FDIC Bulls Ahead in Bear Market; KC Fed President Cheers Them On

Yesterday was Friday, and a check of the FDIC website reveals that yet another bank has gone into receivership. This week’s winner was Freedom Bank of Georgia in Commerce, Georgia, whose depositors are waking up this morning to learn that they are new customers of Northeast Georgia Bank in Livonia.

For those keeping score at home, that’s #17 since January 1, 2009. 

Despite all the handwringing on Wall Street, all the posturing in DC, and all the bloviating on cable financial networks about potential "nationalization," the FDIC has quietly stepped in and begun to do what they do well — take failed banks under their control, protect depositors, and work to clean up the mess.  

To judge by their "FDIC Careers" page, they are expecting a lot more work in the next two years. They have three large categories of jobs posted — some open to anyone, others open to Federal employees (or retirees), and still others open only to current FDIC employees. For each specific job title listed, they show the office where it is located (St. Louis, Washington DC, etc.) and also the number of openings: 1, 2, 3, "FEW," and "MANY."

There are hundreds, if not thousands of jobs posted with titles like Compliance Officer, Compliance Examiner, Risk Management Examiner, and Loan Review Specialist. Make no mistake: the FDIC is preparing for a bull market in bank takeovers. And they may not be alone in their thinking. 

Kansas City Fed President Tom Hoenig gave a speech yesterday entitled "Too Big Has Failed." [pdf] As Mark Davis of the KC Star described it

Kansas City’s resident voice on the banking system prescribed a dramatic turnabout Friday in how Washington is dealing with the nation’s troubled big banks. Tom Hoenig, president of the Federal Reserve Bank of Kansas City, urged Washington to scrap its current capital-investing rescues of banks deemed too big to fail and prepare to “resolve” them the old-fashioned way.

According to Hoenig, the old-fashioned way is to use the FDIC. In 1984, when Continental Illinois –the seventh largest at the time —  was taken over by the FDIC, they injected capital, brought in new management, separated problem investments, restructured it and sold a clean bank. They brought in specialists to oversee loans and help with the liquidation process, and shareholders had their stakes wiped out. "A lesson to be drawn from Continental is that even large banks can be dealt with in a manner that imposes market discipline on management and stockholders, while controlling taxpayer losses." (pdf, pp.8-9)

Hoenig seems to understand that what is needed is exactly what the FDIC is set up to do: provide stability and confidence. As he says at the end of his speech:

The experience of the banking agencies in dealing with significant failures indicates that financial regulators are capable of bringing in qualified management and specialized expertise to restore failing institutions to sound health. This rebuilding process thus provides a means of restoring value to an institution, while creating the type of stable environment necessary to maintain and attract talented employees. Regulatory agencies also have a proven track record in handling large volumes of problem assets – a record that helps to ensure that resolutions are handled in a way that best protects public funds.

Finally, I would argue that creating a framework that can handle the failure of institutions of any size will restore an important element of market discipline to our financial system, limit moral hazard concerns, and assure the fairness of treatment from the smallest to the largest organizations that that is the hallmark of our economic system.

That last line brings me back to the last two job listings on the FDIC Careers page, all in their DC office: one Supervisory Criminal Investigator and a few Senior Criminal Investigators.

Sounds like Law & Order: Special Banking Unit to me.

Apparently the FDIC thinks you can’t clean up the problems of the past and move ahead without examining whether there was criminal behavior that brought us to this point. Perhaps some other oversight bodies might take a lesson from them.

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