The Big Banks’ FDIC Boondoggle

In her post on the changing plans to release stress test results, Yves congratulated the Administration for planting a story that blamed everything on Goldman.

Back to the New York Times:

While all of the banks are expected to pass the tests, some are expected to be graded more highly than others. Officials have deliberately left murky just how much they intend to reveal — or to encourage the banks to reveal — about how well they would weather difficult economic conditions over the next two years….

Yves here. That means this is being negotiated. Wonder if the Times story was leaked to box the banks in and (as you will see later) blame it on Goldman. If so, this crowd would be playing a much smarter game than I have given them credit for (the "Goldman made us do it" part, the leak alone is a more predictable move). And this story was clearly planted. The Times reports it came from "senior officials"; as we noted, the Journal also has a story up.

Keep that in mind as you review coverage–both in Sanger’s story on the stress tests, and in a completely separate story–of FDIC backed lending. Sanger sort of throws the reference in at the precise point most designed to blame Goldman Sachs for forcing the Administration’s hand on the stress tests.

The Goldman move also puts pressure on the administration to decide what conditions will apply to institutions that return their bailout funds. It is unclear if Goldman, for example, will continue to be allowed to benefit from an indirect subsidy effectively worth billions of dollars from a federal government guarantee on its debt, a program the Federal Deposit Insurance Corporation adopted last fall when the credit markets froze and it was virtually impossible for companies to raise cash.  In ordinary times, regulators do not reveal the results of bank exams or disclose the names of troubled banks for fear of instigating bank runs or market stampedes out of a stock. But as top officials at the Treasury and the Federal Reserve Bank focused on the intensity with which the markets would look for signals about the nation’s biggest banks at the conclusion of the stress tests, the administration reconsidered its earlier decision to say little.

“The purpose of this program is to prevent panics, not cause them,” said one senior official involved in the stress tests who declined to speak on the record because the extent of the disclosures were still being debated. “And it’s becoming clearer that we and the banks are going to have to explain clearly where each bank falls in the spectrum.”

Shorter Anonymous Senior Official: "Goddamn it Goldman, you risk starting a panic here! And as punishment, we’re going to reconsider the terms of that FDIC backing."

fdic-bailout-graphic.jpgAnd to explain what that means, the NYT provides the accompanying story (and the handy graphic, which shows up in both stories online). 

Goldman Sachs, you see (and Bank of America, and JP Morgan Chase, and Citi, and Morgan Stanley, and Wells Fargo) have been benefiting from higher credit ratings than they themselves merit because the FDIC has been backing their loans to the tune of billions of dollars. 

Banks have been benefiting from an indirect subsidy adopted by the federal government at the height of the financial crisis last fall that allows them to issue their debt cheaply with the backing of the Federal Deposit Insurance Corporation.

That debt — more than $300 billion for the banking industry so far — helped otherwise cash-strained banks to keep their businesses running even when it was virtually impossible for other companies to raise funds. The program will continue to bolster scores of banks through at least the middle of 2012.


Rather than relying on a direct infusion of taxpayer money, the agency is helping the banks raise debt from private investors by endowing them with the equivalent of an AAA rating. If any of the banks relying on the guarantees ran into trouble, the F.D.I.C. would make good on those bonds.

Gosh. The ability to access credit with an artificially high credit rating? I bet Chrysler would love that boondoggle right about now, huh JP Morgan Chase (and note, three of the other beneficiaries–Citi, Morgan Stanley, and Goldman Sachs–are also Chrysler creditors)?

The story on the FDIC boondoggle quotes Goldman CFO David Viniar trying to downplay the benefit of the FDIC backing, along with others calling it an "invaluable" subsidy from the government. It’s worth it to click through and see Viniar squirm, really it is.

Now, frankly I’m most interested in this from the same perspective that Yves is. These two stories, taken together, appear to be a welcome new tactic from the Administration, to start laying out all the value the government has given the banksters. It’s time to make these banks squirm with the recognition that they’re deadbeats for a change.

