Busted: Bankers and The Global Economy

July 21, 2008

FDIC: Let the Innocent Cast the First Stone

Back in 2001, FDIC employees supervising day-to-day operations of failed bank Superior FSB funded more more than $550 million in subprime loans. According to a recent lawsuit by Beal Bank, who eventually purchased Superior FSB, a significant portion of 5,315 subprime mortgages are non-performing. The FDIC has even bought back 247 of the original loans, priming the pump for their blame. The problem is that the FDIC made the decision to continue to operate the failed bank under the banking monikker, churning out an additional 6,700 subprime loans.

Based on the FDIC’s own report, at least 19% of the loans are fully fraudulent or “contained significant breaches of warranty.” The FDIC recognized the problem, but carried the business of the failed bank as well as selling the loans to another bank. The reality is that the U.S. government was, in essence, one of the lenders giving out high-interest, predatory, subprime mortgages. Whether the lawsuit, originally filed by Beal Bank in 2002 is successful or not, the American taxpayer is on the hook for the entire affair, including the cost of the lawsuit. It’s too bad that the economy couldn’t take the hit for faulty loans back in 2001 if that were possible. Unfortunately, the government was not into dealing with reality of fraud that was being perpetrated on the American people by the mortgage bankers and the like. Because the FDIC was fully aware of the fraud, Beal Bank expects to win.

The FDIC just took control of the IndyMac Bank, a major lender that specialized in higher risk loans when it became insolvent. The FDIC intends to keep IndyMac open, as it did with Superior in 2001, but isn’t planning to originate any new mortgages.

Even in 2001, some lending experts were faulting industry practices while warning about rising foreclosures. What seems to be clear is that bank regulators and government alike have been immorally slow to heed warning signs. Instead of working to solve the problem, they perputuated it. The government encouraged lending to low-income borrowers as a way to increase home-ownership rates while ignoring the rampant abuse in the industry. The Bush Administration needed a victory in Bush’s second election effort and they had one in the banking and mortgage industry, which almost single-handedly had rejuvenated the economy since Bush took office.

There have been some ongoing concerns about the continuing safety of banks and the FDIC. The FDIC has been clear that it expects at least 200 failures over the next few years and has raised insurance rates to combat the expectation. For those concerned about the FDIC, the reality is that it is funded by the fees that banks pay first and secondarily by the government, which is fully supported by American taxpayers.

In the meantime, to prevent bank runs, the FDIC keeps its banking watchlist secret. The FDIC admits that even as supervisory regulators, they do not have the information necessary to predict which bank will fall next. They have the numbers approximately right, but often the wrong bank. Right now, the FDIC admits to 90 problem banks. Unlike the Federal Reserve and the SEC, apparently the FDIC doesn’t have the same pull on securing and analyzing banking information.

What is worse is that the moral bankruptcy of this system of usury is so prevalent that it is scarcely recognized.

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