FDIC Privatizes Bank Investor Profits, Socializes Losses

Tonight (once again, late on a Friday, hoping the story bypasses most of the audience, the government informs us of another outrage): the Federal Deposit Insurance Corporation ("FDIC") formally extended--and has now grossly contorted--a Bush Administration Treasury program that was orignally established this past Fall to free up consumer credit markets, to the point where taxpayers are now insuring virtually all banking industry "senior unsecured debt that converts into (bank) shares no later than the guarantee's expiration, which can last through June 30, 2012."

Known as the FDIC's Temporary Liquidity Guarantee Program ("TLGP"), today's announcement means that the FDIC is now getting into the business of insuring investors' funds when they buy into the preferred stock or warrants of a given bank, where (which covers most transactions of this nature) those investors may  then convert their notes and/or preferred shares to common stock shares of that entity.

"FDIC to Guarantee Bank Debt That Converts Into Equity."
By Gabrielle Coppola and Jody Shenn

Feb. 27 (Bloomberg) -- The Federal Deposit Insurance Corp. plans to back new debt sold by banks that would later convert into common shares in an expansion of its Temporary Liquidity Guarantee Program.

Under the interim rule approved today at an FDIC board meeting, the agency's backing will be available to senior unsecured debt that converts into shares no later than the guarantee's expiration, which can last through June 30, 2012.

"This modification will give institutions greater flexibility to attract longer-term sources of funding that otherwise may be unavailable in today's distressed funding markets," FDIC financial analyst Steve Burton said today.

Putting it bluntly (another way), the FDIC has now decided that it's going to contort a program originally established to loosen up interbank lending and credit markets for a few months, so that the government may get into the business of guaranteeing investors that make preferred share purchases in banks now and going forward (at least until June 30, 2012).

Imagine that you're an investor buying stock in a company and being told that the U.S. taxpayer now guarantees that if that company (in which you're purchasing preferred stock) goes bankrupt, you'll get your money back?

The reality is that only major institutions, such as hedge funds and investment banks, will be purchasers of most of this banking industry preferred stock in coming weeks, months and years; and we're the ones insuring they don't get burned.

If ever there was a blatant example of "socializing the risks and privatizing the profits," our government is, as of today, now saying: "We wholeheartedly approve of this message."

Perhaps far worse than this blatant government endorsement of a downright sadistic philosophy is the reality that just word of mouth of this horrific policy shift by the F.D.I.C. has registered an immediately negative impact upon our country's ability to raise funds to cover all of this new debt within international circles mow, as well, as was made self-evident by this development today, too: "Treasuries Post Weekly Loss on Concern Debt Supply Ballooning."

Treasuries Post Weekly Loss on Concern Debt Supply Ballooning
By Susanne Walker and Daniel Kruger

Feb. 27 (Bloomberg) -- Treasuries posted a weekly loss, the biggest for longer-term securities in a month, on concern debt supply will swell to unprecedented levels as the U.S. borrows to fuel economic growth and finance a $1.75 trillion budget deficit.

Securities due in 10 years or more fell today on concern a Federal Deposit Insurance Corp. move to expand bank-debt guarantees will add more supply to the market. Notes due in seven years or less rose as the economy shrank more than forecast and the U.S. announced a third rescue effort for Citigroup Inc. The gap between two- and 10-year note yields was the widest in three months.


The U.S. sold a record $94 billion in two-, five- and seven- year notes this week.

`Just More Supply'

The FDIC, in an expansion of its Temporary Liquidity Guarantee Program, today approved an interim rule to back new debt sold by banks that would later convert into common shares. The backing will be available to senior unsecured debt that converts into shares no later than the guarantee's expiration, which can last through June 30, 2012.

IMHO, this latest move by the FDIC is nothing short of an outrageous travesty, at least in terms of this effort's  immediately negative impact upon us all. The assumption being made by our government that we'll be granted some sort of special dispensation by the international community (the largest buyers of our debt) to enable us to raise sufficient funds to cover all of this is nothing short of a myth.

We better wake up and smell the coffee and realize that  government support of our non-monied classes must trump Wall Street bailouts now and always. At this point, as today's FDIC announcement and related sidebar article on T-bill sales clearly shows us, funding a bottomless pit (a/k/a The Wall Street Bailout) is a pipe dream had directly at the expense of the middle and lower classes.

Tags: banks, depression, former President George Bush, former US Treasury Secretary Henry Paulson, President Barack Obama, Recession, U.S. banking industry, US Treasury Secretary Tim Geithner (all tags)



Tips/Flames: Bring 'em on....

by bobswern 2009-02-27 09:25PM | 0 recs
Thanks, Bob...

For giving us a reality check, even as painful as it is. This "socialism for the super-rich" isn't just unfair, but it's really unwise. We could be doing far more while spending far less by simply temporarily nationalizing the troubled banks.

by atdleft 2009-03-02 08:12AM | 0 recs
thank you!

So lets stop chasing bad money with good.  The solution is not just all out nationalization either.  I can not believe people who tout the bailouts as a free market solutions, but this is how it will be framed in the near future when the next round of expansion points to nationalizing banks or even internationalizing(not sure if that is a word)

Thanks - Take Care.

by Classical Liberal 2009-03-02 09:48AM | 0 recs


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