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Regarding the expansion of the FDIC powers to include guaranteeing the senior debt of banks and their holding companies...in reviewing the details, I think I figured it out.
Here's the text:
The Secretary of the Treasury, in consultation with the President and upon the recommendation of the Boards of the FDIC and the Federal Reserve, has invoked the systemic risk exception of the FDIC Improvement Act of 1991. [Edit: love the name]
This action will provide the FDIC with flexibility to provide a 100 percent guarantee for newly-issued senior unsecured debt and non-interest bearing transaction deposit accounts at FDIC insured institutions subject to the terms outlined below.
Scope of Eligible Entities
Eligible institutions would include: 1) FDIC-insured depository institutions, 2) U.S. bank holding companies, 3) U.S. financial holding companies, and 4) U.S. savings and loan holding companies that engage only in activities that are permissible for financial holding companies to conduct under section 4(k) of the Bank Holding Company Act ("Eligible Entities").
Not all companies are eligible, but "bank holding companies" are eligible.
Hmmmm...seems that I recently heard something about somebody switching from being an investment bank to a bank holding company recently...who was that? Oh. Here it is.
On Sept. 21, in a move that fundamentally changed the shape of Wall Street, Goldman and Morgan Stanley, the last major American investment banks, asked the Federal Reserve to change their status to bank holding companies.
Goldman would now look much like a commercial bank, with significantly tighter regulations and much closer supervision by bank examiners from several government agencies.
Yes, I remember being confused by this move at the time as it made no sense. At least the explanations did not smell right. We were told that GS and MS "asked" to be placed under "significantly tighter regulations and much closer supervision by bank examiners from several government agencies."
That would have been a first.
It is now clear to me what happened. The government guarantee of all senior debt was already in the works some time ago, and GS and MS hopped on that gravy train. At every turn, GS has been there with a slightly better seat at the table and better inside information than its competitors. The Treasury Secretary happens to be a former GS CEO. Just an unfortunate coincidence, I'm sure.
As always, in this never-ending looting operation, the rules are bent and modified willy-nilly to support a favored class of institutions and individuals.
We now have an openly two-tiered system.
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What are the critical numbers/levels to watch for in the TED spread? What other variable would indicate a thaw of the credit markets?
Thank you for your hard work,
Ron
I must be loosing it as I thought I posted this comment earlier....
Would love peoples thoughts, but one of the untintended consequences I can see is Treasury securities loose - why would someone want to buy a government backed treasury yielding from a dismal .03% yield all the way up to a whopping 4.2% for a 30 year treasury when you can buy a "government" backed senior debt from one of the choosen firms at a minimum of twice the yield!!! This seems to simple to me that I must be missing something. If I am correct, we will be at a credit crisis at the Federal level soon when the world realizes this.... maybe Goldman can come the rescue of Uncle Sam!
Mark,
I made that point in the prior posting.
You are exactly right and I cannot think why one would not immediately pile out of treasuries and into the highest yielding senior debt of FDIC-insured institutions out there.
Here's what I wrote:
Grab it while you can...the advantages of government subsidies have a habit of not lasting long.
Best,
Chris
OK, now just hold on one minute. Morgan Stanley and Goldman Sachs conveniently ask the Federal Reserve for a change of status from an investment bank to a bank holding company just a mere 23 calendar days ago and now voila they reap a 100% debt guarantee from the FDIC in a just announced move today October 14, 2008?
This is clearly actionable. The veil is off and the mystery is OVER. This corvair is DANGEROUS and unfit for the road.
Ron,
nope, no particular levels...the TED spread has historically sat between 0.3% and 0.5%. Today it is around 4.3% indicating that stress remains int he banking system.
Also keep an eye out for the LIBOR swap spreads.
Great what does this all mean?
I suppose banking confidence has been restored.
I suppose that the world governments are now getting deflation under control.
I suppose the amount of money/credit being injected is only enough to control the deflation so inflation will not occur.
My deposits are now protected - the banks did not have a holiday! The stock markets were open! So all is well and recovery is just around the corner.
The rich get richer and I retire on fixed income in 2 years.
I'm happy! Right?
Hi Chris
Why can't this expanded deposit insurance have a deductible and/or cover only a percentage of the full amount at risk?
100% protection on existing FDIC insured accounts and 50% coverage of losses above and beyond the 50 or 100k cap.
Insurance always has a deductible and other limitations. Free, unlimited insurance is a total government give-away (welfare for billionaires).
Chris
I have been as confused as you since the GS/MS change in status was announced. Why would they have asked for more oversight? Even more troubling IMO, were the new rules they would have to live under as merchant banks. As Investment banks they would have access to many multipuls the leverage on deposit. Making the switch over to merchant banking regulations would significantly reduce their access to liquidity.
Yup..Something stunk about the change and sure enough such was the case.
Thanks for some great detective work. Another piece of the puzzle is in place.