Bankster's Cartel: Licensed to Steal

If this isn’t a BO-HICA moment, I don’t know what is. (Bend-over; here it comes again).

Friday, October 30, nine (9!) banks failed and were taken-over by the FDIC. That brought the total bank failures to 115 so far in 2009. This number of failures hasn’t been exceeded since 1992 AND we still have two months to go in 2009 to probably set an all-time record. What a wonderful record at which to look forward.

Not to worry, though. U.S. Bancorp bought all nine of the failed banks. Specifically, they picked up $18.4 billion in assets and $15.4 billion in deposits. The bankrupt FDIC picked up the losses. Is this a great system, or what?

We haven’t even begun to recover from the imbecilic big-bank shenanigans of the recent past; yet here we are creating still more “Too-Big-To-Fail” banks.

Excuse me but if big banks created the problems were now facing, wouldn’t it be a tad more prudent to, say, limit the size any one bank could attain? Hello Barney, Chris – anyone home?

Oh, I forgot. On Friday, Barney Frank did address the problem. He decreed that the TBTF banks would henceforth be charged a “fee” during good times in order to cover potential losses during bad times as the TBTF bank problems are unwound.  I guess size does matter. Apparently all this will be done in secret:

A. There will be a secret club of financial institutions that will be considered “Too-Big-To-Fail.” So if you’re a member, what incentive do you have to act in a prudent manner? Do you not, in fact, now have a license to steal? Can you not do any foolish thing you wish? You know you’d be punished if you simply acted prudently but would benefit with a bailout if your wild schemes failed. Moral hazard? Naw!

B. The public will not be informed of who the members of this private club are. And you thought you had some semblance of privacy in financial matters? The FED still refuses to identify which banks were subjected to the so-called “Stress Test.” Why should we be surprised that they won’t tell us the names of the TBTF club members?

C. A fund will be established by taxing these financial institutions in good times to pay the costs to protect them in the bad times. Anyone really think these fees will cover the bad times? Who will determine when the “good times” are here? And when there are insufficient funds in the kitty, guess who will pay the difference? Moral hazard? Naw! License to steal? From guess whom?

D. The Federal Reserve will have the power to determine and therefore change what the definition of “solvency” is. Oh great, try playing the game when the ground rules keep changing. I’m going to take my bat and ball and go home now!

Did it occur to you that, by omission, the Too-Small-To-Matter banks will continue to be thrown to the wolves? Let’s see; we make big banks even bigger but we close small banks and merge them into already big banks making the big banks even bigger. Figures! First we experience a meltdown in our banking system due to too much debt. We then “solve” the problem by creating still more debt. Part of the fallout of the banking collapse was that we were told we had banks that were too-big-to-fail. Now we “solve” this problem by creating still more and even bigger too-big-to-fail banks? Wow! The logic underwhelms me. Next time my house catches on fire, I guess I’ll try pouring gasoline on it to extinguish the fire. Well, water is just “so-yesterday” a solution. Might as well be innovative.

Currently on the front burner is CIT Financial. Here is an institution that services Middle-American business. CIT apparently no longer qualifies as a TBTF bank, even though they did receive over $2 billion in bailout money a year ago. As a result, CIT finds itself in the middle of bankruptcy proceedings. The intent is reorganization under Chapter 11. Regardless of the outcome, small and medium-sized business will suffer. The Wall Street Journal estimates that perhaps only 20% of the prior level of financial services will be available, and that’s “IF” CIT is successful in reorganization. At best, it’s obvious that any attempt to replace these lost “services” will require much higher financial credit-worthiness and there will be fewer funds available for this process. Well…the TBTF banks have all the money so what’s left for small and medium-sized business? Now tell me this isn’t a License To Steal? Can you estimate how many small and medium sized businesses will be forced into bankruptcy? That really helps our recovery-NOT. Small business creates 90% of the new jobs Obama keeps looking for but, hey, why worry? Privatize the profits and socialize the losses. Just keep the big boys happy.

Every economic problem we face can be directly traced back to the Federal government and the interfering laws that they continuously pass. Remember the Resolution Trust Corp. back in the 1980s? It became “necessary” to bail out the Savings & Loan industry because so many of the S&Ls gambled wildly with their depositors’ money. Sound familiar? How could the S&Ls of the 1980s and the too-big-to-fail banks of the 00s make such horrible business decisions? Were/Are the management teams just stupid or are they also incompetent?

Consider this: We’ve had a 115 bank failures just this year. Are you worried? Why not? Oh, your account is insured. By whom? So when the management of the bank that controls your deposits makes stupid business decisions, you don’t care? The FDIC will bailout your account. Not only that, the “insured” amount was increased from a “mere” $100,000 per account to $250,000 this year (this extra coverage expires at the end of 2013 and reverts back to the $100,000 figure in 2014 as currently scheduled). Do you see a slight problem here? Isn’t the FDIC just another government agency that gives the banks a License To Steal?

Just for giggles, suppose there were no FDIC and your deposits at any bank or S&L were simply not insured. Would you then perhaps have a slightly different outlook as to the safety of your money? Would you perhaps behave somewhat differently when selecting a bank in which to deposit your funds? Why? Do you now see that the FDIC is a Federal Government sponsored insurance scheme to protect you from greedy and stupid bankers? Or do you perhaps see that the FDIC actually facilitates excessive risk-taking on the part of the bankers since they have nothing to loose? Do you suppose there might be a slight moral hazard hiding somewhere in this mix? If the bank did not have the FDIC insuring your deposit and that same bank had to compete in the open, free market for your deposit account, would you suppose that the bank management might behave in a slightly more conservative manner? Wouldn’t you behave in a slightly more conservative manner when selecting a bank?

What’s to restrain the management of those banks today? If they mess-up, the government will protect them. And as we’ve all observed, the very folks that made the stupid and reckless business decisions will still get their multi-million-dollar bonus.’ Would you be willing to make a wild guess that maybe there is a slight moral hazard hiding somewhere in this scheme? Isn’t that a License To Steal?

You don’t want to hear this, but you and I are responsible. Yes we are. We grumble about politicians and yet we continue to re-elect the same folks who continuously lie to us. They tell us what they think we want to hear, and then go do whatever they want. As Walt Kelly’s eminent philosopher of the 1960s, Pogo, opined, “We have met the enemy and they is us.” Don’t we rationalize that “our representative is okay but it’s the other guy’s rep that needs to be voted-out? Well guess what? Our rep needs to go, too. They all need to go. We don’t need term limits. We just need the gumption to vote “no” every time we see the term “incumbent” after a candidate’s name. It’s that simple. I’d guess that the message would be heard loud-and-clear very quickly. Isn’t it about time we put an end to what seems to be an unlimited License To Steal?

Tex Norton

November 3, 2009

The Daily Reckoning