So let me get this straight.  Banks pay an assessment (aka insurance premium) on all deposits, and the assessment is based on institution risk.  Overall, the average assessment looks in the range of 1% to 1.5% of insured deposits.  So banks pay this amount, and then feds guarantee the deposits in the event the bank fails, so that customers aren’t wiped out, or so that customers don’t think they’ll be wiped out and cause a run on the bank, and then get wiped out.

In some ways, consumers are the ones that reap the ultimate benefit of FDIC insurance, but banks also benefit in that they get to take more risks with depositors’ money in search of profit than if they had to assure customers that they would have access to their money at any time without any deposit protections.  So while both banks and consumers benefit from deposit insurance, banks are the ones that make the decisions that put deposits at risk; and the FDIC insurance premium depends on the banks capitalization and other factors.

So now that lots of banks are failing, the deposit insurance fund is dwindling, and Senator Dodd (D-Iowa temporarily lol but typically D-CO/Banks) wants to use taxpayer money to subsidize the insurance fund (through a “loan”).

I say fuck that.  If skydiving and knife-fighting became all the rage among the American citizenry, resulting in massive injuries and virually bankrupting the health insurance industry, there would be no bailout.  The health insurance industry would have to adjust, and quickly.  You want to skydive and get stabbed?  Great!  You premium is now 300% more expensive.  Thanks for calling Blue Cross Blue Shield!

So for banks…oh you want to leverage your deposits 12 to 1 and take massive risks and give loans to people that lie about their income and not bother to check it?  Great.  You probably need to pay higher FDIC premiums you greedy jack-asses!  Thanks for calling the FDIC!

But apparently that’s not how it works.  People with preexisting conditions and proclivities towards skydiving have to pay for their risk for health/life insurance, but banks don’t.  Surely we don’t want to impose costs that hurt businesses!  Even if they’ve self-destructed and the entire US banking system is basically insolvent because of liberal lending and capitalization.

So on top of everything else in the ballooning deficit (some of it good, if it stimulates the economy), does the federal government really need to be loaning money to banks for FDIC insurance that it might not get back?  The banks have demonstrated that they will take risks to earn a profit, and at some point in this string of bailouts it has to be shown that those risks have consequences.  No one complained when the market was booming, but now the party’s over.  Banks have no one to blame but themselves.  If the fund isn’t keeping up with the demand to cover deposit losses for failed banks, then the FDIC needs to raise the fee charged to banks to reflect the actual risk of insuring a banks deposits.

Hopefully Obama will do something with the rest of the bailout money to actually affect home foreclosures, which is what is behind the capitalization problems at banks and the problem with mortgage-backed and other credit-related securities.  And if Obama succeeds in reducing foreclosures and stabilizing the banking sector, home prices should start to rebound, and the rest of the economy along with them hopefully.  If this chain of events happens, it will be another judgement on Bush (as if history or his legacy need any more damning judgements on Bush) that he wasted months dilly-dallying with a bailout that doubled the size of the annual deficit without actually acheiving any results.

I’m hopeful that Obama can do this and that the rest of the bailout money will be  managed better and more productively.  The crash in home prices has had a huge impact on the economy, as well as on the psyche of the population.  Yes, housing prices were overvalued and unrealistic (in some markets more than others), but the market needs to find a pricing floor, so people can accept their losses and move on.  People shouldn’t have to worry that their primary investment (or if thinking about buying a home, future investment) is going to be losing them money or is basically worthless (if you have a mortgage that is underwater).  Keeping foreclosures from flooding the market is an important step for stabilizing housing prices and stimulating the economy as a whole.

The details of the automaker bailout look similar to the financial sector bailout in some ways…the government gets an equity stake in the companies in exchange for credit (for the automakers, this will be 20% of the credit given) and there are limits to dividends and executive compensation.  However, the automaker bailout has some differences and in many ways will function like a bankruptcy.  The government will appoint a “car czar” that will preside over the restructuring of the companies (not unlike a bankruptcy judge) and try get the companies to renegotiate agreements with the labor unions, suppliers, and other creditors so that the companies can eventually return to profitability.

There are some good parts of this plan.  The automakers need a bankruptcy restructuring so that they can get rid of their long term labor and other costs that put them at a permanent competitive disadvantage.  However, the Big 3 (and many others) believe that bankruptcy is not a viable option for the companies because no one would want to buy from a bankrupt car company and sales would further plummet.  So if this bailout can let the needed changes be made without technically calling it bankruptcy, that would be a good step.  And if the “car czar” feels that progress is not being made by one of the companies during the restructuring, he or she could withdraw the loan, which would basically force the bankruptcy and liquidation of the company (Harsh!)

However, the fact remains for the American car market that there is excess inventory and production that must come down.  The Big 3 are making more cars than people will buy.  There needs to be some consolidation and/or elimination of some brands or even whole companies (I’m looking at you Chrysler!).  GM cannot continue to make GMC and Chevy trucks.  There is no reason for Buick and Cadillac.  Pontiac has been dead in the water for some time (perhaps since 1991?) even with this wonderful attempt.

Personally, I think Chrysler is the most expendable and prime for making an example of, while preserving the other two larger companies.   I don’t see why a private equity firm needs to be bailed out.  They made the decision to try to turn the company around and failed.  They should be allowed to fail, just like they would have been allowed to reap the profits if their turn around had succeeded.  If this means Chrysler has to be broken up or closed down, that would be fine.  Chrysler has some assets that could be sold…Dodge has some decent-selling cars that might make it an attractive fire-sale acquisition and the Jeep brand is still well known, even if Chrysler has watered it down (does the world really need a Jeep Compass, Cherokee, Liberty, and Patriot?  They all look fairly similar to me…).

Ford seems to be in the best shape of the Big Three, since they lined up credit before the current credit contraction, but they still need to cut costs, reduce dealerships, and  make its fleet more competitive and fuel efficient (Yay Ford Focus!) if it is going to be viable in the long run.

What do you guys think?  Save em?  Let one or more crash?