Out of Control Policy Blog

FDIC considers blacklisting banks

In a move that would underscore the gut wrenching agony the government's reaction to this financial crisis has brought about, the FDIC is considering effectively blacklisting the banks who do not participate in the upcoming bailout package handouts.

Not every bank and financial institution is in the crapper these days. Believe it or not, but some firms were smart enough to manage their resources effectively and limit their risk exposure. Banks like BB&T and Wells Fargo have proven to be very resolute in the face of the market downturn. Some of these more solvent banks have expressed some displeasure at the federal government's fast draw to inject cash into a system full of inept financial managers. Yet, even bailout opposer BB&T and others such as JP Morgan Chase have said they'll willingly accept the federal money offered to them in order to go out and buy up failing institutions. In the case of BB&T, they don't need the money, but they'll plan on putting it to good use.

However, it is interesting that BB&T is willing to let the government come in and take a portion of their equity after CEO John Allison spoke out so harshly against the federal government's inappropriate intervention into the market. Allison said the initial efforts of the federal government to rescue the economy were misguided and served to increase public anxiety, going so far as to call our situation today a "government-caused panic." However, he now supports the latest move to inject taxpayer funds directly into banks.

This contrast of vision might have something to do with a rumor that the Treasury, Federal Reserve, and FDIC will establish a blacklist for banks who do not want the federal government to intervene and take an ownership stake in their firm. The banks on this hypothetical list might be forced to notify their customers that they were not participating the bailout's equity offering, creating a false sense of insecurity for the bank's customers. This amounts to blackmailing banks into letting themselves be nationalized.

The banks on this list would most likely not be the big national banks. Almost all them are willing to give up part of their privatization to get a crack a the billions being handed out. Wells Fargo, which just bought Wachovia, will get a cool $25 billion in play money because they don't have balance sheets in the red to shore up. But community banks around the country are the ones this blacklist might target, as they were only deposit holders and not big subprime loan handlers. If this list is created, it amounts to a totalitarian government action, trying to force bank boards to accept money they neither want nor need, or else face a future cut off from the federal regulatory structure.

Anthony Randazzo is Director of Economic Research


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