"At That Moment, Operation Happy Looked Pretty Grim"

At the end of their latest radio piece on the financial crisis, Alex Blumberg and Adam Davidson make a great point about uncertainty in the nationalization debate:

Of course, if [Tim Geithner and the Obama administration] were planning to take over the banking system, they wouldn’t announce it beforehand. They’d probably say exactly what they’re saying right now, wait ’til everything’s set up, ’til they hired enough people and got all their plans in order … and then one Friday evening, they’d make an announcement, and nationalize the banks over the weekend.

It’s a good point because that’s what already happens, every Friday night, when the F.D.I.C. seizes a small bank — by surprise — somewhere in America, cleans it up, and sells it back to a private owner.

60 Minutes reporter Scott Pelley recently rode shotgun with a band of F.D.I.C. agents as they snuck into town under assumed names and then, after business ended for the week, simultaneously seized all five branches of Chicago’s Heritage Community Bank.

The F.D.I.C. takes pains to keep its takeovers secret until the last minute. In this case, they gave the Heritage takeover a code name: Operation Happy.

You can watch the report below. It’s fascinating viewing, and should make you feel better about the safety of your bank deposits.

(HT: Ben Chandler)


royale

This secrecy seems like the best way to do it. No prior notice means that stock market investors don't have the chance to take advantage by decimating the bank before hand.

Steven Surowiec

I personally don't see the big problem with nationalizing the banking industry. Many of the Founding Fathers wanted the country to have a National Bank (as apposed to a Central Bank). This is especially important in a country like the US where the Constitution calls for Congress to have control of the banks and the economy. If they don't do what we like we can vote'em out. And while that doesn't happen very often right now in Congress I'm willing to bet it would start to happen very often if they were actually given the ability to do what they were meant to.

This is especially important when you consider that banks have the power to create money. if you give that power to a private organization it doesn't matter what laws you have in places or who's in charge, they can and will walk right over them because they'll have dictatorial control over the entire country.

neil wilson

I used to work for the FDIC and went to 'paying agent' school in DC. I left to work for KPMG before I ever had to go to a failed bank.

I know that there is ZERO chance of anyone who was in a position to know saying what they were going to do on the record.

Don't forget, that as a business, the FDIC wants to keep its loses as small as possible.

Saying that Citi is going to be taken over tonight would not be good for business.

Citi might be taken over tonight but we won't know until the close of business Friday.

Are any other big banks as sick as Citi? I can't think of any. NatCity is gone. Wachovia is gone. I'm not sure who else is as bad but I don't follow banks full time anymore.

Mike B

FDIC!! Everybody get down on the floor and put the deposit accounts in the bag....NO TALKING! :-D

Michael

That seems like a tough job because dealing with bank customers is tough enough as it is. Prime example is that old guy who walked in with a briefcase. His deposits were insured. He should have known that. EVERYONE should know that. Yet there he was storming into the bank in a panic, flustered and initially unwilling to speak with anyone. I know he was old and can understand his fear of losing his savings, but panicky people do not impress me. Luckily that FDIC employee working the door was insistent enough to keep after him and be the voice of reason.

I wish people could deal with money and their personal finances in a more rational manner, no matter what the economy is doing.

Dr. Tonic

"Can the FDIC run out of money?"

"Well, no, we are the government, we'll print it if we have to"

David Chowes, New York City

GOING OUT ON A TANGENT:

Saw 60 MINUTES last weekend, as I always see every Sunday. Excellent, revealing and comforting piece on the FDIC.

My comment: 60 MINUTES, now about 40 years on CBS amazes me. The number one program (in the ratings for many years), for a while the number of viewers declined.
Now it's the top or, one of the top CBS programs in terms of viewership.

My question: how can a program of such quality draw so many viewers for so many years?

It is the antithesis of THE BATCHELOR and DANCING WITH THE STARS and . . .

econobiker

#5 Michael- you said "I wish people could deal with money and their personal finances in a more rational manner, no matter what the economy is doing."

Same feelings here.

I have an acquaintance who, despite being college educated and even with a masters degree, kept all of his money in a savings and checking account. I mean everything- about $30k! in checking and $65k in a savings account. Not even in CDs but in a passbook savings at a lame interest rate. All of this wouldn't have mattered too much, other than his loss of potential interest, until his wife cleaned out his accounts and their house one spring Thursday afternoon and turned herself into his ex-wife.

Only then did I learn his naivete about money when I asked about whether he had Certificates of Deposit that she wouldn't have been able to take and he asked "What are those?" It was sad.

