While we haven't been a fan of their recent editorials, yesterday's Wall Street Journal featured an Review & Outlook piece entitled, "The Latest Big Bank Bailout." The commentary takes aim at the possible extension of the TAG (transaction account guarantee) program that was extended in Dodd-Frank to offer unlimited FDIC insurance to noninterest bearing accounts through the end of 2012. The Journal says, "[B]anks have been lobbying to extend a deposit insurance program that was sold as a temporary response to the financial crisis in 2008. It's called the Transaction Account Guarantee (TAG). Whereas traditional insurance from the Federal Deposit Insurance Corporation now covers up to $250,000 per account, TAG provides unlimited coverage for non-interest-bearing transaction accounts. These are typically checking and payroll accounts for corporations and municipalities, as well as some large personal accounts. Taxpayers now stand behind more than $1.3 trillion of TAG deposits."
The editorial explains, "TAG is scheduled to expire at the end of this year. But four years after the crisis, some bankers can't seem to wean themselves off government assistance.... Like all government deposit insurance, TAG rewards poorly run banks at the expense of well-run institutions, distorts the allocation of capital, and is used to justify additional regulation. And of course it puts taxpayers on the hook for private risk-taking. While it creates the veneer of safer banking, TAG also sows the seeds of future instability. Hard as it may be for some youngsters to believe, interest rates normally don't stay near zero. When rates inevitably rise, expect a lot of cash to exit non-interest-bearing accounts for better returns."
The Journal adds, "The immediate danger to taxpayers is a back room deal on Capitol Hill. As lawmakers draft a continuing resolution to keep the government open past September, a TAG extension could be slipped into the legislative text at the last minute before taxpayers notice. TAG has largely flown under the media radar because some of its most prominent backers have often postured as opponents of the giant banks. Congressman Barney Frank (D., Mass.) promised "death panels" for too-big-to-fail banks, but his 2010 Dodd-Frank law quietly extended TAG for two years."
Finally, it says, "Lawmakers should consider how far they can stretch that net before taxpayers simply cannot cover the tab for Washington's moral hazard. A 2010 report from the Federal Reserve Bank of Richmond found that from 1999 to 2009 the coverage provided by the federal safety net surged to 59% from 45% of all liabilities at financial firms. Moving that number much closer to zero over the next decade should be high on Mr. Romney's agenda."
See also the article "Trillion dollar bank insurance program may sneak into legislation" in The Dailer Caller. It says, "A little-known bank insurance program implemented in 2008 at the height of the financial crisis may quietly slip into legislation and become permanent. The Transaction Account Guarantee program was implemented in 2008 and provides unlimited FDIC insurance to deposits for all non-interest-bearing transaction accounts above the limit of $250,000. Today, more than $1.3 trillion in deposits are covered by the program. As a part of the Dodd-Frank Act, TAG initially was to be phased out at the end of 2012, however, now there is a lobbying push in Congress to keep the program permanent, by way of a stealth amendment."