The Regulators Must Be Crazy

Couple of items in the news show specific cases of insanity on the part of federal regulators. Bloomberg is our first example. Bank of America is moving some risky assets to a subsidiary that has insured deposits. This is fine with the Fed, but not the FDIC.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers… The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting… The bank doesn’t believe regulatory approval is needed.

The regulators are protecting the same constituents – banks. If BAC gets FDIC protection from loss, that makes the Fed happy. The Fed is getting beat up all the time about its QE and inflationary policies, used to offset huge budget deficits. Somebody has to pay for them and it’s up to the U.S. Treasury and the Fed to make sure that happens. So, they don’t want banks to fail.

But since the FDIC is an insurance program that assesses all banks to cover losses of some banks, it has to increase premiums it charges all the banks it regulates to cover the possiblity of a loss if BAC’s risky assets fail.

Sounds pretty arcane, right? Deep in the weeds of the financial world? But remember who gets forgotten – the banks’ customers and shareholders. Surely employees won’t suffer pay cuts, though there may be staff reductions.

Here’s a specific example from IFO’s own experience at the annual meeting of IFO’s longtime credit union a year ago. Credit unions also pay deposit insurance to its regulator, the NCUA. The CEO said increases in deposit insurance premiums over the past couple of years had forced the credit union to cut interest rates it pays depositors, known in the credit union world as members.

And in a second example, we find the Commodity Futures Trading Commission, which has politics to deal with in addition to its responsibility to regulate commodity trading. The WSJ makes this astonishing statement about a rule adopted by a party-line 3-2 vote: “…even some CFTC commissioners supporting the rule think it may not have the desired effect.”

Anyone who thinks government protects us (consumers, customers, members, or whatever) should re-think that in view of these and many, many more equally outrageous examples.

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About InvestingforOne

I've been investing in various assets by myself using a discount broker for many years. Over that time, I've developed some theories that others might find useful. Plus, there is more to investing than money. Time, talent, work, friends, family all go into developing a good and satisfactory strategy.
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