Thursday, September 1, 2011

It's a Good Thing the FDIC Protects Us from Bank Failures! U.S. Said to Be Ready to Sue Banks Over Mortgages:

The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.
The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.
Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.

Thankfully, if any of those banks are rendered insolvent by the actions of our federal government, that self-same federal government will be there to reimburse each depositor up to $250k!

Perhaps now it's a little more apparent that the FDIC fosters moral hazard, because, really, why should the big banks care about ponying up $30 billion dollars if their depositors are in the end made whole (up to $250k)? That's not to say that depositors shouldn't be insured, but that the federal government shouldn't be providing that insurance. If we want deposits to be insured without the cost of moral hazard, then deposit insurance cannot be an essentially free government give away. Depositors should acquire and pay for deposit insurance just as they do other forms of insurance. This gives depositors an incentive to consider the soundness of the bank where they wish to deposit their money and provides another check against reckless banking practices. What we have today is the taxpayer backstopping depositor risk.

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