27 replies
  1. Peterr says:

    Spencer has a post up about the lack of benchmarks in the US aid program to Pakistan, but it sure sounds to me like they could also be applied to the banks with a few minor edits.

    Per Spencer, we have this from the State Department’s spokesperson, Robert Wood:

    I think you would expect when the U.S. taxpayer is providing money, assistance to a country, that we want to make sure that we’re not only getting our money’s worth, but that certain things that we care about, we want to see that they be dealt with. And so we have said we will provide and would like to provide $1.5 billion over a five-year period to Pakistan, but clearly we want there – we are going to establish benchmarks. We want to see certain standards and goals met. And that’s something you would expect that we would be willing to do. And – but I don’t have anything else beyond that.

    Replace “a country” with “a bank” and “Pakistan” with (for instance) “Bank of America”, and you’ve got what appears to be the White House language about the big banks and Wall Street financial firms.

    But as Spencer laments, “Will someone just announce some benchmarks? Like in a piece of legislation or from a department podium?” Benchmarks seem to be in short supply in DC these days, whether at State, DOD, Treasury, or the White House.

    OK, there is one more thing that needs adjusting. You’d also have to change the dollar amounts, because (as the NYT chart shows) those banks are getting a helluva lot more than Pakistan is getting. Hmmmm . . . Maybe Pakistan should try converting itself into a bank.

  2. Leen says:

    The Diane Rehm show focused on this issue this morning. Several guest (Deborah Solomon from the Wall Street Journal) said no reason to upgrade regulations. Not going to work. Unenforceable.

    Deborah seemed to have an agenda

    10:00State of the U.S. Economy

    Guest host: Katty Kay

    President Obama defends his administration’s efforts to revive the economy, but warn tough times lie ahead as the nation re-builds its financial system. Guest host Katty Kay of the B-B-C and her guests offer a look at the state of the U.S. economy.

  3. Leen says:

    Just finished listening to Amy’s report on the Somali Pirates. Always Amy going deeper and wider in any story that she does. Her guest share a different take on the Somalia piracy..way different than anything we are hearing in the MSM

    There was an odd statement by Amy about a Larry Summers statement at the end of Amy’s program about Somalia…..n_response

    “AMY GOODMAN: When I read your article, Mohamed Abshir Waldo, it reminded me of a controversial memo that was leaked from the World Bank—this was when Lawrence Summers, now the chief economic adviser, was the chief economist at the World Bank—in which it said, “I think the economic logic behind dumping a load of toxic waste in the lowest-wage country is impeccable, and we should face up to that. I’ve always thought that under-populated countries in Africa are vastly under-polluted.” He said he was being sarcastic.

    MOHAMED ABSHIR WALDO: Actually, the more formal official concerned with this UN habitat has also confirmed in various reports that this has been dumped in Somalia. The special representative of the Secretary-General, Ould-Abdullah, who is now working with the Somali authorities, has also, I think, made a statement to that effect. So it is very well known. It’s not something hidden. It’s not something we are making up. The world knows, but it doesn’t do anything about it.”

  4. Peterr says:

    Goldman doesn’t seem to be a big fan of transparency. Per the Washington Post, with a little emphasis added:

    December was a disastrous month for Goldman Sachs, producing a loss of $780 million, but you wouldn’t know it from looking at the company’s bottom line for the last quarter of 2008 — or the first quarter of 2009.

    December fell through the cracks as the big investment-banking firm moved from a fiscal year ending in November to a fiscal year beginning in January. Billions of dollars of write-downs in the value of commercial real estate loans and other assets showed up in neither period.

    The result was that Goldman was able to report a first-quarter profit of $1.81 billion Monday, just as it was gearing up to raise $5 billion from investors yesterday through a new stock offering.

    “Hey Rocky, watch me pull a rabbit out of my hat . . .”

