Raising FDIC Insurance - Don't Underestimate The Power Of A Fig Leaf

Raising the FDIC insurance limit from $100,000 to $250,000 per deposit is the hot rescue idea of the moment.  Backed by both Obama and McCain, such a plan might well allow wavering Republicans to justify flip-flopping a "No" vote over to the "Yes" column by giving them something beneficial to Main Street to which they can point with pride.  From Jane Sassen of Business Week:

So what’s back on the table? Throughout Tuesday, there was growing talk that increasing FDIC insurance on individual bank accounts from the current level of $100,000 to $250,000 – at least temporarily -- might go a long way to resolving the problem. House Republicans had proposed a bump up in FDIC insurance early in last week’s negotiations, but the idea had gained little traction.

...

It could also help win over moderate Republicans, argues Daniel Clifton, the head of the Washington D.C. office of Strategas Research Partners, an investment advisory firm – a thought seconded by one high-ranking Democratic aide. “Republicans need to figure out something that appeals to the populists” complaining about the package, he says. That’s not likely to happen by adding a reduction in capital gains taxes to the rescue package, or suspending “mark-to-market” accounting for troubled banks, as some Republicans have called for. “I don’t know if increasing FDIC insurance would be enough, but it’s something that small banks have always wanted,” he adds. Small businesses might be happy to see such a move as well, as would many individuals now worried about how safe their money is. That could help calm fears that more bank runs are ahead if more institutions fail.

So its a useful fig leaf.  Will it have any real impact?  Per Reuters, probably not:

"Frankly, I think it plays better as rhetoric than as reality," said Ann Graham, a former FDIC official, who is now a law professor at Texas Tech University.

Investors who hold more than $100,000 in savings are usually savvy enough to structure their deposits in various $100,000 blocks spread across different accounts and banks, Graham said.

The higher limit would help small businesses that maintain deposits for payrolls that fall between $100,000 and $250,000, a relatively small group.

"It might have a lot of psychological value, but the real benefit is limited to a relatively small sliver of small businesses," said Mark Flannery, a University of Florida finance professor. "I don't think it helps very much at all with the credit seizure and market turmoil coming from the asset side."

And let's not overlook moral hazard - shades of the 1980s S&L debacle:

John Douglas, a former FDIC general counsel who is now a partner at law firm Paul Hastings Janofsky & Walker, said raising the deposit insurance limit could create a greater moral hazard.

Keeping the insurance limit at $100,000 -- an amount set in 1980 -- imposes market discipline by making investors who maintain deposits above that level investigate the soundness of their bank, Douglas said.

"If I were at the FDIC, I would have mixed emotions because it allows more funds to go into weak banks," Douglas said.           

Well.  If it works as a fig leaf to switch enough votes to pass the Paulson plan, it works for me.

Comments

[RR Ryan]

And that really is the point. Anyone who has that much cash on hand has it in different accounts in different banks. And yes, you check the viability of the institution regardless of FDIC insurance.

[bad]

Sometimes the full monty is the better option.

[Jane]

So what is the "tax package" they are reporting that is supposedly carrying the day?

[Thomas Jackson]

What a joke. One of the causes of the S&L debacle was rising bank insurance from 50,000 to 100,000 encouraging reckless speculation because of increased capital. Some people really don't learn from history.

How about stripping support from alien deadbeats from the bill? How about prosecuting those government and private individuals guilty of fraud and misrepresentation?

This thing needs to crash and burn. A bail out will only encourage another and larger disaster. Anyone who buys the "Chicken Little" line is really dull.

Duke Energy just drew on their billion line of credit today. So much for there is a credit crunch meme. If you are credit worthy you can get a loan today.

This bailout is an utter and complete insult to the American taxpayer. Worse is the contempt these politicians display for the American public whom they believe to be utterly clueless.

Is there anyone out there who thinks the Congress could run a lemonaide stand better than your 9 year old? If you do then you're dumber than my nine year old.

[Charlie (Colorado)]

It's the alternative minimum tax reset:

But by also adding legislation to prevent more than 20 million middle-class taxpayers from feeling the bite of the alternative minimum tax, the step could build momentum for the Wall Street bailout from House Republicans. The presidential candidates Sens. John McCain, R-Ariz., and Barack Obama, D-Ill., intend to fly to Washington for the votes, as does Sen. Joe Biden of Delaware, the Democratic vice presidential candidate.

Emphasis mine.

[DebinNC]

From The Corner: Some more info, from an aide: "it will be the economic rescue plan, plus the FDIC improvement, plus the tax relief extension bill that we passed earlier this month ($100 million in net tax relief that’s being stalled in the House)."

[mark l.]

over/under on house republicans that will support the bill:
65.

take the under on this.

I'm guessing that in its current form, the bill has a 30% chance of failing to reach 60 in the Senate. (at best/worst only three democratic senators would vote no, and Harry would need another 13 republicans.)

I'm sure that Corker(TN) will sign anything in front of him...anybody got the other 12?

