All Blog Posts from Econwatch

After seizing control of more than 150 failed banks in the last two years, the U.S. government reluctantly finds itself in the real estate business.

According to a Wall Street Journal report Tuesday, the Federal Deposit Insurance Corp. now owns more than 5,000 foreclosed properties taken from small banks that collapsed as the housing market went into the tank.

The entire catalog of properties, ranging from an $18,700 home in Birmingham, Ala., to a $1.7 million lodge tucked in the mountains of Steamboat Springs, Colo., carries an appraised value of $1.8 billion.

As the Journal's Michael M. Phillips writes: "The financial crisis started with Americans buying homes they couldn't afford. It is ending with the government struggling to sell buildings it never wanted."

Phillips charts the FDIC's efforts to sell troubled Dresden Heights – an unfinished housing development in Atlanta that counts an interstate highway and a pest control company as neighbors.

Among the many challenges facing the FDIC – a decaying constructions site, looters and the fact that potential buyers would technically have to trespass to get to their homes (the original developer took out loans from two different banks to buy the land and then build on it).

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Senate Banking Committee Chair Chris Dodd is planning to push a financial reform plan that would restructure the government's control of the banking industry, according to today's Wall Street Journal.

Dodd, the Democratic senator from Connecticut, has been praised by President Obama for his financial reform efforts, particularly for his work to establish a consumer protection agency.

His new plan, however, would significantly diverge from efforts by the Obama administration and the House Financial Services committee to overhaul the nation's financial regulation system.

The bill Dodd is proposing would almost completely restructure the federal financial regulation system, taking almost all bank-supervising responsibilities away from the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), the Journal reports. Bank-supervisory responsibilities would fall to a new agency that would oversee all national financial institutions: one single financial regulator. Currently, America has four federal regulatory agencies.

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This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

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While the world continues to be distracted by the sideshow over executive compensation, there was finally a bit of good news from Washington yesterday. The House Financial Services Committee (in conjunction with the Treasury Department) finally released details of financial regulatory reform. Under the proposal, the Fed would become the primary systemic risk overseer, with input from a council of regulators. I like to think of this as the nation's superheroes - admittedly, a somewhat aspirational vision.

The proposed legislation gives the FDIC resolution authority - that is, the power to resolve financial holding companies that fail. Instead of the taxpayers being on the hook for the bill, the burden of bailouts would be on the financial industry itself. Firms with more than $10 billion of assets would pay for the rescue or unwinding of a collapsed competitor.

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This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

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Dressing up executive compensation as the salvation of regulatory reform is the best Halloween costume of the year.


Limiting executive compensation is a terrific way to appease the masses and make it look like you're doing something without having to embark on the hard work of true regulatory reform. Of course it bugs us to watch Wall Street honchos going back to business as usual, but let's not take our eyes off the ball here - there are lots of scary issues that need attention and I'm not sure compensation tops the list.

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After the U.S. government stepped in to loan hundreds of billions of taxpayer dollars to save sinking financial firms, now it may be the banks' turn to lend a helping hand . . . to Uncle Sam.

The New York Times is reporting that the Federal Deposit Insurance Corporation, which protects the accounts of bank depositors, is running rapidly short of funds after having taken over 94 failed banks so far this year.

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Uncle Sam's guarantee for money-market funds expires today. This emergency measure from "The Week That Shook Wall Street" (cue the appropriate scary music), was one of the few decisions that actually calmed ordinary investors at the time.

Money market mutual funds were created in 1970 to allow small investors to pool assets to gain access to short-term, higher yielding US government bonds. At the time, government bonds were paying about 3% more than savings accounts, but could only be acquired in ten-thousand dollar increments. The funds were priced at a dollar per share and while they were not backed by government nor insured by the FDIC, they were considered safe.


As the industry evolved and government bond yields dropped, many money market funds expanded their investments to include commercial paper, the short-term debt that companies use to fund their on-going operations. That's where our story last year begins.

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With all the hoopla around the one-year anniversary of Lehman Brothers' plunge into bankruptcy (we need a Miss Manners consult to determine the correct gift to honor such an event), what has really changed in the lives of ordinary Americans?

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The FDIC insurance fund that’s intended to protect over $6 trillion of depositor assets, has dropped to the lowest level since the savings and loan crisis in 1993. That’s not actually surprising or all that scary. Any of us could have done the math: the fund was worth over $45B last year at this time and since then, the financial world nearly melted down. This year alone, 81 banks have failed, requiring the FDIC to pony up money from its coffers and cover the losses for depositors.

FDIC Chairman Sheila Bair is probably not happy to go from $45 billion to $10.4 billion, but as she reminded us yesterday–the FDIC is backed by the US government and has access to up to $100 billion from the Treasury. The other point that Bair makes when speaking in public or before the media is that no depositor who has banked with an FDIC-insured institution has every lost a penny of his or her money since FDIC was created in 1933. That’s a pretty good track record!

I’m a bit more concerned about the second part of the report: there were 416 banks on the FDIC “problem” list at the end of last quarter. These black sheep banks accounts for nearly $300 billion worth of assets. That’s a number that can take your breath away if you ponder it for too long.

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The country's overall economic outlook may be brightening, but things aren't nearly as rosy in the banking industry.

The number of troubled banks on federal regulators' "problem list" grew to 416 by the end of June – more than a 33 percent increase from March's total of 305 – according to a Wall Street Journal report ($) Friday.

That means a full 5 percent of U.S. banks, holding just under $300 billion, are in danger of failing in the eyes of the Federal Deposit Insurance Corp. – the government entity created during the Great Depression that insures individual bank deposits up to $100,000.

It's been a rough year for small and midsize banks. Last June, there were just 117 banks, accounting for $78.3 billion in deposits, on the FDIC's danger list. In the ensuing 12 months, regulators have closed 81 financial institutions, according to the report.

"It's a continuation of the deterioration across the industry," Gerard Cassidy, a bank analyst at RBC Capital Markets, told the Journal. "We think there are hundreds of failures to come."

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A remarkable game of chicken is being played in Washington that has the potential to set a new precedent for banks pushed to the brink in this year old financial crisis. It may also cause some serious headaches for nearly a million small businesses.

On one side are federal regulators - specifically FDIC chairwoman Sheila Bair. On the other, CIT Group - the country's largest lender to small business.

CIT may declare bankruptcy as soon as tomorrow unless federal regulators allow it to shift around $9 billion of its own assets it needs to reassure the credit markets it has the money it needs to meet its obligations.

CIT specialty is providing cash to businesses waiting to get paid by customers. One way CIT does this is by basically buying pending invoices. In the trade this is called "factoring" and it is popular solution to a business owner's cash flow problems.

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