWAY FROM THAT CALCULATOR!!
posted by pyramid termite at 9:17 PM on March 9, 2009

I always wondered what the process of taking over a failed bank was like and this provided just that. Fascinating is right. Thanks.
posted by grouse at 9:19 PM on March 9, 2009

How feasible and desirable would it be to get a law in the future that limits the size of banks?

There actually are limits at both the state and federal level on how big a share of the total deposits you can have. Federal is 10%, state is generally 30%. And some of the banks have run into these limits: BoA is at around 9%, and so can't really takeover any major competitor.
posted by smackfu at 9:27 PM on March 9, 2009

The comments at that website confound me. They're full of statements about how the trying to take everything over and destroy private business. Personally, I'd prefer to not be wiped out just because some bank manager doesn't understand how to run a profitable business but, you know, to each his own.
posted by LastOfHisKind at 9:53 PM on March 9, 2009

This relates to something interesting I read on 538 this morning that the media hasn't paid attention to for some reason.

The Republican cries of "let the banks fail!!" are ridiculous for many reasons, but mainly this one:

A failed bank does not simply disappear into thin free market All-American air. The FDIC comes in, takes over operations, and pays out to depositors up to the maximum insurable amount. Essentially, the government nationalizes the bank anyway.
posted by drjimmy11 at 9:53 PM on March 9, 2009 [5 favorites]

Fascinating, depressing.

Almost expected to see some sketchy girl in the bathroom flushing baggies of bad loans down the toilet.
posted by jeffmik at 9:56 PM on March 9, 2009 [2 favorites]

Ultimately, the regulation needs to be threefold

It's funny, the third one is the one that you could say has caused the huge problems, if banks were limited in how they sold loans on they would be doing the first two in order to save themselves. You pay attention to who you loan to if you're going to be the one left holding the bad loans, but when you sell them on at a profit you don't really care.

I guess if you did 1 & 2 sufficiently well, the third one isn't the problem it became.

Looking at it, it strikes me that the ratings agencies need to take a big chunk of blame too. A bundle of crappy loans all piled up should have made a crappy asset, not tranches of highly rated assets, once that happened there was no reason not to write as many bad loans as you could.
posted by markr at 10:50 PM on March 9, 2009

if banks were limited in how they sold loans on they would be doing the first two in order to save themselves.

Well, yes and no.

You could say that if the banks were on the hook for their bad loans, they'd be doing a lot more due diligence of the people they were lending money to. However-- look at how many banks are failing, simply because of the lack of due diligence. It wasn't in Mister Banker's best interest to do the work, because he was getting a 90% return rate. 90%! Damn the torpedoes, full speed ahead!

This is where government regulation has to step in, because-- other than some looney Rand-ian disciples-- most people don't believe that there's a good market for self-regulation here. To your point, the ratings agencies screwed up bigtime as well, because hey, what's in it for them? More and more money. By definition, this is the perfect opportunity for a nonbiased, non-capital-seeking streamlined government regulatory body (I know, bleeding heart liberal lunacy!!!rofloneone!!socialism!!!) to offer guidelines and regulations around the three points above.

I actually agree with the calls to let the banks fail-- to a point. If you mismanaged your business to the point where it is in the ground because of bad investments, you should be toast, and possibly investigated for fraudulent business practices. However-- I also support FDIC insurance of all deposits, not just $100k, because the last thing I should have to worry about is the safety of my money.
posted by mark242 at 12:23 AM on March 10, 2009

I don't know what's more interesting about this post. Is it the actual mechanics of bank failure and how the FDIC steps in? Or is it that the FDIC and the Powers That Be recognise that the situation with banks is so bad that it might do to have a segment like this on a show like 60 Minutes?

