FDIC

[mastein]

In response to a previous, now well-worn, thread a discussion of the FDIC and its vunerability came up as a secondary topic. I think it is a topic worthy of discussion beyond just the reserve ratio of 1.5% and the insurance up to $100,000 per depositor (regardless of number of accounts). In particular, could the FDIC handle a situation where a major bank collapsed or would a major cash and or credit crunch occur. Dr. Robert Reich, has some interesting logic on it, I am wondering what the group has to say.

[WhoCountsTheVotes]

1. they can always just print more money

That's the beauty of it. If any bank collapsed, just print enough to pay off the depositor. In practice, they don't even need to wait until a collapse.

Interestingly, it was the FDIC - not the Fed - that ushered in the era of stable banking.

[finecraft]

2. Darn right it was!

I was a bank examiner with the FDIC during the late 80's/mid 90's. Everything good we were able to accomplish went to crap when Bill Seidman effectively "liquidated" the local and regional FDIC offices and turned everything over to the RTC.

[mastein]

3. Can you explain

the changes you are talking about? I think the RTC is the Resolution Trust Corp. that was created by Bush I, to oversee the S&L bail out, am I right? Did these changes do anything to decrease the stability of the banking system? What about all of these massive bank mergers, do they pose the real threat Reich says they can upon failure. (Incidentally I think of how quickly someplace like BCCI fell and fear that it can happen here)

[finecraft]

6. When I worked for the FDIC

It was during the run of bank failures during the late 80's and early 90's. I worked for the Shreveport office, and we had a caseload of approx. 60 failed and closed banks in Louisiana, Mississippi, Arkansas and Oklahoma. At that time, there were approximately 30 or so "local offices", supervised by 5 larger regional offices. Our office alone had over 600 people. We closed the troubled institutions, tried to collect on their bad and delinquent loans, investigated the actions of their loan officers, bank directors and officers (as well as prosecuted them), and packaged and sold the remaining assets to solvent institutions. We also did regular reviews of the operating banks in the area we covered, and monitored their lending habits and debt ratios like a hawk. When Seidman reorganized the FDIC, he did away with all of the local FDIC offices, as well as half of the regional offices. He effectively did away with the "eyes and ears on the ground". Since then, many banks have gone back to making more questionable loans, and have slipped back into the "good old boy" network of lending and management. Reich is correct in his assessment of the mega-mergers. Some of the banks we closed had BCCI related cases, and it was a mess. The financial web of business is immense, and once one large institution fails, you can bet that a few others will follow shortly. Seidman is a slimey worm, and the only thing he accomplished with his FDIC reorganization was to make it easier for his banking buddies to get away with alot more crap than they ever could before.

[rapier]

4. ?

What did the RTC have to do with the FDIC? Did the FDIC inherit the FSLIC when the RTC was formed, giving it, and Seidman defacto control. Seidman is a funny guy. So likeable as TV talking head. I don't believe the image for a second. He is a GOP insiders insider.

[finecraft]

7. Yes, the FDIC inherited the FSLIC

We not only closed institutions, we monitored operating institutions closely and were able to intervene in several cases when we found a bank on shaky ground, before they had to be closed. The officers and directors of all the banks in our area learned not to mess around and play straight up with their lending habits and operations, and quit making mega-million dollar questionable loans to their friends and buddies. When "Bill" liquidated the local offices and turned our work over to the RTC, he effectively did away with the monitoring portion of what we did, and let the RTC handle the bank liquidation portion.
With nobody looking over their shoulder, the banks in large part have gone back to the "Good old boy" system of banking....with less oversight and monitoring. And you are correct....Seidman is a big GOP insider, and a total pig.

[rapier]

5. notes

Contrary to popular belief the Fed connot just print money. They can monitize debt buy buying Treasury, and now agency, paper. The effect is like printing money but there is an understandable and measurable process behind it.

The FED was formed to stabilize banks by insuring the quality of their capital. This was a progressive idea by the way. Soon this changed, as was inevitable, into an obsession with the quantity of money. When Breton Woods collapsed the power over money they weild, thru their open market and credit market price (interest) setting powers, has given them godlike power. Which Greenspan understands, yet abuses.

FDIC has apparantly been so successful because it has been untested. That is the idea behind it to a degree, that is people don't worry about getting their money out so they don't make "runs' on banks. The thing is however that the system has been so stable for 80 years that this impied guarantee isn't what produced the stability. It has been the underlying stability itself which has made deposits safe. I guess that sounds like double talk, Hope you get my point.