Sheila Bair as a Tool of the Power Elite

Sheila Bair gets good press from MSM. And the Kennedy crowd loves her. Last year, she received a Profile in Courage Award at the Kennedy Library, in Boston. Each year, the Kennedy Library Foundation presents the award to public officials who it feels have exhibited "political bravery."

Sheila Bair politically brave? I can't get her to answer a simple question about whether an FDIC approved program creates moral hazard.

Moral hazard occurs when a person is insulated from risk and thus makes decisions in a different manner than they would if exposed to the risk. In the banking sector, the FDIC is one big moral hazard machine. By insuring bank accounts up to $250,000, the FDIC creates a situation where depositors aren't concerned about how well a bank is run, since if a bank goes under, the FDIC will insure the depositors up to that $250,000. If their money was at risk, they sure as hell would be looking at how safe their bank is.
The limit on FDIC insurance at $250,000 was instituted because regulators recognized that this moral hazard exists. They argued that "the little guy" needed to be protected against severe loss. The argument continued that if at least the very rich are exposed to risk, they will act as a check on banks operating with too much risk. The underlying argument being that with a limit of $250,000 per bank, it would be difficult for large depositors with $25 million, $250 million or a billion to practically open enough accounts to get all the money insured under the FDIC cap of $250,000. Someone with $25 million to deposit would have to open accounts with 100 different banks. Someone with $250 million would have to open accounts with a 1,000 different banks. Thus, the argument went, since its practically difficult for these large, and presumably sophisticated investors, to open enough individual accounts, then at least they will have to be concerned as to the risk level at the banks where they deposit their non-FDIC insured sizable funds. It would be, in other words, be a check on the banking system becoming to reckless.

Of course, the D.C. elite don't really think in terms of what is good for the country, or the banking system, and the spirit of why a regulation is written. Their specialty is looking for ways around the spirit of the law, so that they can line their own pockets by servicing the super wealthy. One such operator is the economist Alan Blinder. Amazingly this man was once vice-chairman of the Federal Reserve, so he should be aware of the dangers of extending moral hazard in the banking sector. He should also further understand the spirit in which the cap at $250,000 in insurance per account was written.

Nevertheless, Blinder co-founded a firm, with cronies that were formerly with the FDIC and the Office of the Comptroller of the Currency,  to get around the spirit and practical limitations of the super wealthy getting all their bank money protected by FDIC insurance. Blinder and company bundle and unbundle the money so that a super wealthy person gets, as Blinder's web site puts it, serviced as though you had only one under $250,000 account:

... you sign one agreement with a participating financial institution of your choice, earn one interest rate per maturity, and receive one regular statement.

It's that easy!

So much for putting a check on the risks banks will take.

I contacted the FDIC, to get further thinking on their views on this matter.

Greg Hernandez in the Office of Public Affairs responded with this email:

Bob,

Thanks very much for your message. I’ll check with my colleagues on these issues. I hope to get back to you by Friday morning.

Greg
Greg Hernandez
FDIC, Office of Public Affairs
Washington, D.C.

He then followed up with an email that said:

I checked on your query. My colleagues tell me that this is most likely CEDARS that was created by the Promontory Interfinancial Network. We believe that this is simply a CDARS-type arrangement operated by a deposit broker.

FDIC is not part of CDARS. However, the FDIC has looked at their program and given them an opinion saying that an individual’s deposits in this program will get “per bank” insurance coverage.

I was also in touch with FDIC spokesman David Barr. He wrote:

You left me a voice mail about people spreading their money to increase deposit insurance coverage...I understand that you were in touch with my colleague Greg Hernandez. From my understanding, he’s already responded to your request. I just wanted to drop you this note. Per your voicemail, this is not a “loophole” to insurance rules.

I responded:

Hi David,

Thank you for your response. Is Sheila Bair aware of this program? If so, for how long? Does she support the opinion letter sent out by the FDIC legal department? Does she believe that the CDARS program does not have any impact on moral hazard in the banking system?

Barr replied:

This program you describe pre-dates her becoming the FDIC chairman.

--db

Huh! Read my questions in the email above. The spokesman for the FDIC headed by this woman of bravery, doesn't answer my questions and tells me that the program was started before Bair joined the FDIC, as though this brave woman can't change or do anything about policies that were instituted by the FDIC before she got there, even if the program greatly expands moral hazard, and  leaves the banking sector with one less check on risk, while at the same time protecting the wealth of the super wealthy.

I tried to make things simple for Barr and left a voicemail, and sent an email with just one question:

Is she concerned at all that the program creates moral hazard?

Barr has not responded to my voicemail message or my email on this question. And so there you have it. This "brave woman" who is supposedly protecting the interests "of the people," through her spokesman will not answer a question about whether the FDIC views the insuring of the wealth of the super wealthy as an expansion of moral hazard.

In truth, the FDIC should be abolished. If people are concerned about protecting their liquid assets there are many, many ways to do this without FDIC protection.

Bair's pose as someone who is fighting to bring integrity to the banking system is just a pose. A New Yorker clip shows how the Bair myth is promoted:

[Bair's]position [at the FDIC] has a five-year term and is usually held by an anonymous bureaucrat, but Bair has forced her way to the center of the debate over the financial crisis. Advisers with ties to New York banks have dominated both the Bush Administration and the Obama Administration, and Bair has consistently stood out for her skepticism of Wall Street and for her eagerness to confront the big banks.

In truth, the inability for her spokespeople to respond to my questions about moral hazard and FDIC insurance for the super wealthy, tells us a lot more about Bair as a tool of the power elite than some New Yorker puff piece likely written at the behest of the FDIC spin machine. Who knows maybe at the behest of David Barr, himself?

What's going on here is just another example of how the elite know their way around the regulations to achieve goals never intended by the original legislation. There are probably more unsophisticated widows who have lost money form banks going under than the elite. Indeed, anyone who has lost money from a bank that has gone under has to simply be classified as not "in". Because if you know former Federal Reserve vice-chairman Alan Blinder, he is going to tell you how he can protect every penny you have, for a fee, of course.