(for non-Americans: 60 Minutes = long-running early Sunday evening news programme specialising in serious but softball journalism and commentary segments by Andy Rooney, a stock in trade cranky old guy with folksy wisdom)
posted by Grrlscout at 1:46 AM on March 10, 2009

Yes, it definitely felt like I was watching propaganda for the FDIC. Well meaning, factually correct propaganda, but propaganda nonetheless. Like a PSA saying "Don't Panic".
posted by ryanrs at 1:57 AM on March 10, 2009

In England there was lots of talk about banks being "too big to fail". Then Lloyds merged with TSB fo form a bigger bank, and then that just got bailed out by the government. Not sure what they had in mind with that one!
posted by devnull at 2:08 AM on March 10, 2009

Bravo! Fantastic post. Very interesting and at the same time depressing how the banking system works. Would love to see an analysis on the 500B loan the FDIC just asked for...
http://www.msnbc.msn.com/id/29543959/
posted by edmo at 3:08 AM on March 10, 2009

commentary segments by Andy Rooney, a stock in trade cranky old guy with folksy wisdom the cushiest job in America.

I don't understand how this man exists. He complains about things that he doesn't get, like an out-of-touch Grandpa to America. It's never relevant, and sometimes hilariously out of date. For instance, I expect him to rant about LOLcats and other Internet caption memes sometime around 2015.

Give me his job, I'll find something to rant about every week at half the wage. And I'll even be funny occasionally, rather than just hopelessly lost.
posted by explosion at 3:52 AM on March 10, 2009

Rooney is entertaining to watch because he's Grandpa, and he's fully aware that his "not getting something" is often a joke on himself, rather than a witty commentary. I guess his target audience matches up with Garrison Keillor's - you either get it, or you get it and it drives you up a wall, or you don't get it.

But, once in a while, he'll swing a mean, mean left hook while you're waiting to see if he has a minor complaint about oatmeal. He was among the first mainstream media figures to call the Iraq war for what it was, for instance, and had something to say about the style and the substance of Dubbya that was worth hearing.

And while it may not have the bloodthirsty edge a lot of us would like to see in the interviews, calling it softball journalism isn't fair, either. For most of the '80s and '90s, the single most terrifying phrase any corrupt official or shady businessman could imagine was "I'm Mike Wallace with 60 Minutes, and I'd like to ask you a few questions."
posted by Slap*Happy at 5:59 AM on March 10, 2009 [2 favorites]

The Republican cries of "let the banks fail!!" are ridiculous for many reasons, but mainly this one:

A failed bank does not simply disappear into thin free market All-American air. The FDIC comes in, takes over operations, and pays out to depositors up to the maximum insurable amount. Essentially, the government nationalizes the bank anyway.

I need to read much more about the whole mess, but I thought that the deposits are really only a small piece of the problem. The bigger issue being the credit default swaps (and/or similar instruments) and the domino effect caused by big banks going under.
posted by Bort at 6:47 AM on March 10, 2009

For most of the '80s and '90s, the single most terrifying phrase any corrupt official or shady businessman could imagine was "I'm Mike Wallace with 60 Minutes, and I'd like to ask you a few questions."

Yes, and they got him, didn't they?

Even in the 70's, 60 Minutes was softball journalism. You really can't do much else in 15 min. on TV. It is a feature, not a bug.
posted by QIbHom at 7:34 AM on March 10, 2009

I need to read much more about the whole mess, but I thought that the deposits are really only a small piece of the problem. The bigger issue being the credit default swaps (and/or similar instruments) and the domino effect caused by big banks going under.

I think the problem is basically this: because they have all those other obligations, many banks seem likely to fail if they don't get emergency aid. We could always just let the market take its course and let the banks fail, as some argue. But then, when the banks did fail, the FDIC would still be on the hook in a big way for the deposits of the failed banks (at least, up to the $250,000 FDIC deposit guarantee), because there are lots of other parties who would get to jump on the gravy train ahead of the depositors whenever the banks went insolvent. So it's basically a pay now, or pay later situation, only the pay now option may be much costlier than the pay later option, depending on what the actual, full extent of the problem is.

