Wednesday, September 23, 2009
The FDIC does not want to borrow directly from the Treasury for political reasons, even though it has a $100 billion line of credit. As a result, additional loan interest will go to the healthy banks without any risk on the part of those banks. Why? Because, the healthy banks don't need to use their own money, they can just act as the middleman by borrowing from the Fed at near zero interest rates and passing the money on to the FDIC. Articles on this issue have in large part been misleading in presentation of the FDIC's goal of using future bank assessments to repay the bonds. But the reason the loan to the FDIC is needed in the first place is that the other banks can't afford to pay assessments now, and if they can't pay in the future, then the taxpayer will. So this is another bailout, this time of smaller banks, backstopped by the government.
I am not against all bailouts, but this one could be shady.
Look at the last sentence of the NY Times article above. The banks would receive bonds in exchange for the loan at a rate set by the Treasury Secretary. That interest rate would represent a direct transfer of value from taxpayers to private banks without value in exchange, and how ironic that the article claims it would be done to avoid political furor.
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