Banks to Treasury: Keep Your Bailout. We’ll Keep Our Bonuses.

Jacobs poses this question. The U.S. government has a far uglier budget than any U.S. bank, with a deficit expected to more than double to $407 billion this year from last year’s $161 billion. It also is the home of $640 toilet seats and $1 trillion in missing transactions. No bank in the U.S. has been as irresponsible as that. So who is in a better position to push the banks into more responsible performance–the government or the markets and shareholders?

via Deal Journal – WSJ.com : Banks to Treasury: Keep Your Bailout. We’ll Keep Our Bonuses.

The Mishkin Case for the Bailout

From the NYTimes:

In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right.

A year later, as Wall Street’s problems were starting to spill into the broader economy, Mr. Mishkin’s store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again.

Frederic Mishkin — Meyer’s grandson and, until he stepped down a month ago, an ally of Ben Bernanke’s on the Federal Reserve Board — told me this story the other day, and its moral is obvious enough. Many people in Washington fear that the country is starting to spiral into a terrible downturn. And to their horror, they see the public, and many members of Congress, turning into modern-day Meyer Mishkins, more interested in punishing Wall Street than saving the economy.

The rest of the article goes toward making a case that the bailout is needed to avoid another great depression. While I don’t beleive that, I do fear the social effects of credit tightening.

Senate Passes Christmas Tree

Looks like the Senate has passed the new, enhanced Christmastree Bailout Bill.

Another provision added by the Senate would require most employers and health insurers to put mental health problems on par with physical illnesses, including coverage for hospital stays and doctor visits as well as co-payments and deductibles.

Senate Expands Bailout Package – WSJ.com.

Added to the original Bailout plan is a drive to increase the FDIC limit to 250k, the above mentioned mental health care, changes in SEC accounting rules, and changes in the tax rules.

The idea is that passing this bill will push the House into accepting the proposal and passing the bill. I suspect this will work, although we’ll have to wait until Friday to find out. Fiscal Conservatives can come out of this with tax cuts, while Democrats can come out helping solve health problems.

At least something will be passed. Only time will tell if this proposal solves the liquidity crisis and helps us right our economy.

US Considers Raising FDIC Limit

The congress is now discussing the idea of raising the limit of FDIC insurance to 250k from 100k. This is a worthwhile idea, BUT I think that the FDIC insurance limit should be removed. The FDIC should be run like any other insurance company and allow banks to choose the limits they apply to their accounts and pay the appropriate rates to the FDIC to provide that insurance.

The congress could then mandate that all demand depost accounts carry a minimum of 100k or 200k.

This would run the FDIC similar to the SIPC and allow banks to target insurance on accounts at appropriate customers. Most banks don’t pay a real return on checking these days anyway, so they should have no problem peddling small business savings accounts and checking with a million dollars of deposit insurance.

Properly run, which for the most part the FDIC is (they’re running low on funds these days), this wouldn’t cost tax payers a dime.

Bailout Plan B

Well, I told you it would happen. We got the Bailout We Deserve. When the bailout was defeated by the house. Decried as a bailout for Wall Street bankers which is exactly the opposite of how it would actually work. We have already had several banks failed and been taken over by the FDIC. Starting tomorrow we might see companies unable to make payroll. Expect consumer loan & credit rates to spike over the rest of the week.

The Federal Reserve is expanding its current offerings to keep liquidity in the system.

The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed’s emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.

Bloomberg.com: News.

We’re going to have to come up with something to provide the trillions in liquidity that we’re going to need.

Short term help:

Expand the FDIC for corporate checking/savings account (demand deposit) to an unlimited amount. This will require higher fees to cover the potential defaults. It will give companies a SAFE place to put payroll money prior to make distributions.

Pay interest on Federal deposits. We require banks to hold capital at the Federal Reserve but do not pay any interest on it, creating a disincentive to hold extra capital there. Additionally, paying interest makes it much easier to maintain the target Fed Funds rate.

DO NOT USE Federal Reserve emergency funds to insure Money Market funds. These have been sold as an investment, not a Federally Guaranteed fund, they should be subject to market forces. There are plenty of MM funds that are run well, let the ones that are not have their capital flee.

Bloomberg: Blame the Ratings Agencies (Part I) from The Big Picture

An example of what I have been saying all along: the special status of Rating Agencies was pivotal in the excesses of the credit boom.

That day, a member of an S&P executive committee ordered him, the company’s top mortgage official, to grade a real estate investment he’d never reviewed.

The Big Picture | Bloomberg: Blame the Ratings Agencies (Part I).