The FDIC has been on the hunt for funds keep insuring the nation's banks, which continue to go belly up in staggering numbers. Today, the FDIC has proposed another solution: borrow money from strong banks to prop up the weak ones. Or, as Stephen Labaton of the New York Times quipped, "ask banks to bail out the government."
This comes as a relief to some econopundits who blasted the idea that the FDIC might tap an emergency credit line from the Treasury that would put taxpayers on the hook for the nearly $5 trillion in liabilities. (FDIC Chairwoman Sheila Blair's gruesome promise that she'd rather take "bamboo shoots under the nails" than use funds was also reassuring.) Other analysts, however, think it's dumb to punish the strong banks--although the banks themselves support the idea, since it would spare them additional fees.
The best reactions:
- Great Idea--Make Banks Pay for Themselves, writes Barry Ritholtz at the Big Picture. "Given that the banking industry blew up due to the irresponsible behavior of its own members, seeing some of its leaders step up to facilitate further repairs to the sector is an idea I can get behind -- and is greatly preferable to yet another taxpayer funded bailout."
- Terrible Idea--Moral Hazard Galore, says Edward Harrison in Credit Writedowns. Harrison has covered the FDIC for a long time, and anticipated that the agency would turn to banks for an infusion. He is pessimistic on the idea, "Having prudent banks pay up for the mistakes of their reckless brethren is the height of moral hazard. This would not be good policy." He concludes with a jab at the administration's "phony" stress tests of banks, which have left the industry "very, very weak."
- Mixed--One of Three Tough Options, says Lita Epstein at Daily Finance. She explains that Blair could still decide to impose an additional fee on banks to raise the money, and notes that "in the long term" the FDIC may go begging at private equity funds or foreign banks. Because each possibility has unsavory downsides, she says, "the FDIC was forced to soften to their presence because it's running out of options."