    • gannonguckert says:

      Did I miss a meta-joke, or isn’t it really important that we remember our history, and recall that it was Rocky who would show Bullwinkle the rabbit-from-the-hat trick, no?

    • Hmmm says:

      “Hey Rocky, watch me pull a rabbit out of my hat . . .”

      Well, as you well know, fortunately the rejoinder to that line is “Aw, Bullwinkle, that trick never works.”

  5. readerOfTeaLeaves says:

    Well, I have only the merest cursory grasp of all this, but the item brought to mind a topic that I’ve not seen discussed recently; the fact that Goldman and some of these banksters were buying up energy commodities a year ago and wildly escalating the prices of energy commodities and food. The same behaviors that occurred with electricity by Enron in the early 2000s appear to have been repeated in the energy and gas markets the last couple years.

    Note what was happening one year ago — months before the July oil spikes, and months before the Sept 15th ‘meltdown’. This is on the topic of Senate committee hearings in May 2008:


    The USDA now expects retail food-price inflation of 4.5% to 5.5% [in 2008]…

    …Jeff Harris, chief economist with the Commodity Futures Trading Commission, said data modeling and analysis indicates that “there is little economic evidence” showing that speculators systematically drive prices in the markets.

    Yet according to Masters, institutional investors such as corporate and government pension funds, sovereign wealth funds and university endowments — relatively new participants in the commodities futures markets — are creating a demand shock. Specifically, he cited index speculators who allocate a portion of their portfolios to commodities investments that track popular indexes such as the Dow Jones-AIG Commodity Index.
    “Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant,” Masters said.

    …CFTC’s Harris acknowledged that commodity futures markets are “experiencing robust growth” with the recent influx of institutional investors. But he warned about “overly restrictive limitations” on speculative positions that could impair market liquidity.

    “In the absence of reasonable hedging opportunities, commercial businesses may be forced to increase prices to compensate for unhedged risk,” Harris said. “Diminished hedging activity can also impair price discovery in futures markets since commercial hedgers typically are a primary source for new market information.”

    Sen. Joseph Lieberman, I-Conn., chairman of the Homeland Security and Governmental Affairs Committee, is looking at whether the CFTC has the authority and resources needed to adequately monitor and regulate commodity trading.

    Masters recommended that Congress eliminate index speculation and take other steps such as prohibiting pensions from investing in commodity index replication strategies. He further suggested that Congress close a swaps loophole that enables all sorts of speculators to access the futures markets in positions beyond their limits.…..874B5DC%7D

    Assuming that people like to eat, and that starving populations pose security risks, one could conclude that Holy Joe Lieberman was asleep at the Senate Homeland Security switch — at least, if you consider the potential of huge institutional investors buying futures on your corn flakes, milk, seeds, chicken, lettuce, etc as a potential risk to national security.

    And WTF are ’sovereign wealth funds’ and hedgies (who for all anyone knows are getting money from the Medellin drug cartel, or other despots) getting a shot at the potential to control the prices of everything from Grape Nuts to yoghurt to radishes?!

    How is a future price on soybeans a ’stable investment’ for an endowment or a pension fund?! (Especially in an era of global warming that destabilizes the climate, making crop production less predictable, but I digress…)

    I don’t understand how all this fits together, but at some point we really need those banks turned upside down, inside out, and sidewise and shaken till every last nickel hits the floor.

    I hope Yves and EW are correct: I sincerely hope that we see the fraud, the stupidity, the greed, and the deceits fully exposed.

    Paging Eliot Spitzer…

    • OrganicGeorge says:

      The hedge funds have made it impossible for farmers and grain dealers to hedge their risk. These new players push markets far beyond their actual values so far and so fast that margin calls have become to expensive for the people who actually have a need to hedge their crop risk.

      When the markets no longer work, for the very people it was designed to help, it’s time to reevaluate the purpose of these new players.

  6. barne says:

    Speaking of financial looting –…..992277.ece

    “TAMPA — One of the leading figures of the savings and loan scandal of the 1980s jumped to his death from a parking garage at Tampa International Airport last week.

