Saturday, April 10, 2010

Doing Good Things Sometimes Makes You A Bad Guy

The other day my wife asked the bank president at our bank about what happens when a bank goes belly up? This seems to be a daily occurrence in these dire economic circumstances we live in. His answer did not surprise me because I hear about the chain of events he reiterated, which I will list below, all the time on the nightly news…
  • The FDIC steps in and arranges for another bank to come in and take over the defunct bank.
  • The investors hardly notice that the FDIC and the new bank are going about going about what they do.
  • The investors get a letter telling them about the defunctness of their old bank and selling them on how wonderful their new bank is.
  • The next time they go to their bank they see that the new bank’s signage has been hung on their old bank.
  • The end result is the bank’s customers don’t lose their money.

I am sure there are some exceptions to the above rosy picture but generally this is how it works.

The reason I started pecking out this Foolishness…Or Is It? is I read a news article that tried to paint the Taking Over and Saving Bank in a bad light. It said that banks that save other banks are evil because they end up making money after they have done their good deed. In other words, a good deed cannot be a good deed unless the good deed doer loses money by doing the good deed.

My Foolishness juices are flowing. Here is what I foresee in the way of a set of guidelines for Future Want To Do Good Deeds Banks…

  • Banks that want to save other banks must provide documentation that proves conclusively that they will lose money after they have saved the bank they are applying to save.
  • In their Application to Save Savers Savings (ASSS) they will be required to specify the exact dollar amount that they will lose.
  • From the beginning there will be an explicit understanding that the bank that certifies the largest amount of loss will be the one that will be permitted to save the failed bank.
  • If the Saving Bank ends up making money there will be fines levied by our ruling government that will confiscate all monies made and the Falsifying Saving Bank will be levied a penalty that will be equal to 100% of the amount that they certified that they would lose in their ASSS.

I can just hear an intrepid chairman of some congressional committee issuing a statement that goes something like this…
“I am confident that, once the banking industry has fully adsorbed these new Loss Assurance Regulations (LAR), they will be flocking to submit their ASSS’s so that they can lose lots of money”.

That oughta do it … Or will it?

Would I kid u?