FDIC goes after Ally

June 16, 2009 – 5:18 pm

by Rolfe Winkler, CFA

OA is way late to this.  Turns out that the 2.35% rate GMAC/Ally was advertising last week was already a significant cut from 2.8%, made at the behest of the FDIC, which had written a letter instructing them to lower deposit costs.  [Even so, as of today, the 2.35% APY offer still ranks them tops for 1 yr CDs.]

Ron Lieber has the full story at the first link above.  And his conclusion properly alludes to the key issue:  Going after individual banks that are both weak and offering high rates will always be a whack-a-mole exercise.  As long as we have (ridiculously underpriced) public deposit insurance, free-riding weak banks will keep offering high rates to fund risky projects.

Speaking of which, WSJ has a great story on New Frontier Bank in Greeley, CO, which FDIC shuttered earlier this year.  There are hilarious characters in the article.

  • A borrower who is angry with the bank for lending her too much (the loan officer raves about her business plan, saying she’ll make a profit, “which is why I went forward.”)
  • A competing bank exec who says other bankers in town urged borrowers who fell behind on payments to get second loans with New Frontier in order to pay off first loans with their own banks.
  • New Frontier’s founder who insists he didn’t do anything wrong because his loans “helped the community.”  For perspective, 35% of New Frontier’s loan portfolio was delinquent at the end of March, compared to less than 4% at CO’s other state-chartered banks.

It’s guys like this who provide “ponzi finance ” at the end of a credit bubble.  Put another way, they are the greatest fool in the market.  Taxpayer-backing via FDIC insurance enables them.

  1. 2 Responses to “FDIC goes after Ally”

  2. I missed this one too, nice find. This point is so key, “As long as we have (ridiculously underpriced) public deposit insurance, free-riding weak banks will keep offering high rates to fund risky projects.”

    Those horrible GMAC/Ally TV ads bragging about how they have the “highest rates” have been bugging the crap out of me lately. So this article is somewhat reassuring, in that at least the FDIC is aware of the horrible injustice/crime. But you’re right, micromanaging interest rates isn’t a long-term solution.

    By Adam on Jun 16, 2009

  3. Micromanaging rates may not be a solution, but micromanaging FDIC insurance premiums would be a good (although imperfect) idea. Bank regulators may not be able to fully comprehend all risk (heck, they still let Wells cling to its “well capitalized” rating despite its portfolio of Wachovia Option ARMs that don’t recast until 10 years after inception), but there should be some differentiation in premiums between high-flyers and more conservative banks.

    By John on Jun 17, 2009

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