FDIC Charge Versus a Systemically Risky Bank Fee

I want to emphasize Felix’s point here. If the $20bn bank fee is replaced by a FDIC increase, that impacts a broader community of people rather than the specific risky agents we want to assess:

It would be a fiasco of tragic proportions if the banks managed to remove these taxes from the final bill, essentially absolving themselves from cleaning up after their own mess….

An increase in the FDIC premium would be a gift on a platter to banks like Goldman Sachs and Morgan Stanley which don’t have insured deposits — not to mention non-bank players like Citadel which are systemically very important. I’m unclear on what exactly this Republican “procedural hurdle” is — I thought that after reconciliation, you just needed a simple majority to pass a bill. But I’m getting very annoyed about it.

Also remember if you think about a bank’s balance sheet in two dimensions, as deposits and non-deposit liabilities, the non-deposit liabilities are the ones that get people in trouble. We want to encourage banks to use the “sticky” deposits as their lending base, not non-deposit liabilities. There’s talk about raising the FDIC premium ratio to 1.35 from 1.15, which would be an extra tax on the deposit base, which impacts depositors and not the capital markets. That’s the opposite of what we want to do.

Ants

Kevin Drum finds a doozy. House GOP leader John Boehner thinks that the financial reform bill “is killing an ant with a nuclear weapon.”

Is he serious? Does he really think the financial crisis was the equivalent of an “ant”? What parts of this bill go too far? Name them.

That’s the video of him opposing HR 4173, the House version of the Financial Reform Bill, from the final December 2009 vote. His argument against voting for the bill? Bailouts. Permanent bailouts. That’s his talking point. This bill is designed to do permanent bailouts. It’s too weak, and will just bail out banking firms. That’s all he said in substantive opposition to the bill. Now it’s the opposite – the bill will nuke Wall Street, leaving no man behind to be bailed out. Which is it? Obviously it’s mercenary to whatever is polling well.

Which is a real shame – this reform effort could have used some principal conservative critics who could take the spotlight from those scoring cheap points, and it never got it.

Recourse

Felix notes this piece from John Carney at CNBC, New Bank Taxes May Derail Financial Reform Bill, which relies on Jeffrey Friedman’s argument about the Recourse Rule for why we don’t need regulation because regulation got us in trouble in the first place. Here’s the money quote (bold):

“If we seek the sources of a systemic failure, a logical place to look is among the legal rules that govern the system as a whole. Unfortunately, being legal mandates, these rules—unlike the different strategies pursued by competing capitalists—aren’t subjected to a competitive process. So if they are based on mistaken ideas, we all suffer the consequences,” Jeffrey Friedman, the editor of the forthcoming book What Caused The Financial Crisis, writes at his blog…

So in the run up to the last crisis, the government pushed hard for expanded home-ownership, pushed down interest rates, lowered lending standards and put in place bank capital rules that strongly encouraged banks to engorge themselves on mortgage backed securities. Most of the biggest and most sophisticated financial institutions followed the government’s lead.

“Engorge.” Nice word. Any proof? We discussed this argument of Jeffrey Friedman’s, that a 2001 change to bank capital rules caused the crisis, here in detail. His argument, which he mentions in comments, that people bought MBS not because they were chasing yield but because they were gaming Basel requirements doesn’t strike me as an accurate representation of either how these things were sold, who they were sold to, or the arguments salesmen used to sell them.

And there’s no evidence I’ve seen since then, though Carney closes with this argument about the Recourse Rule. In fact, in the original Friedman editorial Carney is presumably sourcing, footnote 6 notes: “[6] We won’t know with any certainty, however, that bankers did buy these securities because of the Recourse Rule until somebody actually asks them, in confidence. This research is being undertaken by Wladimir Kraus of the University of Turin.” I am excited to see Wladimir Kraus ask bankers if it was someone else’s fault why they screwed up – any guesses on what the answer will be?

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