The folks in Washington D.C. say one thing – the bureaucrats in the field do another. This is happening today on Main Street to America’s community financial institutions. Because I suspect the health care bureaucracy will be similar, this writing will point out the abuses by the FDIC and relate them to what might happen in health care.
There are now 702 institutions on the FDIC’s Medusa list. This number is likely to rise in the second quarter despite the closure of 41 banks year to date through March 26, 2010. Almost all of these are community based or regional institutions, and they are victims of current economic conditions. The balance sheets of these institutions were never meant to be “marked to market” or “marked to fire sale prices”. As the economy heals, so would these balance sheets. In the interim, nearly all of these institutions have enough liquidity to survive even if their “capital” base is low. Yet, the FDIC’s approach has been that the managements and boards of directors of these institutions are lacking or even incompetent despite the fact that 3 years ago the FDIC itself rated most of these managements and boards in the top two rating categories. It almost appears that the FDIC is on a mission, directed by the “Too Big To Fail” (TBTF) institutions, to eliminate a large chunk of community institutions so that the TBTF can get even larger.
The institutions on the Medusa list cannot raise capital precisely because they are on the Medusa list. The FDIC is supposed to “resolve” a failing institution in a “least cost” way. The least cost way would be to provide some seed money (like TARP which went mainly to TBTF) or change some regulatory accounting rules to allow write-downs to amortize over a longer time period, like 10 years. In either case, once the public perceives that the Medusa banks can survive, private capital would become available. But, under current FDIC policy, why should private capital come into a Medusa institution when all the investors have to do is wait for the FDIC to “resolve” the institution? The deals the FDIC makes when it closes an institution are once in a lifetime deals for investors, and something they would never see in a free market transaction. How could it cost the FDIC more if private capital comes to the aid of the institution without an FDIC “intervention”? Even if it is later closed, the FDIC would be better off by the amount of the private capital raised. Clearly, the FDIC closure policy is illogical in and of itself.
Let’s dig a little deeper. Each of the Medusa institutions is under a “Cease and Desist” order which requires a blizzard of paperwork and reports which takes up most of management’s time and effort, often reporting on a weekly basis, to fulfill a whole lot of irrelevant requirements. This takes time away from the important things management should be doing, e.g., dealing with the asset problems and trying to find additional capital. At examinations, examiners are often arbitrary, especially when it comes to capital, often requiring uncalled for asset write-downs, which directly depletes capital. It actually appears as if the examiners are under orders from their superiors to do so.
Having given away taxpayer money to save TBTF Wall Street institutions (the very ones that caused the financial crisis), the FDIC seems to have reacted to taxpayer outrage. So, in an effort to appear “tough”, they aren’t about to help any other institution, even if it’s what the public wants or is the “least cost” resolution method.
More important, the way government bureaucracy is set up leads to wrongheaded decisions. Today, the FDIC case managers are overwhelmed with the number of cases to manage. The Medusa institutions send paperwork to the case managers who have so many cases to manage that they don’t have time to read the reports they themselves have required. Most of these Medusa institutions regularly get messages from the case managers asking for reports that often have already been sent multiple times. In the end, the easiest way for the case managers to cope is to reduce the number of cases. This is shorthand for “closing” the institution, because keeping it open would only increase the case manager’s workload. From their point of view, it isn’t their money and the money pot is unlimited. So, case managers instruct field examiners to do what they have to do to justify an FDIC “intervention”, even if they have to be arbitrary in their judgments. (Often, when the “intervention” occurs, it is Gestapo like. For example, the FDIC sent 65 field agents to close a one branch, nine employee bank in Carson City, NV in February!)
This is what happens when a bureaucracy is given unlimited power. The managements, boards of directors and shareholders have no recourse, and any lawsuits filed are met by an army of government lawyers with unlimited resources.
Think of what this means for the health care system. First, for any particular illness, the bureaucrats will establish rules and guidelines which they will apply whether it makes sense or not. That is, the bureaucrat, not the doctor and/or patient makes the medical decision. Second, because cost will always be an issue in health care, the case managers will always be overwhelmed. They will not have time to collect and read all of the relevant information. Even if they do, if the rules and guidelines do not permit a treatment, it is safest for the bureaucrat to say “no”, even if he/she thinks a different treatment is appropriate. No criticism can be leveled against a bureaucrat who follows all the rules. Finally, like at the FDIC, the best way to control your workload is to get rid of case files. Saying “no” may lead to a patient’s death – saying “yes” may prolong the life and keep the case file on the bureaucrat’s desk.
Like the TBTF Wall Street banks, if you are lucky enough to be a celebrity or a big political contributor, no doubt you will receive “special treatment” in the new health care world. But, if you, like most, live on Main Street, no matter what is said in Washington, D.C., if you become ill, you can expect the same treatment that the 702 Medusa institutions are now receiving at the hands of the FDIC.
Robert Barone, Ph.D.
March 29, 2010
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