Moving beyond their traditional role?

For most of us, the Federal Deposit Insurance Corporation is thought to be a self-sustaining government corporation created by the Glass-Steagall Act of 1933 for the purpose of insuring the stability of the banking industry by providing deposit insurance to depositors. The premium for participating in this deposit guarantee program is borne by the banks ... and by the depositors who receive a slightly smaller yield on their deposits.

In addition to acting as the receiver of “unsound banks” and providing for the orderly liquidation or sale of its assets, the FDIC also serves as a secondary regulatory authority, in conjunction with the OTS (Office of Thrift Supervision), OCC (Comptroller of the Currency) and the Federal Reserve Bank. In its role of reducing the cost of failed financial depository institutions by managing asset sales, the FDIC’s guarantee authority is backed by the full faith and credit of the United States.

Questioning their wisdom …

There is no doubt that the FDIC was created to protect the average investor. That is why the guaranteed amount was capped at $100,000 and any depositor with greater amounts on deposit were forced to look at the funds recovered from a sale or acquisition to be made whole.

However, in one fell swoop, this agency which was running low on funds, upped the ante to guarantee the safety of deposits in member banks up to $250,000 per depositor per bank. Thus immediately placing the program at greater risk for political purposes.

"On May 20, 2009, President Barack Obama signed the Helping Families Save Their Homes Act, which extends the temporary increase in the standard maximum deposit insurance amount (SMDIA) to $250,000 per depositor through December 31, 2013. This extension of the temporary $250,000 coverage limit became effective immediately upon the President's signature. The legislation provides that the SMDIA will return to $100,000 on January 1, 2014."  <Source:FDIC>

So what is the deal with GMAC?

GMAC, originally known as the General Motors Acceptance Corporation, was the finance arm of General Motors – put in place to capture financing profits lost to banks on automotive purchases – and then later to mortgages sold by real estate affiliates. GMAC was partly owned Cerberus Capital Management (51%) the private equity company that also owned a majority state in Chrysler.

A Christmas gift …

“On 24 December 2008, the Federal Reserve accepted GMAC's application to become a bank holding company in order to gain access to billions of dollars in government aid, a crucial attempt to ensure the survival of the company.”

And now another gift …

“FDIC Approves GMAC Financial Services Participation in TLGP”

“The Federal Deposit Insurance Corporation (FDIC) announced today the approval of GMAC Financial Services to participate in the Temporary Liquidity Guarantee Program (TLGP) allowing the company to issue up to $7.4 billion in new FDIC-guaranteed debt. GMAC will pay a fee to the FDIC for this guarantee.”

“In connection with receiving FDIC approval, GMAC has committed to develop a funding plan. The plan will reflect GMAC's management of the bank's funding and deposit costs with a focus on diversifying funding sources and reducing the bank's overall cost of deposit funding.

“GMAC and the bank have also committed to maintain bank capital at a level well above the regulatory minimums. These commitments, combined with the current level of TLGP-generated fees and the newly enacted holding company assessment authority, will fully protect the deposit insurance fund.”

Excuse me, but aren’t those regulatory minimums insufficient to actually resolve loan losses in current portfolios – at least that was the reasoning behind the Congressional request for additional “bailout” capital requirements? The idea that anything GMAC may do will full protect the fund is highly suspicious.

“The participation of GMAC Financial Services in the TLGP is consistent with the parameters in place of the broader TLGP program. The program will expire on October 31, 2009.”

It looks like this is extremely short-term funding of long-term assets, which is always suspect as a bad idea in banking. Or is it that there are those in the know and confident that the program will be extended further?

Why the FDIC?

Why is the FDIC offering this guarantee to private investors in this newly-created debt?

Is it a politically-inspired ploy to switch actual debt which appears on a corporate balance sheet with large loan loss reserves to more acceptable debt with smaller loan loss reserves – thus artificially creating the impression that the institution is more “sound” and well-capitalized?

Is it a method for slyly turning unsecured debt with dubious value into secured-debt which further protects the large institutional investors' investment.

Is this program an expansion of the FDIC’s original mission and is it detrimental to both the hardworking U.S. taxpayer and the ordinary depositor who is relying on funding guarantees at banks whose management and assets may be problematical?

Is this a method of circumventing the “transparency” which is highly touted by the Obama Administration – but has yet to be demonstrated?

There is no doubt in my mind that something toxic is brewing in the government; between the Department of Treasury and other government and quasi-government agencies (Fannie Mae, Freddie Mac, Federal Home Loan Banks) and the private Federal Reserve. Nobody in the government or in the financial media seems to know what is really going on – and the democrat Congress is unwilling and unlikely to hold hearings on the matter.

Bottom line …

Even though the government is urging consumers to borrow money and continue spending, you need to protect yourself and your family first. Our government has become a coalition of self-interest and special interests – none of which are favorable to the ordinary American tax-paying citizen.

The media, having surrendered their journalistic ethics to the Administration cannot be trusted to tell us the truth – especially because their corporate survival appears to depend on favorable regulatory rulings and access to capital.

Like I said; be well, be safe and take care of yourself and your family first.

-- steve