Marketplace Scratch Pad

The FDIC wants in

Scott Jagow Dec 30, 2009

We seem to be in an age where government regulators are pushing the boundaries of their duties, to put it politely. The latest example involves the FDIC and all those banks it’s been auctioning off.

As you know, the FDIC’s insurance fund for banks has been wiped out, and it’s expected to stay in the red until 2012. So, the FDIC has a new idea for raising money. It will try to profit from failed banks that are sold off. Several banks that have purchased failed counterparts through the FDIC have seen their shares rally afterwards. Now, according to the Wall Street Journal, the FDIC wants a cut:

The strategy comes after the FDIC collected $23.3 million this month from New York Community Bancorp Inc. as part of the regional bank’s recent acquisition of AmTrust Bank, a Cleveland thrift that failed. The purchase included an unusual financial provision inserted by New York Community to give it an edge over rival bidders.

The provision entitled the FDIC to reap gains from a rally in New York Community’s stock price after it announced the AmTrust purchase.

The mechanism paid off for the government when New York Community’s stock price rallied more than 16% in the two weeks after the deal, which will substantially expand the regional bank’s deposit base.

While it sounds great that the FDIC’s fund might be augmented by taking a stake in these banks, the American Thinker points out several potential problems here. Will the FDIC be more aggressive in closing banks because it sees dollar signs in the process? Will the auction price be affected by the FDIC’s involvement? Do shareholders of the acquiring bank want to share their profits? And what if the bank’s shares tank instead? How will the FDIC explain that one to taxpayers? More:

The FDIC has no business (literally) expanding its Glass-Steagall charter as regulator/insurer. In so doing, the federal government becomes an insurgent, corrupting free-market capitalism as it has done by seizing parts of publicly traded “too big to fail” financial institutions and manufacturers.

Congress needs to draw a line here. If it fails to do so, there is little doubt that this sort of federal insurgency will eventually morph into full-blown fascism.

What do you think? You okay with the FDIC taking a piece of the action?

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