8.31.2009

Overleveraged - Okay for Me, But Not for You

Isn't this basically what the financial institutions were doing...the lack of prudence that upended the entire economy?

The FDIC is assuming most of the risk on nearly $80 billion in loans and other assets as it encourages a handful of healthy banks to help clean up the toxic banking environment through a series of takeovers and consolidations. As the FDIC moves into an aggressive "clean up mode," the agency's total exposure "is about six times the amount remaining in its fund that guarantees consumers' deposits," a huge potential risk for taxpayers. But with high risk comes the opportunity of high rewards.

With high risk comes the opportunity of high rewards?  That's how the government is supposed to be acting - guaranteeing accounts far beyond its ability to back them?  I know some see the central government's financial arms as lenders or bailors of last resort that can balloon out like some invincible blowfish.

I don't think that's the place of the federal government - not in a nation of ostensibly limited government.  I've taken note of the recent articles noting, rather glowingly, the "return on investment" of federal programs that bailed out financial institutions.  I worry that too many public figures will find the returns a tempting way forward...a legitimate action of government, and, instead of using the returns as a reason to exit the field, find further moral-hazard inducing interventions tolerable.

I'm also concerned about pushing toxic assets onto the healthy financial institutions that do exist.