Monday, October 5, 2009
Bloomberg has an article this morning claiming that FDIC Chairman Shela Bair believes that regulators should consider making secured creditors carry more of the cost of bank failures. "This could involve potentially limiting their claims to no more than, say, 80% of their secured credits," Ms. Bair said yesterday while giving a speech in Istanbul, where hopefully nobody was listening. "This would ensure that market participants always have some skin in the game, and it would be very strong medicine indeed." I'll say. In fact, the medicine would be so strong that it might kill a few banks along the way. The whole point of secured financing is that secured investors can rely on being first in line to collect 100 cents on the dollar before anyone else gets a penny in a bankruptcy filing. If you are no longer assured of that outcome, you are no longer a secured investor. You are now "slightly secured and charging a much higher rate" or maybe "mostly secured and asking for WAY more collateral" or possibly "just not doing secured lending anymore." So, I'm thinking that cutting off secured funding on struggling banks is not going to help those banks stay alive, which is not going to help the FDIC's insurance fund, which doesn't really help Ms. Bair do her job of paying for bank failures.