|
| Von – There is a lot there. First of all, I am a country banker so I may not be as sophisticated as some of my larger counterparts. I will try to address each point as good as possible but it may take me a while. I plan to be gone for the second half of this week as well. Point #1:
I believe the Cyprus bank debacle undercuts the notion that there is no risk of putting your money in a bank. If depositors lost their money in this manner in an EU country it can certainly happen in the US. I think it already has but is done by stealth via artificially low interest rates and the FED printing more money. Moreover, if the US loses its status as the Reserve Currency of the world (likely IMO) and their power to just print money, you better believe our politicians will be just as willing to raid bank deposits to fix fiscal problems if this example in Cyprus actually works in the long-run. So, why accept 1% on your deposits if you can listen to news some Friday afternoon and find out that a banker’s holiday has been declared and you are locked out until it has been resolved in the most political expedient manner possible? Beware of 3 day weekends.
I agree with those who say that Cyprus’s solution may be in fact better than the FED printing money because their solution places a heavier burden on those involved in creating the problem. Here is the US, everybody’s money is being debased equally whether you contributed to the problem or not. One thing to consider, though, is that many of us conservative bankers did nothing to contribute to the financial crisis, and yet, we shoulder a heavy cost via greatly increased FDIC insurance premiums and lots of onerous regulations whereby we have had to hire a compliance officer at an on-going cost of a $100K+ per year to comply with.
Moreover, I would suggest to you that there is really a two tier banking system in the US. The TBTF are one tier where you throw everything and the kitchen sink at in the event that one of them has a problem to shore them up and us smaller banks whereby we will be closed much more quickly in the event of a problem because the FDIC wants to minimize any potential loss just because they realize that by letting bad management go forward, the losses will likely deepen. The short-trigger approach towards small banks means that some solvent smaller banks have likely been closed by the FDIC. Also means that for us that remain we must consider keeper even larger amounts of capital in the bank to avoid any problems with the FDIC.
I favor the break-up of banks larger than the FDIC can afford to takeover. If that solution is not politically or economically feasible, I would then advocate separate FDIC assessment on the larger banks (only) until the fund was built up to the point where it could take down a TBTF.
Have you ever considered that FDIC insurance is itself just another form of a credit swap? You are hitting the nail on the head in your criticism of credit swaps, derivatives, etc. that are too large be legitimate in the event of a macro downturn. Apply the same rationale to the FDIC. In the case of FDIC insurance, the banks pay an assessment to the FDIC to create a reserve in exchange for cheap access to Federally Insured Deposits (whatever that means anymore) that is supposed to clean up banks that are deemed to be insolvent. The catch is that if too many banks get in trouble due to an economic downturn, the FDIC’s reserve will not be big enough to fund the clean-up. Or, as you point out, the fund may not be large enough to clean up even one TBTF.
You tell me, why should companies like AIG and MGCI be allowed to continuing to sell mortgage insurance when it has already been proven that there is NO WAY they are big enough to sustain losses in the event of a double dip recession? The business model will not work of the long-run. Answer - AIG, Freddie Mac, and Fannie Mae have all kinds of political power in Washington to this day. The appeal of the American Dream of Home Ownership for everyone is no less today than it was prior to the financial crisis. Take a look at FHA and Rural Development loans to fund 100% of home purchases. They have sky-rocketed over the past 5 years or so – think they are 40% or so of all purchases these days. Have we really learned anything? I can tell you that as recent as two months ago, Freddie Mac was still purchasing mortgages from borrowers that had 50% debt to income ratios. How can that work when taxes need to be paid and the family still needs money to live on? To avoid such problem loan situations and to disassociate our name with these practices, we run each and every 100% financed Rural Development loan through our loan committee, meaning that we turn away more than 2/3rd’s of such applicants, the associated fees and potential growth that can result. Moreover, we will not originate a loan for sale to Freddie Mac if the debt to income ratio exceeds 36% which happens to be the ratio that was in place with both Freddie Mac and Fannie Mae before they were liberalized under the Clinton administration and continued from other various liberal politicians.
Edited by Iowegian 3/25/2013 22:59
| |
|
For Iowegian and others Re: Banker conversations.