Lee

I was involved in auditing a failed bank before. This immediate takeover is needed to preserve a lot of documents and a reliable paper trail. You can not imagine the desperation of some bank employees in destroying evidence - shredding, document substitution, wiping out hard drives, and even burning documents in a fireplace. Like any other criminal, they will attempt to hide, destroy or erase anything that can be linked to them. Other hard assets like cars, computers, furniture, boats and even planes can all be moved to out-of-reach locations if there is a warning. It will be a long and painful process locating or retrieving them but sometimes you end up looking for phantom assets which never existed but included in loan papers. Good luck to those who are charged with recovering assets from Maddoff, Stanford and other scammers.

Blank Xavier

F wrote:
> and should make you feel better about the safety of your
> bank deposits.

Translation into political-economy terms;

1. Party A decides to store money with Party B.
2. Party B turn out to be incompetent.
3. Party C takes a whole bunch of money from Partys X, Y and Z and uses it to repay Party A.

Party A should have made sure Party B was sound before putting his money there. Why are X, Y and Z paying out because A was incompetent to manage his own money? what happens when A goes and does it again?

What happens when everyone stops bothering to make sure their bank is sound because they know Party C will take money from X, Y and Z? it means Party C has to do that all the time, because people happily bank with bad banks because they have no idea if they're good or bad.

Overall assessment : broken situation. We appear to need FDIC taking tax money to pay for bad banks *because* we have FDIC taking tax money to pay for bad banks.

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Blank Xavier

One other point -

I can imagine a counter-argument along the lines of "what about the poor guy who just lost his entire savings?"

The answer is for him to buy some insurance.

The answer is not for Party B to take money from Parties X, Y and Z, who have nothing to do with Party A and his bad decisions.

And I'd also say that insurance company will have a fundamental interest in keeping track of bank reliability - and charging premiums accordingly - which provides a clear signal about which banks are reliable and which not.

Sounds a whole lot better than a mechanism whereby random strangers are forced against their will to bail out people who have no incentive to care whether or not their bank is reliable.

PaulK

Blank Xavier: you need to look up the word "insurance". See, it means that we all (us X, Y, and Zs) pay a little so that there is money to pay party A when needed (things go wrong). Risk is used to determine how much we pay in advance.
How many of us are able to determine how strong a Bank is? I would say almost none, which is why the FDIC exists.
Further the alternative is bank runs where panicky people pull out their money and ensure that a bank in fact does fail, even if otherwise OK.

Blank Xavier

PaulK wrote:
> Blank Xavier: you need to look up the word "insurance".
> See, it means that we all (us X, Y, and Zs) pay a little so
> that
> there is money to pay party A when needed (things go
> wrong).

Yes. But you are missing the crucial issue.

If Party A puts his money in a bad bank and then Party B takes money from X, Y and Z, it's unjust. X, Y and Z have nothing to do with A. Why are they carrying the can for A being incompetent?

But if Party A - along with Q, R and S - puts money into an insurance scheme, then A, Q, R and S *have chosen of their own free will* to pool some money to cover their risk. If one of them invests in a bad bank and loses his money, *then they had all agreed to cover each others losses*.

You should pay for what you use. A, Q, R and S are paying for what they use. X, Y and Z are not - they have not chosen to use insurance, but they are being forced to pay for someone else. This is unethical and unfree.

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Blank Xavier

econobiker wrote:

[snip]
> until his wife cleaned out his accounts and their house
> one
> spring Thursday afternoon and turned herself into his
> ex-wife.

> Only then did I learn his naivete about money

Then you had previously learned of his naivete about relationships?

If he chose a partner who'd do that to him, I'm less surprised than I would be that he was so unthoughtful about his money.

PaulK

@Blank Xavier, FDIC is the Federal Deposit *Insurance* Corporation. All banks, good and bad, pay some into the FDIC (off deposit gains) so that it insures all banks, good and bad.
That is why it was created.

Blank Xavier

PaulK wrote:
> @Blank Xavier, FDIC is the Federal Deposit *Insurance*
> Corporation. All banks, good and bad, pay some into the
> FDIC (off deposit gains) so that it insures all banks,
> good and bad.

Yes. But this still misses the crucial point about freedom and paying for what you use.

First question : why am I forced by my bank to buy my insurance from FDIC?

Second question : why are FDIC forced to insure *all* banks, thus raising the price of insurance to everyone? any sane insurance company would refuse insurance to at least some banks.

Third question : imagine Party Z does due diligence and thinks that a particular bank is secure and puts his money there. He now may or may not want to buy insurance. If he does not, why are FDIC forcing him to do so?

Fourth question : imagine Party Z does no diligence and puts his money in a bad bank and doesn't want insurance. Why is he being forced to buy insurance? why are X, Y and Z being forced to contribute towards his insurance with their premiums?

