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Wednesday, April 14, 2010

TAG, You're It

 In a little reported press release from the FDIC - the only reason I heard about it is because I subscribe to their press release service - the TAG Program (Transaction Account Guarantee) has been extended.

What is the TAG Program?
The TAG extension will provide a continued stable funding source for participating banks and will help them maintain their ability to secure low-cost, large deposits, thereby preserving their deposit franchise value and supporting the rebuilding of their earnings and capital, which in turn protects the Deposit Insurance Fund.
In short, it's an FDIC deposit program where funds that are not normally covered by FDIC insurance, get coverage.  So, if you're a rich guy, gal or business with more than $250,000 in deposits in one bank, your money is covered.

Some 6,400 banks with normally uninsured deposits totalling $266 BILLION have this extra coverage.

Re-read the FDIC explanation above, particularly the end of it - "...thereby preserving their deposit franchise value and supporting the rebuilding of their earnings and capital, which in turn protects the Deposit Insurance Fund."

Translated from FDIC-ese, that means that this program is artificially propping up (preserving) banks that would likely fail without this bailout.  The "logic" being that the FDIC fund is protected by propping up these failing banks.

For some reason, I'm reminded of the phrase, "When you find yourself in a hole, stop digging."  Apparently, this phrase has never been uttered in any federal government agency or department.

Why might the FDIC be extending this program, which has been in existence since October of 2008?
FDIC Chairman Sheila Bair said, "It's necessary to extend the TAG program because the lingering effects of the financial crisis that emerged in 2008 in large systemically important banks have now spread to institutions of all sizes, particularly in regions suffering from ongoing economic weakness."

Hey, wait a minute! I thought we were tripping over Green Shoots and all of our problems were behind us. That's what the Administration and their media scribes are telling us.  Sheila needs to get with the propaganda Informational Program.

Chairman Bair continutes -
"Allowing the TAG program to expire in this environment could cause a number of community banks—already under stress—to experience deposit withdrawals from their large transaction accounts and would risk needless liquidity failures. This reflects the continuing legacy of too big to fail and the different liquidity pressures our community banks experience as a result."
So now ANY size is, "too big to fail?"

Let this sink in:  This program was extended by a vote of 5 non-elected officials.  These 5 people have committed YOU to a potential bill of $266 BILLION.

In the good old days, a person or business had to actually manage their own money.  They knew that by leaving all of their money in any one bank, a portion of it would be above the normal FDIC limits, and be at risk.  If they chose to keep their money in that bank, they had to do due diligence to ensure themselves or their investors that the bank was financially sound.

This requirement for Due Diligence gave banks an incentive to be fiscally sound.  If you were not safe, deposits were withdrawn and the market put you out of business.

With the TAG program, the government has taken that risk away from THEM, and transferred it to US.  Sound familiar?

Disgusting.
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Speaking of being "shaken to the core", what is going on with all of these massive earthquakes?  Haiti, Chile, Mexico and now China.  All at or near 7.0 on the Richter Scale, all since January.

The Mexican and Chinese earthquakes were located in BFE regions of their countries, and resulted in relatively low death rates, considering the size of the quakes.

I sure hope all of these quakes are taking the pressure off of the faultlines here in California...

Accept The Challenge

By these actions, the government is acknowledging that our financial system is still in deep, deep trouble - they just can't come out and say it directly.  Wouldn't want to panic the masses.

Individuals need to stay abreast of financial matters, even though they may have no interest in the subject ("I hate talking/thinking about money").  If I may make a suggestion, one of my daily reads is Calculated Risk.  I strongly recommend you make it one of yours as well.

They do a fantastic job - multiple times each day - of taking seemingly obscure financial and economic information, and making it digestible and relevant.

On the earthquake front, obviously, everyone should have some sort of an earthquake/emergency plan.  Have a car bag and a work bag, in addition to your home emergency preps.  Be sure to include water in all of them.

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2 comments:

mama4x said...

My local bank is bragging about *not* acting like the big banks- they're telling us they act locally and still have money, and many of the construction I'm seeing around here has one of their "funded by" signs out front.

Chief Instructor said...

mama, most small banks follow that model - staying local. It's good in the sense that they're serving their local community. It's not so good if that local community is having an economic down-turn. You're very dependent upon the local economy for the survival of the whole bank.

That being said, I trust local banks much more. I've worked for large national banks, and local, one-branch banks, and everything in between. I think a regional bank - something with 5-20 branches - has the best opportunity for success, as long as the management doesn't get greedy!