In better news, though, a recent leaked memo from CitiGroup indicates they've been operating at a profit in the first two months of 2009. (I kind of suspect shenanigans on this report, though, but even so, barring any outright misrepresentations in the memo, it still seems like basically good news.)
posted by saulgoodman at 10:36 AM on March 10, 2009

long-running early Sunday evening news programme specialising in serious but softball journalism

You call 60 minutes softball journalism? I beg to differ. For the size of the audience it reaches, it's about as hardball as they come. You don't get to reach 20 million Americans and act like a DailyKos diarist.
posted by jckll at 11:32 AM on March 10, 2009

How feasible and desirable would it be to get a law in the future that limits the size of banks?

How it's done in Canada:

For weeks, Cleghorn’s fuse had been growing shorter as his frustration mounted over Canadians’ inability to understand the bankers’ point of view. In response to [Canadian Finance Minister] Martin’s evasiveness, something apparently snapped. Cleghorn asked straight out whether the Royal’s merger with the Bank of Montreal, and the Toronto Dominion Bank’s copycat arrangement with the Canadian Imperial Bank of Commerce, were going to be allowed to proceed. "No," Martin said simply. Cleghorn, according to both banking and federal government sources, said something along the lines of "No, but . . . ?" or "Unless what?" Martin repeated his first answer. "No."

This was when the usually composed banker lost it, according to government officials. Watching a year’s work sacrificed to what the bankers see as political expediency and parochialism was apparently too much to swallow. His face grew red and he pounded the table, while giving the minister an earful.

For once in his life, Martin remained ice-cool. As Cleghorn gave vent to his complaints, all the finance minister said was: "John, you’re not listening to me." Sources close to Martin say he repeated this phrase several times before Cleghorn calmed down.

That's Paul Martin, nebbish Canadian hero, enforcing the Bank Act in 1998. Given the events of the past year, the CEOs of Canada's largest banks should seek him out and kiss his shoes.

So yes, its both feasible and desirable.
posted by justsomebodythatyouusedtoknow at 1:30 PM on March 10, 2009 [2 favorites]

Bonfire of the Profanities -- An investigator who exposed dishonest savings and loan regulators in the '80s re-encounters an old rival in the latest banking crisis.

(Juicy story about Nancy Pelosi in the sidebar)
posted by potsmokinghippieoverlord at 3:25 PM on March 10, 2009 [1 favorite]

Now-needy FDIC collected little in premiums. The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006.

... James Chessen, chief economist of the American Bankers Association, said that it made sense at the time to stop collecting most premiums because "the fund became so large that interest income on the fund was covering the premiums for almost a decade." There were relatively few bank failures and no projection of the current economic collapse, he said.

"Obviously hindsight is 20-20," Chessen said.

House Financial Services Committee chairman Barney Frank agreed that officials believed at the time that the good times would last and that bank failures would not be a problem.

"We had this period where we had no failures," the Massachusetts Democrat said in an interview yesterday. "The banks were saying, 'Don't charge us anything.' "

- Bank failures from January 1-February 28, 2009. (Total: 17)
- 2008 bank failures. (Total: 24)
- 2007 bank failures. (Total: 3)
- 2006 bank failures. (Total: 0)
- 2005 bank failures. (Total: 0)
- 2004 bank failures. (Total: 4)
- 2003 bank failures. (Total: 3)
- 2002 bank failures. (Total: 11)
- 2001 bank failures. (Total: 4)
posted by maudlin at 2:20 PM on March 11, 2009

Wait a second, so the FDIC was providing insurance to banks in case of failure, but the banks didn't have to pay any premiums for this?

Can I get some health insurance from the government like this? I haven't had to see a doctor in years, so I'd prefer to not pay for the insurance, thanks!
posted by Talanvor at 1:48 AM on April 5, 2009