The President and Congress have finally allowed us to allocate $700 billion to a policy, about whose success they are, at least reasonably, doubtful. They have to do it, they say, to save Wall Street. Before they go any further, they should enact new regulations to better protect us all from turning our $700 billion bailout into a trillion dollar bank deposit insurance guarantee.
In the struggle to pass the bill, the government agreed to insure bank deposits up to a limit of $250,000, the previous limit had been $100,000. At the start of 2008, under the old limit, the government estimated that it was insuring about $4.42 trillion dollars at the $100,000 rate and had set aside a $55.2 billion reserve against potential liability. That's calculated at about 1.25% default rate.
No one seems to know how much more money will be insured under the new limit, but the new law provides that banks will not have to pay premiums on the new insurance. They get it for free. The new law insures two-and-a-half times as much as the previous law did. We have put the U.S. Treasury at risk for some additional amount, and for every trillion dollars we must add $10.25 billion to our Reserve fund. If banks collapse at a greater rate, we will incur a far greater loss. And nobody's paying attention.
The last time the federal government went down this track was in 1980, when in order to save "Main Street", i.e. the Savings and Loan industry, Congress, under Jimmy Carter, passed a law raising the deposit insurance limit from $40,000 to $100,000, also a 250% increase over the previous level. Then, under President Reagan, Congress enacted the Garn-St. Germain Depository Institutions Act, which relaxed statutory and regulatory requirements on the S&Ls.
Between 1982 and 1986, the Reagan administration reduced the Bank Board's regulatory and supervisory staff considerably. The average bank examiner had only two years of on job experience. During this period, the bank industry assets increased by more than 50%. Forty Texas S&Ls tripled in size, many of them growing by 100% each year. We insured 50% more assets, with many fewer regulators.
In 1985, the FDIC transferred regulators from Washington to the twelve regional federal home loan banks so that they were no longer overseen by the OMB [Office of Management and Budget] and their salaries were paid directly by the Bank Board system. In other words, regulation of the S&Ls and banks was left largely in the hands of regional representatives far removed from their Washington supervisors. To summarize, fewer regulators were now overseeing more assets with less supervision from the home office. We all know what happened next--the S&L crash, the Keating scandal, and ultimately the George Bush S&L bailout, which cost American taxpayers 124.1 billion dollars.
How can we avoid repeating our mistakes--one first step: add bank examiners as well as asset managers.
We have all read about the Treasury Department's website ad for more asset managers to help in the disposal of Wall Street's "toxic loans." We should also be advertising even more ardently for experienced bank examiners to review banking and S&L performance on a monthly basis. We must double the number of bank inspectors back to pre-Reagan levels. We must return them to Washington, where they will report directly to the people who control the insurance reserves. To prevent a too cozy relationship between regulators and the regulated, bank examiners must switch assignments on a random basis. And bank regulators should be held responsible when banks under their supervision fail. The new administration must demand the accountability of its employees.
Further reading:
It is interesting to note that most of the information above has been available on two federal websites: Office of Thrift Supervision (OTS), http://www.ots.treas.gov/?p=History, and the FDIC, http://www.fdic.gov/bank/historical/s&l/index.html, for many years.
Below readers will find direct quotes from those websites that establish the accuracy of the above narrative, unless, of course, the current administration erases them as soon as this article is posted. The point is, these guys knew, or should've known, about their own record.
Office of Thrift Supervision (OTS): "In the early 1980s, interest rates climbed to unprecedented levels, undermining the viability of the S&L business model. Many institutions were economically insolvent. In an effort to help the industry "grow" out of its problems the government deregulated the powers of savings and loans, and gave them full access to federally insured deposits to fund their new lending powers."
FDIC: "The law is a Carter administrative initiative aimed at eliminating many of the distinctions among the different types of depository institutions and ultimately removing interest rate ceiling on deposit accounts...Deposit insurance limit raised to $100,000 from $40,000."
FDIC, March, 1984--"Failure of Empire Savings of Mesquite, TX "landflips" and other criminal activities are a pattern at Empire. This failure would eventually cost the taxpayers $300 million.
FDIC, July, 1985-- Chairman [Edwin] Grey begins transfer of federal examiners to the to the twelve regional Federal Home Loan Banks so that they are no longer overseen by OMB and their salaries are paid directly by the Bank Board system.
FDIC, August, 1985-- Only 4.6 billion [left] in FLIC insurance fund.
FDIC, 1987--Losses at Texas S&Ls comprise more than one-half of all losses of all S&Ls losses nationwide, and of the twenty largest losses fourteen are in Texas.
FDIC, April, 1987--Edwin Grey ends his term of Chairman of Federal Home Loan Bank Board in June. Before his departure he is summoned to the office of Sen. Dennis DeConcini. DeConcini, with four other Senators (John McCain, Allan Cranston, John Glenn, and Donald Rigle), questioned Grey about the appropriateness of Bank Board Investigations into Charles Keating's Lincoln Savings and Loan. All five Senators who have received campaign contributions from Keating would become known as the "Keating Five". The subsequent Lincoln failure is estimated to have cost the taxpayers over $2 billion."
FDIC, November, 1988--George Bush elected President. S&L problem not part of election debate.
FDIC, 1989--President Bush unveils S&L bailout plan in February."