Raising FDIC Deposit Insurance to Bail Out the $700B Bailout Bill

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After the House failed to pass Paulson’s $700B TARP that provided cover for Wall St., the Bush Administration, politicians, and lobbyists are scrambling to figure out how they can make the plan palatable to an angry populace who saw it for the $700B boondoggle it truly is.

Concerned that the bill wasn’t focused on helping “average Americans,” politicians are attempting to load it up with various tax credits and other trivialities that continue to ignore the real problem that constituent response and polling shows Americans want: foreclosure prevention through mortgage modifications. Legislators assisted by industry lobbyists are considering changing the bill’s language to give Treasury Secretary Paulson “the ability to shrink struggling homeowners’ mortgages.” Translation: the Treasury Secretary can (but is not obligated) to do this. If you want to know how “committed” Paulson and the politicians are to mortgage modifications, consider how ineffective Paulson’s “Hope Now” program launched December 6, 2007 has been in helping struggling homeowners facing foreclosure. Libra energy likes to please all parties involved. With Mercury, the planet of communications and legislative documents retrograde in Libra, Congressional leaders think that if they rewrite the language a bit so it sounds pleasing, it will be sufficient to pacify the public.

As I wrote in the Libra New Moon Cycle post, the stock market during this time would make big moves in either direction, and the first two days of trading this week have reflected that. The Libra New Moon challenging Jupiter in Capricorn (representing the government) and Mercury retrograde in Libra reflected yesterday’s mindset of “renewed optimism” that the bill will get passed - one of the drivers propelling yesterday’s big market upswing.

Politicians have now latched on to what they think could propel the bill to pass: increasing FDIC deposit insurance. The idea got on the fast track after it received strong support from both presidential candidates, whose campaigns are now arguing over who came up with the idea first. FDIC Chairwoman Sheila Bair said she supports a temporary increase in deposit insurance, but hasn’t specified by how much or how long the increased insurance should be in place. FDIC insurance covers deposits at FDIC insured banks up to $100,000. On April 1, 2006, FDIC insurance was increased up to $250,000 for “certain retirement accounts.”

The $100,000 cap has been in place since March 31, 1980 when President Carter signed the Depository Institutions Deregulation & Monetary Control Act (DIDMCA). Mercury retrograde conjoined the Act’s natal Pluto yesterday, prompting talk to reconsider increasing insurance (which is ruled by Pluto). The Act is approaching its first Saturn return (exact in August 2009) which could change the rules regarding deposit insurance.

In “Libra New Moon Blows Off TARP, Exposing Big Hole in $700B Bailout Bill” , I wrote that FDIC insurance should be permanently raised to provide unlimited coverage for all bank deposits. Individuals and businesses would not be fearful of losing their hard earned money – money they paid interest income tax to the government that some bank customers have already seen get wiped out.

A temporary insurance increase does not help individuals and businesses residing in areas of the country where there are few banking choices. If the temporary increase is for a short amount of time, it will not diminish the “fear factor” that with every bank failure has propelled individuals and businesses to seek shelter at another (usually larger) bank. Make the temporary increase too long, and customers will forget that it is temporary and get wiped out in a sudden crisis.

Big banks have always resisted raising deposit insurance. They argue that it benefits weak banks who would offer much higher savings rates than their competition to attract deposits to help save their bank. After all that has recently occurred, I think at this point most people would view a financial institution offering much higher rates than their competitors as one that is potentially in trouble. The bottom line is that deposit insurance limits benefit big banks. Walk into a branch of one of the behemoths such as Bank of America (BAC), Citigroup (C), or JPMorgan Chase (JPM), and chances are good you’ll overhear a customer of a smaller bank inquiring about or opening up a new account there. Because big banks determine who gets Board seats on the Federal Reserve Bank of New York, they have the ear of the heads of the Fed, FDIC, and Treasury. Former Fed Chairman Alan Greenspan was adamantly opposed to raising FDIC deposit insurance.

A final reason why banks are resisting an increase in deposit insurance is that the premiums they pay to the FDIC rise by the amount of coverage. The FDIC had already scheduled an increase in premiums to start on October 1, 2008. I think something should be arranged between the banks, FDIC, and the Treasury to facilitate permanent unlimited deposits. Even if the government absorbed the increased cost of insuring deposits, it would be so much cheaper than $700B! As the crisis subsides, the FDIC could gradually implement small premium increases to banks.

The FDIC celebrated its 75th Birthday on June 16. Mercury turned retrograde last Wednesday, exactly challenging the FDIC’s natal Pluto in Cancer. It was that night that the FDIC contacted JPMorgan’s CEO Jamie Dimon to tell him that his bank would get to acquire WaMu. Reflecting the secretive nature of Pluto, the FDIC contacted Dimon two weeks earlier to tell him that the FDIC would likely seize WaMu. However, it was no secret that Dimon had been interested for quite some time in acquiring WaMu, but with his Mercury challenging Saturn, Dimon is famous for making acquisitions at a low price. On September 25 (WaMu’s 119th Birthday), the FDIC announced JPMorgan’s acquisition of WaMu.

As transiting Mars in Libra challenged the FDIC’s natal Uranus in Aries on Sunday, Sheila Bair decided she was going to engage in shock and awe (Uranus) by taking Bush’s pre-emptive military (Aries) strategy and hold a shotgun wedding (Mars in Libra) between Wachovia (WB) and Citigroup (C). But in this instance, Wachovia wasn’t pregnant. Wachovia was a weak bank made weaker from WaMu’s demise. Wachovia CEO Robert Steel began talking to other banks. Wells Fargo (WFC) was interested, but dropped out Sunday because they wanted a JPMorgan-like deal to get Wachovia. According to yesterday’s Wall Street Journal, when talks broke down Sunday evening, the FDIC told Steel it was taking control of the process.

So far this week the FDIC and Chairwoman Bair have been praised for their actions. Transiting Saturn in Virgo exactly conjoined the FDIC’s natal Jupiter on September 30. This represents the FDIC expanding their role beyond intervening in insolvent institutions. Jupiter rules ideologies such as the Bush doctrine of moral hazard and taking pre-emptive action. Many on Wall St. are anticipating which banks will face another Sheila shotgun wedding, viewing bank consolidation as a good thing (just as they love airline consolidation). Saturn and Uranus in Pisces are in opposition; in October and November will challenge the FDIC’s Mars in Virgo. Reverence towards the agency by the public and the politicians will likely turn to criticism over recent actions the FDIC has taken.

And who pays the price even if you’re not a customer or shareholder of the bank that faces death rather than marriage? The taxpaying public that the Administration and Congressional leaders keep reminding us they’re out to protect.

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