[Charlie (Colorado)]

So let's see: we've got Paulson, Bernanke, McCain, Obama, Newt, National Review, the Wall Street Journal, Chris Dodd, Judd Gregg, Greg Mankiew, and (now that they've had their minds focused) 70 percent of today's called saying "we've got to fix it" while McDonalds is having trouble getting credit and one and a half trillion in people's real live actual wealth destroyed in a day.

And we've got you saying that "anyone buying the 'Chicken Little' line is really dull."

Golly, it must be difficult being so much smarter than all those other people.

[Charlie (Colorado)]

Mark, did you see Chriss Dodd talking about it yesterday? Not only was there real fear in his eyes, he never once even mentioned blaming it on Republicans.

It'll pass the Senate, and with calls not coming in strongly in favor of fixing things, it'll pass the house.

[bad]

Golly, it must be difficult being so much smarter than all those other people.

Yes, yes it is. What was the question?

[DebinNC]

I think Bennett (R-UT) and Gregg (R-NH) okayed the Dodd plan, or whatever was on the table last Thursday before the House Republicans were allowed in.

[mark l.]

If McCain votes for the bill...his presidential run is over.

This is a bill that is actually detested by more independents than either republicans or democrats...a rare occurrence.

If McCain votes against it, and Obama can be suckered into voting for it, we might have a close race for November. (note to republicans: do not give your votes away. Give them 8 votes, and let the dems sweat the rest.)

[Pofarmer]

Unfortunately, Bond(MO) is probably on board too.

Listening to a local radio show this afternoon that took lots of calls on this. Not one, not one in favor of the bailout, and I don't think Hulshoff(R-MO) will cave, period.

[Pofarmer]

Let.

The.

Market.

Sort.

This.

Out.

[Jim Rhoads aka Vnjagvet]

Assuming 100k was the appropriate amount in 1980, if it had been indexed for inflation, the amount would now be $265,881.07.

Raising the level to $250,000 is hardly a problem with the moral hazard because it should have been indexed all along.

[Buford Gooch]

It only takes 51 votes in the Senate to pass. The Republicans can all vote against it, and, unless the Republicans filibuster, the Democrats can still pass it.

[Sara (Pal2Pal)]

I've got the feeling that those in the know are screwing with us, figuring that Joe Public, like me, is sick to death of the "financial crisis" and will acquiesce to whatever they offer just to get the news on to talking about something else. I swear it is like the Anna Nicole Smith story of the banks and brokers and all their various acronyms.

[mark l.]

normally bg,
I'd agree that 51 does it...even 50 with cheney, but the link I caught from the corner reported a 60 vote threshold.

I don't see a filibuster, but for some reason, 60 is the new 50.

[Pofarmer]

So, what's wrong with the Dave Ramsey plan?

Years of bad decisions and stupid mistakes have created an economic nightmare in this country,
but $700 billion in new debt is not the answer. As a tax-paying American citizen, I will not support
any congressperson who votes to implement such a policy. Instead, I submit the following threestep
Common Sense Plan.
I. INSURANCE
a. Insure the subprime bonds/mortgages with an underlying FHA-type insurance.
Government-insured and backed loans would have an instant market all over the
world, creating immediate and needed liquidity.
b. In order for a company to accept the government-backed insurance, they must do two
things:
1. Rewrite any mortgage that is more than three months delinquent to a
6% fixed-rate mortgage.
a. Roll all back payments with no late fees or legal costs into the
balance. This brings homeowners current and allows them a
chance to keep their homes.
b. Cancel all prepayment penalties to encourage refinancing or
the sale of the property to pay off the bad loan. In the event of
foreclosure or short sale, the borrower will not be held liable
for any deficit balance. FHA does this now, and that
encourages mortgage companies to go the extra mile while
working with the borrower—again limiting foreclosures and
ruined lives.
2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and
executive team members as long as the company holds these
government-insured bonds/mortgages. This keeps underperforming
executives from being paid when they don’t do their jobs.
c. This backstop will cost less than $50 billion—a small fraction of the current proposal.
II. MARK TO MARKET
a. Remove mark to market accounting rules for two years on only subprime Tier III
bonds/mortgages. This keeps companies from being forced to artificially mark down
bonds/mortgages below the value of the underlying mortgages and real estate.
b. This move creates patience in the market and has an immediate stabilizing effect on
failing and ailing banks—and it costs the taxpayer nothing.
III. CAPITAL GAINS TAX
a. Remove the capital gains tax completely. Investors will flood the real estate and stock
market in search of tax-free profits, creating tremendous—and immediate—liquidity in
the markets. Again, this costs the taxpayer nothing.
b. This move will be seen as a lightning rod politically because many will say it is helping
the rich. The truth is the rich will benefit, but it will be their money that stimulates the
economy. This will enable all Americans to have more stable jobs and retirement
investments that go up instead of down.
This is not a time for envy, and it’s not a time for politics. It’s time for all of us, as Americans, to
stand up, speak out, and fix this mess.

[Buford Gooch]

Mark.
Well, it will be very interesting if the vote is, say 53-46 (assuming no Kennedy vote). The bill passes and everyone is surprised?

[Pofarmer]

I've got the feeling that those in the know are screwing with us, figuring that Joe Public, like me, is sick to death of the "financial crisis"

I'm just hoping folks will get sick of it and tune it out. It's the same song, new verse, we've been hearing for 6 or 7 years now. They just upped it a chord and raised the tempo.

