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Another hidden tax, another reason for poor bank interest rates …

We are encouraged to save our money, for purchases we want, for a rainy day, for retirement and for our children. But the banks took our money to fund imprudent investments and then rewarded themselves with large executive bonuses.

Currently, the Federal Reserve is loaning money to the banks at one-quarter of one-percent. The yield on our savings is abysmal and well below the erosive effects of inflation. The banks do not feel that they need to pay more for capital, so they restrict the yield on depository accounts.

And now we find the FDIC, headed by Sheila Bair, is proposing that regulated banks prepay three years of regular FDIC assessments to replenish the shrinking insurance fund used to make customers of failed banks whole – at least up to the limits of the FDIC insurance.

Bearing in mind that corporations do not pay taxes and fees – they are paid by the financial institution’s customers in the form of a reduced return on their savings or additional fees on banking services – this latest move is simply another tax on your savings.

Perhaps it is time to take another look at the FDIC and its leadership?

One, the FDIC almost tripled their exposure to bad debts when they moved the amount insured from $100,000 per covered account to $250,000 per covered account. This is a self-inflicted would; ostensibly done to allay depositor’s fears and keep the money in the failed and failing banks.

Two, why would the FDIC insure up to $139 billion of  General Electric capital debt? How could this possibly benefit the consumer?

It should be noted that a high-ranking official, possibly with permission from his superiors, allegedly illegally backdated deposits at the failed Indy Mac bank to convey a false sense of soundness while the FDIC was negotiating a resolution deal to stem the consequences of Indy Mac’s failure. I haven’t heard that he has been prosecuted as of this date.

It should also be noted that the FDIC may have mislead the public in announcing an assets purchase by a private financial organization. Misstating the purchase price of the assets by not noting that part of the funds being used may have come from the FDIC itself and that the net amount of money put into the new entity was far less than advertised.

Reuters is reporting …

“U.S. bank regulators are expected to propose on Tuesday that banks prepay three years of regular assessments to replenish the dwindling deposit insurance fund, according to a source familiar with the matter.”

Such an option would give the Federal Deposit Insurance Corp more liquidity to deal with the sharp increase in bank failures, while banks would not be required to report the expense of the fees until they would normally be due.”

Something stinks …

The FDIC traditionally has a strong ratings system known as CAMELS (Capital, Assets, Management, Earnings, and Liquidity) and now seems to have no answer to why banks are failing.

Using CAMELS and deficiency letters, the FDIC knows what is going on and should be taking action to mitigate the damage to the consumer and the American taxpayer. So unless the FDIC is engaged in playing politics – a distinct possibility as Sheila Bair struggles to save her job and keep the funding and influence of her agency – perhaps the FDIC needs to further explain its request for prepaid  assessments made on thin-air projections.

“The source, speaking anonymously because the regulator discussions have been private, said the FDIC would likely propose for the banking industry to prepay $12 billion per year in assessments, for a total of $36 billion.”

While this is not quite wealth redistribution – from those who have money to those who have lost theirs – it is a tax on the deposits of the American consumer; further reducing their ability to earn a satisfactory return on their deposits. At a time when the Obama Administration is talking about problems with Social Security and potential cutbacks in Medicare, older Americans need their money to be safe and earning a fair return.

“The board of the FDIC is meeting on Tuesday to propose alternatives to charging the banking industry hefty emergency fees to avoid having the balance of the insurance fund hit zero.”

“The industry has said such upfront fees could hurt banks just as their balance sheets are starting to recover from the recent financial crisis.”

From one pocket or another …

Whether or not it comes from the consumers in form of reduced yields on their investments or borrowed directly from the consumer via the U.S. Treasury, the result is the same. The consumer gets screwed!

“FDIC Chairman Sheila Bair has said the agency is considering alternatives to the upfront ‘emergency’ fees, including prepayments of regular assessments, tapping the FDIC's $500 billion line of credit with Treasury, and borrowing from healthier banks to rebuild the fund.”

Is this the same Sheila Bair who is selling of problematical debt to private investors at deep discounts? Using the very same mechanism that was used to bailout the Savings and Loans?

“It is unclear what combination of options the FDIC board will propose to put out for public comment on Tuesday, as it seems regulators have narrowed the menu of options.”

“So far this year 95 U.S. banks have failed, compared with 25 last year and only three in 2007.”

“Those failures have whittled the balance of the insurance fund down to $10.4 billion at the end of the second quarter from $45 billion a year earlier. The FDIC notes it has an additional $32 billion in reserves to handle failures over the next year.”

It is my personal belief that recently enacted accounting reforms have allowed the banks to appear healthier than they really are in order to attract depositor’s money and to sell bank shares to the investing public.

Be well, be safe and take care of yourself and your family first. Treat all transactions on a profit an loss basis. Judge risk carefully. And above all, forget about loyalty to any financial institution – no matter how friendly they seem, you remain just another number in the quest to wring profits from your money.

-- steve


OneCitizenSpeaking: Saying out loud what you may be thinking …

Reference Links:

FDIC to propose banks prepay 3 years of fees: source | Reuters

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