Tuesday, December 11, 2012

How long do bankers intend to rely on temporary rescue plans? Forever

A Wall Street Journal editorial asks a terrific question:  how long do bankers intend to rely on "temporary rescue" plans?

The editorial focused on the Transaction Account Guarantee (TAG) program which was put in place by the government to guarantee all non-interest bearing deposit accounts not covered by the FDIC's $250,000 guarantee.

Why was TAG needed?  Because at the start of the bank solvency led financial crisis nobody, including the depositors, could figure out which banks were solvent and which banks were insolvent.  As a result, policy makers were concerned that there would be a run on the banks for non-government insured deposits.

Regular readers know that today, five years after the beginning of the financial crisis, nobody knows which banks are solvent and which are insolvent.

There is only one way that market participants will ever know and that is to require the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

Without this information, market participants have no way of independently assessing the risk and solvency of each bank.

Without ultra transparency, it is virtually impossible to end the "temporary rescue" plans.  Ending the plans causes the events they were designed to prevent to occur.

For example, ending TAG will most likely result in a sizable reduction in bank deposits, up to $1.5 trillion, and a decrease in the interest rate on US Treasury bills, probably causing the interest rate to become negative.

This prediction reflects the fact that there is no reason for the covered depositors to take on bank solvency risk.  They only kept their money in the bank because of the government guarantee.  Buying US Treasury bills even when they have negative interest rates gives these depositors the government guarantee and liquidity at a small price.

From the bankers perspective, it is bad news to have any of the 'temporary rescue' plans ended.  All of these plans are designed on the same basic premise:  transfer money from the taxpayers to the bankers.

For example, under TAG, the banks earn money by investing the non-interest bearing deposits.  Effectively, the bankers reap the benefit of the taxpayer providing free deposit insurance.

So, the answer to the question of how long do bankers intend to rely on temporary rescue plans is forever.

Would you give up the opportunity to take unlimited quantities of money from the taxpayer at no risk?
As early as Tuesday Senate Majority Leader Harry Reid (D., Nev.) will seek to extend a 2008 emergency program that aids banks and their wealthiest customers. Senator Richard Shelby (R., Ala.) tells us that he will be voting no, and taxpayers should hope that a bipartisan majority will join him. 
Mr. Shelby rightly says that the program, known as the Transaction Account Guarantee (TAG), represents far too much taxpayer exposure. U.S. banks now hold close to $1.5 trillion in TAG deposits. These are non-interest-bearing accounts, typically owned by businesses, well-heeled individuals and local governments. Whereas regular coverage from the Federal Deposit Insurance Corporation now guarantees up to $250,000, TAG accounts enjoy unlimited protection from the FDIC. 
We've never understood why middle-class taxpayers should be forced to stand behind an infinite guarantee for the largest bank customers. 
Instead of providing an answer, the bank lobby tries to pretend that those taxpayers really don't stand behind it and that it's fully funded by premiums paid by banks. ... 
Bankers keep saying that they have cleaned up their balance sheets, raised capital, improved underwriting and enhanced their liquidity since the crisis days of 2008. So why do they still need a crisis-era backstop courtesy of Uncle Sugar?

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