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Published September 23, 2009

In a reversal of roles, healthy banks may bail out US govt

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(WASHINGTON) Tired of the government bailing out banks? Get ready for this: Officials may soon ask banks to bail out the government.

Senior regulators say they are seriously considering a plan to have the healthy US banks lend billions of dollars to rescue the federal insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.
The plan, strongly supported by bankers and their lobbyists, would be a major reversal of fortune.
A hallmark of the financial crisis has been the decision by successive administrations over the last year to lend hundreds of billions of taxpayer dollars to large and small banks.
'It's a nice irony,' said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company. 'Like so much of this crisis, this is an issue that involves the least-worst options.'
Bankers and their lobbyists like the idea because it is more attractive than the alternatives: Yet another across-the-board emergency assessment on them, or tapping an existing US$100 billion credit line to the Treasury.



The Federal Deposit Insurance Corp (FDIC), which oversees the fund, is said to be reluctant to use its authority to borrow from the Treasury. Under the law, the FDIC would not need permission from the Treasury to tap into a credit line of up to US$100 billion. But such a step is said to be unpalatable to Sheila Bair, the agency chairwoman whose relations with Treasury Secretary Timothy Geithner have been strained.
'Sheila Bair would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help,' said Camden Fine, president of the Independent Community Bankers. 'She'd do just about anything before going there.'
Bankers said they worry that a special assessment of US$5 billion to US$10 billion over the next six months would crimp their profits and could push a handful of banks into deeper financial trouble or even receivership.
And any new borrowing from the Treasury would be construed as a taxpayer bailout that could open the industry to a political reaction, resulting in a wave of restrictions such as fresh limits on executive pay. Any populist furore could be avoided, the thinking goes, if the government borrows instead from the banks.
'Borrowing from healthy banks, instead of the Treasury, has the advantage of keeping this in the family,' said Karen Thomas, executive vice-president of government relations at the Independent Community Bankers of America. 'It is much better for perceptions than having the fund borrow from somewhere else.' - NYT