FDIC as QUANGO (quasi autonomous non-governmental organization)?

The Federal Deposit Insurance Corporation (FDIC) is the federal agency that insures bank deposits. Basically, they backstop banks to ensure that depositors don't lose their money (up to a limit) if the bank fails.  Given that the FDIC is "on the hook" for the insured deposits under the control of banks, the agency takes great interest (no pun intended) in the financial health of banks. Ultimately, through examination and regulation, the FDIC determines when a bank has failed and it then arranges the auction that sell the assets of the failed bank to a healthy bank or even a private equity group. Good so far.

Now it seems that the FDIC is no longer satisfied with its role as referee. In fact, it wants to be a player. As delineated in the WSJ article
FDIC to Seize Slice Of Bank-Stock Rallies, the FDIC is going to require the buyers of failed banks to fork over a cash "bonus", AFTER the auction/acquisition, based on the buyers stock value which typically rallies following the acquisition. To be even-handed about it, the FDIC will also agree to share in any post-acquisition losses.

At first blush, the FDIC's interest in capitalism  may seem sensible, particularly given that the reserves it holds for deposit insurance purposes have dwindled under the weight of 140+/- bank failures in 2009. In other words, why not skim off a little "profit" to replenish reserves that are otherwise taxpayer funded? The problem, as noted above, is that in so doing, the FDIC becomes a player on the same field it regulates. This opens a Pandora's conflict-of-interest Box of potentially epic proportion. Here are but a few of the concerns:

•·       The FDIC's role in bank closing could be called into question if it stands to "profit" on the stock rally of the acquiring bank. Perhaps better stated, the FDIC may be perceived as acting to close a bank on motives that are not purely regulatory.

•·       The FDIC's willingness to "share" in post-acquisition losses actually puts taxpayers "on the hook" in a way that does not seem to fit FDIC's insurance function.

•·       The auction price offered for failed banks, otherwise guided by free-market capitalism will undoubtedly be skewed by the FDIC's participation in post-acquisition stock performance.

•       Shareholders of the acquiring bank, as investors, are entitled to the proceeds of any post-acquisition stock rally and likewise should be responsible for any post-acquisition stock losses (it's called capitalism).

The FDIC has no business (literally) expanding its Glass-Steagall charter as regulator/insurer. In so doing, the federal government becomes an insurgent, corrupting free-market capitalism as it has done by seizing parts of publicly traded "too big to fail" financial institutions and manufacturers.

Congress needs to draw a line here. If it fails to do so, there is little doubt that this sort of federal insurgency will eventually morph into full-blown fascism.

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