Blog on the Run: Reloaded

Monday, March 23, 2009 6:59 pm

If you’re going to start a run on a bank, you’d better hurry …

Filed under: You're doing WHAT with my money?? — Lex @ 6:59 pm

… because Tim Geithner, for whatever reason (perhaps he believes Congress won’t appropriate any more bailout money directly because of the AIG-bonuses flap), apparently expects the Federal Deposit Insurance Corporation to help fund his bailout plan:

In the latest version, the Treasury will put up between $75 to $100 billion to leverage loans and loan guarantees from the Federal Reserve and the FDIC (down from earlier projections as high as $200 billion.) The money will be used to entice a new round of speculative bets by hedge funds and private equity companies.

The FDIC is the newly drafted participant in this scheme and its leaders are said to be less than thrilled with its designated role. Compared to the Treasury, the FDIC has been a model of competence and transparency. The FDIC is coming before Congress to seek replenishment of its somewhat depleted insurance funds, and now Treasury is coveting that money to underwrite much of Geithner’s latest scheme. But you can only safely insure so many risks with the same capital (shades of AIG!)

Two key points about getting the FDIC involved: 1) Its primary purpose is to ensure that people don’t lose their money from basic bank accounts if a bank goes under; this plan would deviate enormously from that purpose. 2) The FDIC already doesn’t have enough money to do its job and is asking taxpayers for a half-trillion-dollar loan. (And the primary reason for that is that between 1995 and 2006, a GOP-controlled Congress refused to give it the authority to hit banks up for the premiums that would fund the agency’s activities in the event of a major downturn.)

I’m not an economics expert by any stretch, but this has “disaster” written all over it.

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