    Michael Wise, 64, leaped from the ninth floor of the garage in the early afternoon of April 8. The Hillsborough County Medical Examiner’s Office ruled the death an apparent suicide. It’s unclear why Wise jumped.” . . .

    • skdadl says:

      As Leen says, so resonant with brutal sadness from the past.

      Tangentially related, there is a brilliant diary at dkos about the Dust Bowl, a term apparently coined 74 years ago today. Large swathes of our prairie provinces blew away as well at the same time, although they don’t show on those maps. My parents came through that, and then they got to go to the Second World War.

      • cbl2 says:

        fabulous piece from History Channel in October – Black Blizzards

        interviews with survivors, unseen footage, etc. and how FDR was smart enough to pick the one go-to soil erosion guy in govt

  7. cbl2 says:

    holy crap ! about 3 weeks ago I asked out loud in the comments – just who was behind all the Goldman stories suddenly out there (it came during the AIG Bonuspalooza) – thinking it was prolly JPM Chase but guessed WH might be dark horse candidate –

    o/t gratuitous humor – for about 5 min. Fox/Cavuto had sign up behind ol Neil saying “Put Teabags Here” – with an arrow drawn to Hannity’s chin … we are legion

  8. wavpeac says:

    More and more I believe that Nader was right. I don’t think he could have saved our country from the fascists but I do think he was absolutely on target with his vision in regard to the enormity of this problem.

    it’s not as simple as dems and republicans…this problem has big freakin’ teeth. The only solution is truth…now more than ever we need our 4th estate. Someday these blogs will be hailed as the nucleus of this democracy if it doesn’t become completely engulfed by the “global economy”.

    • SouthernDragon says:

      I’ve just started reading David Harvey’s The Limits to Capital, originally published in 1982 but revised and reprinted in 2006. In the intro to the new edition Harvey speaks to the coming disaster with the housing bubble. There were any number of people, not all of them economists, etc, that realized what a debt driven economy was in for. The arrogants, like Summers, Rubin, et al, believed then and today that they are right and that an unregulated debt driven economy is the way to go.

        • SouthernDragon says:

          I really like Harvey. Didn’t discover him until about a year ago. He teaches a course at CUNY Grad Center on “Reading Marx’s Capital.” The 2007 fall semester class was videotaped and is on his website. Made re-reading Capital actually enjoyable. Website also has some recent interviews, including the Democracy Now! segment.

  9. FlashMan says:

    Pretty cool proxy. Anybody know what SEIU’s agenda is here? Are they really trying to organize bank tellers or is something else going on?

  10. rkilowatt says:

    Was GoldmanSachs paid twice?
    Denninger has noticed that GoldmanSachs seems to have been twice paid for its hedges with AIG that AIG was unable to pay-out as contracted, thus leaving GS with worthless “insurance” on its bets…paid #1 by $12B of taxpayer money the gov gave AIG, who secretly passed it on to Goldman…and paid #2 from other counter-parties with whom GS had earlier and secretly further hedged its AIG hedges.

    The #2 payoff was recorded in last year’s earnings per apparent recent GS disclosures and public statements. This would beg for scrutiny in a rational world.

    • readerOfTeaLeaves says:

      I wish that I had a fact-based answer to your question.
      I am befuddled by the very same thing — it sure looks as if they were paid **twice**; once via an AIG payment (which came from TARP), and then a second time from the counter-parties (and we don’t know who they were, nor whether the money they used to pay GS also came from TARP).

      Probably more a feature than a bug.

  11. rkilowatt says:

    For a useful viewpoint, read Henry George’ Progress And Poverty[1879]. It cuts economics to the quick so anyone can more easily spot flimflam that engulfs it.
    IIRC it was the 2nd US book to sell 1,000,000 copies [Uncle Tom’s Cabin was 1st]. Interesting to juxtapose BO 2009 and mid-1800s.

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