[Barney Frank]

Pofarmer,

I'm truly not trying to be an ass; just trying to sort out your position.

Haven't you said that you were upset at the farm debacle of the 80's and the fact that the government didn't help? My understanding of that episode is that it is eerily similar to the housing bubble.
Were you in favor of the market solving the farm crisis or not? Can't remember exactly what you said.

[FD]

51?

http://www.opensecrets.org/news/2008/09/finance-sector-gave-50-percent.html

[warmearther]

Bubbles?

http://www.foxnews.com/story/0,2933,430943,00.html

[Pofarmer]

Barney.

What I'm saying is what's good for the goose is good for the gander. We came out the other side. There were some times that weren't much fun, I can change a starter on a 350 Chevy lying in a mudhole, and benchpress a Turbo350 transmission out of and into a Pontiac Grand Prix. We made it. We can make it through this too. I'm just sick of all this pissy ass coverage. Economies CYCLE, get used to it. Market prices FLUCTUATE, it's the nature of markets. They can't go up forever. You have to have corrections to allow new blood to enter the marketplace. Farmers, with some help from Carter and the Russian Grain Embargo, brought the 80's on themselves, just like we in Agriculture are getting setup for something again, I just don't know when. There were operations that prospered in the 80's. Even in bad times there are bright spots.

The point is not whether I was for the market solving the farm crisis. It did, that's what markets do. The market will sort this out to. Let it work.

[Ann]

Charlie,

Aren't you one of the JOMers that recommended the great Bill Whittle "Undefended City" article?

[Pofarmer]

And, to be perfectly clear, this whole bailout talk PISSES ME OFF.

[mark l.]

"Under the agreement to move the bill to the floor quickly, the measure will require 60 votes to pass instead of a simple majority in the 100-member chamber."

http://tvnz.co.nz/view/page/1316907/2168971

you're right though...explaining a 53-46 'failure' is not going to be easy.

3 key votes?
hatch, coburn, grassley... the dems would do well to get 2 out of 3.

[Pofarmer]

HOLY CARP.

You tube video of Daniell Mudd, CEO of Fannie Mae kowtowing to the CBC.

LUN

[Buford Gooch]

Mark I,
Thanks for the education. I had missed that agreement.

[sbw]

Pofarmer. That Mudd-Black Caucus video has been circulating for some time. Glad you saw it. Everyone should.

It shows more than any single bit of evidence how a venal Congress in cahoots with a stacked agency can skim from an unsuspecting population to feed its special friends.

And people want to vote for Obama? He's not a breath of fresh air; he's the stale stench of old Chicago.

[FSW]

CBC's interests?

http://news.bbc.co.uk/2/hi/africa/7644994.stm

The think tanks are all starting new programs this month.

[M. Simon]

I just instructed my Cong. Critter to vote no unless CRA is fixed.

My Senators are Durbin and Zero. Hopeless causes.

[M. Simon]

FSW's link:

BBC - Africa

[M. Simon]

Pofarmer,

You should be watching Classical Values. We had it a week ago. Zero and his ugly wife - first a smile then a scowl.

[M. Simon]

Cosmic bubble dwarfs economic bubble.

[sbw]

Ah, but to here Ron Suskind of the NY Times and his ilk, George Bush lives in the biggest bubble of all.

Such tools.

[sbw]

here s/b hear

[ben]

"Mark, did you see Chriss Dodd talking about it yesterday? Not only was there real fear in his eyes, he never once even mentioned blaming it on Republicans."

Chris Dodd is a pompous ass...who cares what he says or what he fears? I have a reflexive reaction to anything he says, I am automatically against it.

[DebinNC]

Mud-Flap Manor

As more than a million US homeowners face devastating mortgage foreclosures, ousted Fannie Mae CEO Daniel Mudd continues to live in an opulent Washington, DC, mansion replete with expansive gardens, servants' quarters and a home theater. Mudd, whose former company is being bailed out by billions in taxpayer dollars, calls home a 22-room Colonial mansion on Newark Street in tony Cleveland Park, built on the former property of President Grover Cleveland.

[Sara (Pal2Pal)]

51 to pass in the Senate, 60 to be veto proof.

[RichatUF]

fixed?

[Chris]

I think the deposit insurance is more than a fig leaf. Think consolidation. You have 95k in cd's scattered at several banks. A buys B and takes over C in bankruptcy. Suddenly you're making a mini-run on A to withdraw two of your cd's. Vicious cycle.

The point about business accounts is not insignificant either. The healthy banks should not be facing runs but they have been.

[davod]

I heard Shadegg (SP) say (Before the mighty one blessed th proposal) that raising the FDIC threshold to $250,000 was always in the House Republicans plan, as was repealing the mark to whatever requirements. Paulson refused to entertain any changes to his plan.

If these two provisions had been in what was voted on in the house the bill would have passed.

[davod]

PS:

Raising the FDIC limit might keep more money in the banks and less in the stock market.

[M. Simon]

DebinNC,

I call it the Mudd Hut.