Negative Rating from the FDIC for Protecting the Customers?

The Federal Deposit Insurance Corporation (FDIC) was created by the Glass-Steagall Act of 1933 to protect the safety of deposits in the member banks. Which means, that if a bank is a member of the FDIC, then the deposits of the customers are protected up to a specific amount, in case the bank goes belly up. Which means two things: first, the FDIC must inspect the member banks for safe and sound banking policies that will prevent the banks from going belly up; and second, in case it happens that a bank goes belly up after all the inspections, the FDIC must make sure that it has enough money to move in and provide enough money to allow the customers of the bank to withdraw them and move them to another bank. We will see later how it achieves the second goal.

We know for sure how it works on the first goal. With the multitude of banks that collapsed for the last several years from the impossible burden of bad credits given away in the mortgage and consumer credit craze, the FDIC stood unperturbed, as if nothing happened an business was as usual. Even as early as 2007, it was obvious that more than 500 banks and other lending institutions were in trouble, with bad credits above the level of solvency. In 2008 two dozen banks collapsed and had to be taken over by the FDIC. By the end of 2009 the number swelled to 170. The banks used unsafe and unsound banking practices that threatened both the customers and the banking system in general; but the FDIC said nothing. In 2010 the number of failed banks was 160. The FDIC said nothing.

But these the FDIC is suddenly active. There is a bank that certainly deserves a negative rating, from the perspective of the bosses in the FDIC: East Bridgewater Savings Bank of Massachusetts. The bank received a slap from the Corporation, criticized for its unsafe and unsound practices.

What was the horrendous banking sin that the bank committed, forcing the FDIC to come out of its slumber and publicly criticize it?

The bank has no bad loans. No delinquent loans. No foreclosures. The customers’ accounts are way too safe. There is no danger of a run on the bank – the bank can repay every single penny to its customers, if they happened to withdraw their money in one day. Safety and soundness of banking: the bank has it all. The FDIC should be happy about the bank, one would think.

But no. The FDIC gave the bank bad rating. Why? Because the bank gave too few loans. It should have been more generous with the money of the customers, the FDIC says. After all, that’s what banks are all about: wasting the customers’ money on subprime loans and low-quality credit. That will really give the customers the protection they need.

So, what would protect the money of the customers if not a sound, cautious policy that avoids reckless lending and screens the borrowers for their credit quality?

The FDIC has the answer: Print more money. From the very beginning, the FDIC was set up with money from the Treasury and the Federal Reserve, i.e. money created out of thin air. The FDIC never really cares if a bank is sound and safe – no banks have ever been rated negative for unsafe policies. It can always provide the money to secure the accounts – by asking the Federal Reserve to print more money. Printing more money means more inflation, and means less value in a dollar.

In the final account, the FDIC “protects” our accounts by devaluing the money we have in them. But a bank that wants to protect the money by keeping its value, gets a negative rating.

Just like in my previous article about the Texas wildfires, it is obvious that the Federal government and its institutions are not and can not be part of the solution. They are part of the problem. To protect our families, our homes, and our money, we need to dismantle all Federal institutions that claim they are here to help us. They are only here to make our problems worse.