Transcripts

"Two Ways to Play"-Kevin Depew of Minyanville

SUSIE GHARIB: The nation's banks are being asked to pre-pay billions in insurance premiums. Tonight's "Two Ways to Play" asks the question: what's in it for the banks? Here's Kevin Depew of Minyanville and Minyanville's Kevin Depew with some answers.

KEVIN DEPEW, EXECUTIVE EDITOR, MINYANVILLE.COM: The FDIC this week said it is planning to raise $45 billion to help stave off a cash crunch as it deals with troubled banks. So far, nearly 100 banks have been taken over by the FDIC this year. How are they going to do this? By asking banks to prepay three years' worth of insurance fees. What's in it for banks? Well, for one thing, it means they'd no longer have to set aside money to cover potential losses on FDIC-backed securities. The result would be that some banks' capital cushion would increase almost overnight. Remember, the FDIC, which is ultimately more important to Main Street than Wall Street, is suffering from a temporary liquidity crisis, not reckless insolvency. Well, that's a nice, glossy take on things, but it ignores the bizarre circular nature of what's happening. The banks in this case are being asked to purchase an asset -- FDIC insurance -- and then being told they don't have to put aside capital to cover a potential loss on that asset, because it's guaranteed by the government. What's the difference between asking banks to prepay $45 billion in insurance or to make $45 billion in bad loans? Nothing. So put all the jargon aside and recognize this for what it is, an admission that the financial system may be awash in liquidity, but it's dangerously short of capital.