CBS 60 Minutes aired this on May 31, 2009, from the FDIC point of view: a team of agents make a coordinated move to shut down Heritage Community Bank in Illinois.
On the surface, this feels like a happy ending - the FDIC swooped in to save the customers, and they found a new owner to save the branch employees. Hooray, score one for the little guy!
Keep in mind, however, that not once do we get a glimpse of what led up to the closure of Heritage Community Bank, nor do they speak to those with the bank (or give the disclaimer "the bank refused to comment").
Pay close attention to two key moments in this video: at 7:45, FDIC Chairman Sheila Bair says, "We don't go broke. We're the government, we are backed by the full faith and credit of the United States government." This was meant as an assurance to depositors, but think of the implications - who can fight against someone with unlimited funds and unlimited power?
Second, at 9:44, the FDIC holds a secret auction "a few days before" to sell Heritage. Who exactly gets invited to a secret auction? MB Financial was one, and they ultimately won Heritage.
Ready for the kicker? At 10:26, the reporter announces "it was a sweet deal for [MB CEO Mitchell] Feiger." (As an aside, the transcript on CBS' website omits the word "sweet.") Continue watching and you will discover that "the FDIC paid MB Financial about $3.5 million dollars. MB got all the deposits, customers and loans. If some of those loans go bad, the FDIC will pick up at least 80 percent of the losses."
A common misconception is that the FDIC is taxpayer funded. Not so - every bank insured by the FDIC pays a premium for that insurance, much as you pay regular premiums for health, auto, and home owner's insurance. The FDIC puts these premiums into a reserve fund which is tapped to pay depositors.
At 12:45, the video mentions that "because Heritage Community Bank was bought by MB Financial, the FDIC didn't have to pay depositors." You may have had different experiences, but FDIC Exposer has never had its home or auto insurer bring in a third party to take over my house and car to avoid paying for the losses that I had paid premiums for.
At this point, the FDIC is nothing but a broker who not only finds a buyer for the bank but pays that buyer for their trouble - to the tune of $3.5 million, plus guarantees against future losses in Heritage's case.
$3.5 million on the books can mean the difference between survival and failure for a community bank. If the FDIC instead had loaned that money to the bank, the bank could get back on its feet, the FDIC would get its money back (plus interest), and the community would remain intact. What is going on here?
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