Friday, August 6, 2010

Two Top FDIC Officials Departing Next Week

Michael Bradfield, the agency’s general counsel, and Joseph Jiampietro, a senior adviser for markets, both plan to leave the FDIC  next Friday, the FDIC has announced.

It is not clear if the sudden departures of Bradfield and Jiampietro have any connection to the opinion letter issued by the FDIC that gave the nod for the super-rich to use a program, CDARS, that allows them to place all their funds under guarantee with the FDIC.

Earlier this week, Nassim Nicholas Taleb broke the story that former vice-chairman of the Federal Reserve, Alan Blinder,  approached him about getting into the program.

Yesterday, I contacted the FDIC about the program and this morning they confirmed that they issued an opinion letter "saying that an individual’s deposits in this program [CDARS] will get 'per bank' insurance coverage."

When I followed up later today asking if Bradfield, who afterall was general counsel of the FDIC, issued the opinion letter. This is the response I received:
I do not know who specifically provided the opinion. I know it came from our Legal department.


  1. From a practical standpoint, why would the "super rich" want to deposit millions of dollars within an FDIC insured bank account? To get a little yield premium over treasuries with a slightly higher risk premium?

    Maybe it's a lame loophole, but as far as being a practical tool for the uber-wealthy, I don't think so.

  2. @Anonymous

    So are saying from a "practical standpoint" that the creator of CDARS, Promontory Interfinancial Network, LLC, doesn't have any clients?

  3. Maybe stupid ones.

    Like a lot of programs, I don't agree with it, but it's not like they are hiding the program, and it's not very practical.

  4. It is a relatively simple transaction, pays interest, and has maturity dates as short as 14 days. I use them for holding funds in Section 1031 exchange transactions, which can take up to 180 days to complete.

  5. Okay, so we have a use-case for ultra-short (in lieu of a t-bill). Can you come up with something so we can make the argument that these deposits actually put the taxpayer at higher risk?

  6. Of course, they do.

    By insuring all the deposits of the wealthy, it creates moral hazard. The wealthy investors need not care about the riskiness of a banks activities because they are insured. If they had exposure to losses, money would only flow to what the wealthy depositors saw as prudent banks (or they would demand higher interest). The flow to prudent banks would create more careful banks and then less need for the FDIC to bailout.

    Further, under the CDARS program, more insured deposits will end up through out the system, thus there will be a tendency for the cost of FDIC insured bailouts to be higher.

  7. I think banks, especially community banks, promote them mostly as a customer relations service and to compete with money market mutual funds -- which I think went under Paulson in 2008 from zero federal insurance to unlimited insurance in the matter of a week or two -- although I am not sure how the politics of that worked out. Better keep a customer with only a $250K deposit than to lose him completely.

  8. I get the morale hazard point & just spent some more time reading about the program. Yep, this does look like a taxpayer risk.

    I wouldn't use it, but I'm sure most people at this point are under the impression that an "FDIC" insured account is as good as cash in hand.

  9. I don't see the risk characteristics that people are seeing. If a guy is putting $2 million into CDARs Cds, that money is taken in by the receiving bank and spread out to the other banks who agree on the rate. It's just an efficiency tool--that's the selling point.

    If you want to talk about deposit insurance, then sure, it shields bad banks from market forces (bank runs & deposit drains). If market forces were allowed to work in Treasury rates, by this I mean the Fed not depressing yields by it's policies, then these wealthy folks (also municipalities, nonprofits, etc) could go out and buy T-bills with the good faith and credit of the US Government standing behind their investment.

    What difference does it make?

    Federal dominance in the former market economy, it's lock on fiat money creation, and it's out of control spending are the greatest risks you can imagine.

    The real tragedy is the destruction of the culture of risk taking in our economy. When you insure everything, you actually eliminate risk/reward decision making and vaporize any type of market-based capital allocation. When thee's no risk, there's no discretion.

    CDARs just makes efficient the crappy choices among rates and terms.

  10. I couldn't find the requirements for a bank to quality for CDARS, just the statement: "More than 3,000 financial institutions across the country participate in CDARS."

  11. Anonymous said:

    'From a practical standpoint, why would the "super rich" want to deposit millions of dollars within an FDIC insured bank account? To get a little yield premium over treasuries with a slightly higher risk premium?

    Maybe it's a lame loophole, but as far as being a practical tool for the uber-wealthy, I don't think so.'

    You make a very good point. Why hold deposits in a FDIC account when you can buy some very liquid T-Bills at a relatively competitive (these days) rate?

    One potential aspect (it's probably not the primary aspect, but it may be an important thing to consider) may be the ability of the depositor to hold all of their deposits at one bank for the sake of benefits from higher "relationship profitability."

    Most commercial and high-net-worth customers are priced on the basis of their entire relationship with a bank. This not only includes revenue from deposits held at the bank, but also loans, treasury management, and other services.

    Having a large amount of deposits with a given bank increases the profitability of a given customer relationship with the bank, especially when that customer has a large amount of loans. Think of it: If you are a bank, if a customer holds a large amount of deposits while maintaining a sizable loan portfolio, you are basically loaning the customer out their own money. Sure, you are paying the customer a pittance of an interest rate, but you get to pocket the spread between the deposit rate and the loan rate. The larger the deposits at the institution relative to the loan portfolio, the greater the profitability of the relationship.

    This higher level of profitability gives the customer greater leverage on negotiating lower interest rates on loans and lower fees on other bank products. Thus, though the customer may only make chicken feed on its deposits relative to T-Bill rates, they may actually be making up for this on the loan side of its relationship with the bank. The customer will be able to say:

    "Do you know how much %$#%$# money I have on deposit with you bastards? 100 bps over Prime isn't good enough. I want Prime +0% on this loan or I'm taking my money to (other big Wall Street Institution). Plus, your fee is too goddam much! You may charge the hoi polloi 1%, but you're sure has hell not getting away with that with me!"

    The main benefit of the program is that a high net worth customer can concentrate their deposits at one institution, deriving the maximum benefit for their loan portfolio (assuming, of course, that they actually have a loan portfolio).

    Note also that the relationship may include commercial loans to the customer's closely-held businesses.

  12. Without delving into it's history, I think it's safe to say it was the original intention of the FDIC to protect high net worth individuals (hence the original limits). But once the cat was out of the bag with money markets, I guess they figured they might as well grease the skids some more. Until there are dramatic consequences, this will sit in the closet just as subprime ARMS once did.