Tuesday, October 14, 2008, 1:56 PM
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. » Read more