According to the New York Times, the Federal Deposit Insurance Corporation is running out of money. So the FDIC is thinking of borrowing money from healthy banks, rather than the Treasury, in order to be able to keep bailing out more failing banks and to avoid the popular outrage.
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.
It seems that one reason for the move is that banks would rather not get any cash from the Treasury Department, since Treasury money comes with oversight.
Over at Reuters, Felix Salmon notes:
There’s one more problem with the proposal, under which, according to the NYT, “the lending banks would receive bonds from the government at an interest rate that would be set by the Treasury secretary and ultimately would be paid by the rest of the industry.” If the bonds are coming from the government, that’s likely to mean they’ll be treated as government debt, and it certainly means that there’s an implicit government guarantee there. Once again, the FDIC is using government guarantees, rather than real cash, and pretending that doing so doesn’t cost the government anything. We’ve done that too many times already — including in the Bear, BofA, and Citi bailouts — and we should be putting an end to such shenanigans.
In other words, either way it’s bad news for taxpayers.