Picking Up The Tab

The FDIC is preparing to have big banks contribute to the busted bank fund to cover the failing smaller banks that seem to pop up each Friday, as the government agency is running out of cash to do so.

Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.

The plan, strongly supported by bankers and their lobbyists, would be a major reversal of fortune.

A hallmark of the financial crisis has been the decision by successive administrations over the last year to lend hundreds of billions of taxpayer dollars to large and small banks.

“It’s a nice irony,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company. “Like so much of this crisis, this is an issue that involves the least worst options.”

Bankers and their lobbyists like the idea because it is more attractive than the alternatives: yet another across-the-board emergency assessment on them, or tapping an existing $100 billion credit line to the Treasury.

So what's the catch, as evidenced by that second sentence up there showing the banks and bank lobbyists love this plan?

The catch is through these bank failures, the big banks can get bigger without regulatory oversight by purchasing the assets of failed banks for pennies on the dollar, and splitting the costs of the toxic waste with all competitors. It's certainly a huge win for the big banks across the board, from a financial standpoint as well as a rehabilitative public relations issue. Even better, the big banks are in perfect position to make these long term loans with interest to the FDIC and will earn interest in the long run, meaning that not only will the FDIC pay them back at some point with government money, they'll actually make a profit off of it.

In other words, it's another gift of cash to the big banks on top of the government gift of consolidation for the industry, removing competition and expanding the biggest banks.

Who's picking up the tab? As usual, we are.