The FDIC has a new plan to save itself, one that has already prompted cheering and backslapping in the banking industry.
Instead of hitting the industry with a huge one-time fee, which would hurt profits and stock prices, and instead of running hat in hand to the Treasury for a direct bailout, which would force Sheila Bair to genuflect before Tim Geithner, the FDIC will borrow tens of billions of dollars from banks.
It might appear, of course, that the banking industry will be bailing itself out. But, really, the banking industry is just fronting the money: It’s the taxpayer who is ultimately on the hook here. In the meantime, some members of the banking industry will make money.
In short, why does the banking industry love this plan?
- More risk-free lending to institutions ultimately backed by the taxpayer
- New ways to lend (make money) without actually putting money at risk
- Small hit to income statements
At least banks have to pay interest on the debt instead of the government (taxpayer), though. At least we hope that’s what’s happening.
Borrowing from the industry is allowed under an obscure provision of a 1991 law adopted during the savings and loan crisis. The lending banks would receive bonds from the government at an interest rate that would be set by the Treasury secretary and ultimately would be paid by the rest of the industry. The bonds would be listed as an asset on the books of the banks.