Home > Main > What’s the plan if BoA and Wells Fargo are insolvent?

What’s the plan if BoA and Wells Fargo are insolvent?

August 24, 2011

Does anyone know?  Is there any plan but a normal FDIC unwind?

The lack of discussion around this topic is disturbing.  Interfluidity says we cannot know if a bank is insolvent or not according to it’s public filings.    So it’s just a matter of guessing anyway.

But a bank as big as BoA going bust will have systemic impact.  That doesn’t include Wells Fargo going a few days or weeks later.

Plus, the politics are horrible – if it requires a bailout beyond the size of the FDIC fund, what’s going to happen?

I hope that the government goes all Swedish on BoA – but who can tell?

 

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  1. Clonal Antibody
    August 24, 2011 at 8:00 pm

    A good question for Bill Black. Put it in at one of his NEP articles.

  2. beowulf
    August 24, 2011 at 11:15 pm

    Ugh, just had a looong comment eaten. My fault for not writing it on a Word first.
    To summarize, $500 billion credit line with Tsy- but it falls under Tsy debt limit (oops!).
    However FDIC can use Tsy’s in-house Federal Financing Bank to issue its own securities (which Fed could scoop up as required), the FDIC debt limit is $500 billion plus amount up to FDIC cash on hand. At that point I pointed out the curious law that allowed the Secretary of the Treasury to deposit “public monies” with the FDIC per his instructions. Sooooo, if the embedded bank lobbyists at Tsy wake the hell up and start minting jumbo platinum coins, the FDIC’s cash situation would become… flush. As a legal matter then, FDIC’s credit limit is actually infinity plus $500 billion. Oh yeah, and I made the point that just like the Mississippi River jumps channels once in a while, if the FDIC floats a torrent of paper, control of monetary policy could jump from Fed Funds rate to FDIC insurance premiums rate. Someday John McPhee will write a long article about it.
    http://www.newyorker.com/archive/1987/02/23/1987_02_23_039_TNY_CARDS_000347146

    Since April, the old system of deposit insurance premiums have become a de facto bank asset tax. Nobody really understands how FDIC’s asset-based premiums interact with Fed Funds rate (excepting maybe RSJ). The premiums are sure to go up in the wake of a BOA meltdown to cover FDIC’s own debt service, which would increase the prime rate (what banks charge their most creditworthy customers) even if the Fed doesn’t touch FFR.
    http://pragcap.com/paul-krugman-again/comment-page-1#comment-71013

  3. Kris Smith
    August 24, 2011 at 11:18 pm

    I don’t think it’s FDIC. BoA has Merrill Lynch an investment bank, and probably some insurance…I believe this all falls under the liquidation authority in the Dodd Frank bill, but I don’t know how much of the infrastructure is ready to go right now. They just put them into receivership, break it up, and sell off the pieces. Wipe out the shareholders and the bondholders become the new equity holders.

    • beowulf
      August 24, 2011 at 11:31 pm

      Well that was one of the many advantages of Glass-Steagall, FDIC covered the commercial banks only, the investment banks could go hang (or jump). Now they all line up for the government cheese.

      As I mentioned upthread, FDIC can issue its own securities via Federal Financing Bank with a credit limit of… infinity plus $500 billion. The infinity part is the amount of cash (think platinum coinage variety) the Secretary deposits with the FDIC.

      • Kris Smith
        August 25, 2011 at 7:34 am

        Well, FDIC was a product of Glass-Steagall, too. I’m getting well out of my depth here, but a company like BAC is a holding company that owns a bank as well as other assets. I believe FDIC regulates the bank that is owned by the holding company, but they don’t have the authority to unwind the holding company (with the investment banks, insurance companies, etc.). I think this problem was addressed in the financial reform act and the government now has (or soon will have) the ability to take over systemically important institutions. I’m not sure whether this is handled via FDIC or not, but I’m doubting that it is.

  4. beowulf
    August 25, 2011 at 8:57 am

    “I’m not sure whether this is handled via FDIC or not, but I’m doubting that it is.”

    That’s correct, TARP was administered by Tsy and not FDIC.

  5. Kris Smith
  6. Clonal Antibody
    August 25, 2011 at 9:35 pm

    I don’t know about Moynihan or Ken Lewis (BoA) or John Stumpf (Wells) but Lloyd Blankstein (We do God’s work) has hired a criminal defense attorney

  7. beowulf
    August 26, 2011 at 7:27 am

    Ha ha, I wonder how much market value Matt Taibbi single-handedly destroyed with his outstanding Vampire Squid article?
    http://www.businessinsider.com/matt-taibbi-has-new-rolling-stone-article-out-about-goldman-sachs-2011-5

    It has to be in the billions (GS has a $55 billion market cap, last 12 months its underperformed S&P 500 by over 30 points and JPM by over 25). What’s more, Taibbi’s work was the proximate cause of Senator Carl Levin’s Permanent Investigations subcommittee investigation of GS and it was Lloyd’s allegedly false statements to that committee which leave him in need of a lawyer.

    • TC
      August 26, 2011 at 8:35 am

      Should “value” be in quotes?

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