Monday, September 29, 2008

In praise of the FDIC

As readers know I think the FDIC did a terrible job with the WaMu takeover.  In the WaMu case the FDIC without seemingly any justification and with no appeal took away the rights of the senior creditors.

My view is that the financial crisis will be over when people will lend unsecured to US financial institutions and not before. 

Removing the rights of unsecured lenders without appeal hardly aids that cause.  The FDIC thus made it much worse. 

With Wachovia it was again open to the FDIC to confiscate Wachovia and sell it without the acquirer taking over the obligations to senior bond holders.  This would mean that the government would have got away without risk of loss. 

Instead Citigroup has assumed those obligations.  The FDIC has offered (for a large fee of 12 billion in Citi preferreds) an insurance policy against fat-tail losses at Wachovia.  It has – admittedly at some risk to government – not removed rights from the senior.

This is a darn good thing for America because the sooner the government protects the rights of the senior the more likely it is that people will lend again to American financial institutions.  And when American financial institutions can borrow again the crisis will be over.

On Friday I did not think the FDIC was that competent or creative. 

I am eating my words now.  I withdraw my call for Sheila Bair to be sacked.    



John Hempton


bizQuirk said...

Yes, Yes, John, but why was one done one way, and not the other. Was there a plan for either?

I am very concerned that OTS, while probably the most competent operation in the Federal Government, is not getting clear orders from the top.

Anonymous said...

are you kidding? fdic just took on $300+bb of bad loans with a sliver of losses above it. if i remember you are in oz so you won't have to pay if there are losses. this is a horrible horrible deal for the US taxpayer and a wonderful deal for citi. the only reason you can think this is good is because you're not a us citizen.

Eric said...

Are you not concerned that every large financial institution that has run into trouble has been treated differently by the US Govt. If I am a senior unsecured lender I have no idea at this point what will happen if the financial institution I have lent to runs into difficulties. While I am happy to see the senior unsecureds at WB treated better than at WM, it all seems rather arbitrary to me at this point. Why the completely different treatments in these 2 situations. Until I have some confidence in how similar claims will be treated I would touch unsecured bank lending in the US.

John Hempton said...

I realise the FDIC is making it up as it went along.

And I believe the FDIC triggered to collapse of both WaMu and Wachovia.

But the critical issue here is that the US needs to convince its unsecured creditors that they will be treated fairly. You can treat my preferreds as unfairly as you like. Preferred are equity for regulatory purposes and bank regulation is about ensuring there is enough equity to look after all the non-equity obligations. Bank equity is AT RISK in capital letters.

Senior debt is "at risk" in small letters unless the FDIC steals it from you.

I am not angry about the taking of my preferreds - that is part of the game.

My basic thesis... if the US cannot convince unsecured creditors it is a safe place to invest then it falls into the ocean in great-depression level economic collapse.

You got to convince them. Got to - or your civilisation is at risk.

The Wachovia deal did not risk the end of American capitalism - its bad government policy that got us here - but the current deal is merely bad news - not awful news.

Anonymous said...

"And when American financial institutions can borrow again the crisis will be over."

Thanks for defining the crisis, John, was wondering what all the end of world talk was getting at.

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