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Is Rebuilding Insurance Fund Mortgaging Our Future?


Like living summer 2007 all over again.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial). It's being shared here for the benefit of the Minyanville community.

The media are reporting this morning that the FDIC will propose that banks advance three years of annual insurance premiums -- up to $54 billion -- to rebuild the dwindling insurance fund.

I'll allow others to weigh in on the circular nature of the proposed transaction (and you thought credit derivatives were too interconnected to fail!), our continued mortgaging of the future, and our recurring ability to mistake liquidity for capital.

Instead, let me ask a basic question: What is the difference between a cash-flow and profit-and-loss perspective when asking banks to prepay $54 billion in annual insurance premiums and asking banks to make $54 billion in bad loans? Fundamentally nothing.

In both cases, cash goes out the door immediately and an asset is put on the books (in the case of the former, a prepaid expense and in the case of the latter, a loan). But ultimately both are written off with the associated expense flowing through the profit and loss. (And yes, I can already hear banks telling the analysts that the insurance charges in 2010,2011, and 2012 are "non-cash").

But to me it's very telling that Washington is opting for a solution that at its core screams "We currently have a financial system which is awash in liquidity, but short of capital."

I don't know about you, but it feels like the summer of 2007 all over again.

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