Fifth question : Party A does no diligence and puts his money in a bad bank. He is by his actions helping a bad bank continue to exist. He doesn't care about this, because he's insured by everyone else - by the people who did diligence and put their money is good banks. If people were doing diligence, bad banks would I suspect be much less common.

Sixth question : by having the bank pay insurance by reducing its interest rates and increasing its charges, people don't pay directly and don't realise how much they're paying - because of this, they are insensitive to how much insurance is costing them, which means again they don't care if they put money in a bad bank.

Basically, what I do with my money is my own business and no one else has any business, at any time, under any circumstances WHATSOEVER, to decide for me to spend some of my money. And that is exactly what FDIC is.

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PaulK

@Blank, The FDIC was chartered because what you suggest does not work. You assume people can do real due diligence on a bank. You can get their public filings, but it is not like they will respond your request for all transaction records for examples.
The FDIC serves the two purposes of any insurance company: they monitor the health of banks so they can be taken over if they have gone bad (vs. being refused insurance and allowed to die), and they provide insurance for the depositors. The government is supposed to provide the regulation and do the DD to ensure that they are not unreasonable in their behavior. The regulations include rules about liquidity and leverage and all, but those were ignored and removed over the last 8 or more years. Banks were encouraged to be "bad banks" by the former administration by allowing/ignoring multi-layered schemes rather than the simpler deposit/lend model. When I-banks and banks become interchangeable, this crisis was inevitable.
If you want to invest in something that has no insurance, you have lots of choices. There are plenty of investment options that do not include FDIC insurance.

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HHN

Blank Xavier, a "good bank" can fail just because of the panic caused by a bad bank failing. You are assuming that other people with money in your good bank will always act rationally. History has proven that they don't.

Yes, what you do with your money is your own business. So if you don't like FDIC insured accounts, just don't use one. There are many alternatives out there that are not FDIC insured (e.g. money market mutual funds). Many fund accounts have check writing privileges, albeit with some restrictions. Some, like a Treasury-only money fund, are probably quite safe. FDIC insurance is an OPTION for those who wants it. You can choose not to participate.

Blank Xavier

> @Blank, The FDIC was chartered because what you
> suggest does not work.

Was it tried?

> You assume people can do real due diligence on a
> bank.

Yes. Directly, no. But they are capable of getting hold of that data from other people who are capable - in just the same way I am not capable of doing due diligence on a fridge-freezer but I subscribe to Consumer Reports, read their reviews and make a choice.

> You can get their public filings, but it is not like they will
> respond your request for all transaction records for
> examples.

This is why trying things is so important. People come out with opinions like - it doesn't work - and then provide reasons which wouldn't actually be a problem if it was tried.

> The FDIC serves the two purposes of any insurance
> company: they monitor the health of banks so they can
> be taken over if they have gone bad (vs. being refused
> insurance and allowed to die),

Hang on. Insurance companies are not and have never been responsible for taking over failed companies. They have only been responsible for reimbursement. Taking over failed companies is the role of the State regulator. You should not mix up that role with the role of an insurer.

> If you want to invest in something that has no insurance,
> you have lots of choices.

That's entirely beside the point. Involuntary insurance by FDIC is wrong, *per se*, and whether or not there are other ways to avoid FDIC involuntary insurance is absolutely irrelevant.

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Blank Xavier

HHN wrote:
> Blank Xavier, a "good bank" can fail just because of the
> panic caused by a bad bank failing.

That may or may not be true; and I say that because either way, what difference does it make to buying insurance for my savings?

> You are assuming that other people with money in your
> good bank will always act rationally.

In what way am I making this assumption?

> Yes, what you do with your money is your own business.

No. It is not. I am forced to buy insurance from FDIC via my bank.

> So if you don't like FDIC insured accounts, just don't use
> one. There are many alternatives out there that are not
> FDIC insured (e.g. money market mutual funds). Many
> fund accounts have check writing privileges, albeit with
> some restrictions.

You are missing the point about freedom.

It doesn't matter if there are a zillion options which don't have FDIC insurance.

If FDIC is *forcing* even *one* account in *one* bank to buy its insurance, then it's *wrong*. It is unfree. The FDIC are making other peoples decisions for them.

As it is, the reality out there is that the majority of people are being forced to buy FDIC insurance and the know they're getting it and the don't give a second thought about reliability of the bank they're with - and that is a major problem for us all which is caused by FDIC forcing people to buy its insurance through their bank.

I have yet to see a situation where an unfree act is being performed which did *not* induce significant negative ramafications.

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