“Yes, but let’s be clear about two things: 1) the FDIC’s DIF “took some big hits”, because they were a poor conservator, who fire-sold into panicked markets and cost the DIF tens of billions in avoidable losses, as a result. No other government conservator, not the Fed or U.S. Treasury, or private one (e.g. the Trustee’s of Lehman’s BK), unwisely did the same. These other, more prudent conservators, waited until markets became less panicked and asset prices recovered/returned to their long-term intrinsic value. And 2) in our U.S. banking system, with government-guaranteed deposit insurance (from the FDIC), private bankers and their boards, and their investors and creditors, DON’T set prudent leverage and capital requirements, government central planners set them…

…In other words, free markets (capitalism) didn’t set bank capital standards, the government did through its banking regulators at the FDIC, Fed, and OCC. And as former Fed Chairman Greenspan said in his post-crisis paper, “The Crisis” (I am paraphrasing from memory here)….”we deliberately set bank capital standards at a level that would not cover the once-or-twice in a century banking crisis and therefore, the sovereign (our government) would need to step in and recapitalize the banks in those times.” In other words, private bankers followed the bank capital rules set by the government’s “banking/financial experts”, who had decades of institutional experience and scores of Ph.D. economists on their staffs. Pre-crisis, these private bankers and their bank’s board, shareholders, and creditors, rationally assumed that these “government experts” knew far more about prudent bank leverage/capital requirements than they did. And the “government banking experts” had a huge amount of “skin in the game”; they were insuring/guaranteeing trillions in system-wide U.S. deposits. Clearly, with the benefit of hindsight, these “government banking experts,” were terribly wrong. Private banks (and also the FDIC insurance fund, FHA insurance fund, and Fannie and Freddie) were massively under-capitalized pre-crisis. And according to recent articles I have read, the world’s Too Big to Fail Banks (including those in the U.S.) still need today over a trillion dollars of additional capital; mostly subordinated debt that would convert to equity in a crisis. (See second excerpt below.) How in the world, given these facts/truths, could individual private bankers following their “government experts” leverage/capital rules, be blamed for being inadequately capitalized pre-crisis? P.S. By the way, it was the FDIC’s own fault, as an insurer/guarantor, that its deposit insurance fund (DIF), became insolvent during the crisis, not private bankers. It was obvious on its face, given the late 1980’s/early 1990’s past insolvencies of BIF/SAIF (DIF in this posting) and the significant growth in banking and federally-insured deposits since that time, that the DIF was severely undercapitalized. It’s one thing for our government’s “banking experts” to be massively wrong, in hindsight, about bank capital levels. It’s another though to have the FDIC, DIF, and other government “banking experts” perpetuate a false-narrative, that hides and distorts their overarching role and inappropriately and falsely blame private bankers, like myself. The truth is emerging though, here and elsewhere. Apparently, Democratic Presidential candidate Hillary Clinton said in her private speeches to Wall Street and bankers, something like “we are all in this together”; in essence acknowledging that the liberal view is a populist lie (for votes) and that it was a system-wide financial crisis (with well-intended government’s significant involvement in creating and monitoring the system) and not the fault of individual banking institutions, like mine, who were following the rules of the system.”, Mike Perry, former Chairman and CEO, IndyMac Bank

My Response Above to this February 2016 Mortgage Newsletter Excerpt:

“I received this note from a banking regulator: “Hi Rob – It’s nitpicking, but I want to make sure that you realize that the only parties who have lost money in modern American bank failure have been stockholders, some holders of subordinated debt, uninsured depositors, and FDIC’s Deposit Insurance Fund (DIF). The U.S. government has not lost a penny since FDIC’s formation in 1933. The DIF took some big hits in the recent crisis, but was replenished by premiums assessed on all banks. To the extent that premiums are assessed on deposits, I guess you could argue that the general public pays for bank failures, but it is not a cost that is paid directly, and not paid via taxation per se – thus stronger bank capital protects the DIF and uninsured depositors.””

 Another Relevant Excerpt from February 2016 Mortgage Industry Newsletter:

“Turning to banking news, the Financial Stability Board (FSB) is based in Basel and its global regulators quietly set the tone for the biggest banks in the world. It has been toiling away on new guidelines on how to prevent banks from becoming “too big to fail.” Each designated country generates its own implementation process, but the result looks a lot like what the gatekeepers in Basel had recommended. FSB regulators still want the largest banks to raise $1.19 trillion by 2022 in debt instruments. These banks should maintain sizable cushions able to absorb losses when a financial crisis is looming on the horizon. Regulators remember too vividly what happened in 2008, when taxpayers were obliged by their government to bail out banks. In the future, the cost of the banks’ failure would be supported by its investors, not the general public.  Eight U.S. banks are affected by the new guidelines: JPMorgan, Wells Fargo, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, BNY Mellon, and State Street. These banks will all have to issue debt that could be used to defray losses in times of crisis. These debt instruments will cover losses when a bank’s equity is wiped out and regulators will avoid a potential panic caused by a domino effect. So-called Total Loss Absorbing Capital (TLAC) of the banks will need to equal 16% of their assets in 2019 and 18% by 2022. The FSB recommendations are designed to make the banking industry safer. But will it affect the dynamics of lending for every institution? Sure it will. New types of debts will command higher interest rates – let’s hope those don’t include agency MBS. Banks will find them more expensive, so they will be inclined to lend less. Anyone working in a bank knows that banks today have better cushions in reserve and more commercial loans outstanding than they had before the financial crisis. Consider that the avalanche of debt coming from the big 8 may reduce the money available for community banks who are also trying to raise capital. This could create high transaction costs although the new standards are designed to make sure the largest banks have enough capital to absorb losses if the bank fails in order to protect against further contagion in the broader financial system.”

 

Posted on February 17, 2016, in Postings. Bookmark the permalink. Leave a comment.

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