We’re going to talk about strip clubs and binge drinking today. Yet surprisingly this article is not about Hunter Biden.
I’m actually talking about the FDIC… as in the organization that’s supposed to insure customer deposits in the US banking system.
The FDIC isn’t typically an institution that’s associated with sex, drugs, and booze; in fact an agency that sends people from bank to bank across the country to comb through financial records and look for infractions of obscure regulations… should qualify as THE most boring in the world.
But the reality is the complete opposite.
According to a bombshell report published earlier this week by the Wall Street Journal, the FDIC has a hard-partying, sexed-up Caligula boozer dick pic culture that’s a cross between National Lampoon’s Animal House and the TV show Mad Men.
According to the Journal’s report, some FDIC meetings would take place at strip clubs. Senior bank examiners routinely sent around dick pics to the women on their teams. Auditors were encouraged and pressured to drink whiskey shots during work hours while in the field.
Female employees were openly rated on their looks and expected to have sex with their male supervisors in exchange for promotions and higher ratings.
And vomiting off the roof of the FDIC’s Washington DC area hotel was so common it became a rite of passage. (I was as surprised as anyone to learn that the FDIC owns and operates its own hotel…)
Taxpayers rightly have a certain expectation of their public officials– especially when said public officials have the solemn charge of ensuring the safety of the banking system.
And I think it’s safe to say that a hypersex boozer dick-pic culture at the FDIC falls far, far short of that expectation.
Now, as ridiculous as the FDIC’s party culture may be, it’s made even worse by the fact that the organization has repeatedly failed at its core mission.
Earlier this year, several large banks in the United States (led by Silicon Valley Bank) went bust; these were all banks that were regulated and supervised by the FDIC.
FDIC examiners had conducted multiple audits and examinations of Silicon Valley Bank… yet they never sounded the alarm or raised a red flag.
Perhaps that’s because senior management was too busy f*cking the analysts and getting hammered on the job.
It reminds me of the revelation about the SEC back in 2010.
The SEC is the government agency that regulates financial markets; yet they totally missed the warning signs of the Global Financial Crisis, as well as the Bernie Madoff fraud.
Well according to an internal investigation by the SEC’s Inspector General, it turns out that many of the agency’s senior employees were too busy looking at porn to do their jobs.
According to that Inspector General report, one senior SEC regulator accessed porn sites 1800 times during a two-week period from her government laptop. Another top attorney at the SEC spent up to EIGHT hours per day watching porn at work.
Yet even the SEC’s brazen debauchery has now been surpassed by the clowns at the FDIC. And the problem clearly starts at the top.
The FDIC’s chairman was hauled in front of Congress earlier this week where he faced questions about his agency’s extreme misconduct, as well as his own.
The chairman blatantly lied while under oath to the Senate panel by claiming that he had personally never been investigated for misconduct.
Yet upon later realizing that he would be caught in his lie, the FDIC Chairman then reversed his testimony and admitted that, yes, he had in fact been investigated for personal misconduct.
It’s all so utterly pathetic. And yet, this is the organization that’s expected to maintain a sound banking system in the US… which is a pretty big challenge right now. Here’s why:
1) Banks already have accumulated $650 billion of losses
Commercial banks across the United States bought trillions of dollars worth of bonds with their customers’ money over the past few years, back when interest rates were at record lows.
But now that interest rates have risen from nearly 0% to 5%, those same bonds (that the banks acquired with YOUR money) have lost a ton of value.
In total, banks in the US have racked up a whopping $650 billion of unrealized bond losses; this is an enormous figure, and it poses a major threat to several institutions which may already be insolvent.
2) More losses are coming from commercial real estate
Commercial real estate is suffering– especially office properties.
We can all see it: companies are cutting costs and reducing their real estate footprints, with a number of businesses permanently embracing remote work.
Demand for office properties has softened considerably. Prices are dropping. Defaults are rising. And many banks will end up taking significant losses from their roughly $1 trillion in exposure to US office real estate.
This problem is just starting to unfold, so there’s a lot more coming in the future.
3) The $221 TRILLION risk from derivatives is very difficult to calculate
Back in the 2008 financial crisis, one of the major problems that almost brought down the entire system was major derivatives losses. And ever since then, the term ‘derivatives’ has been a bit of a dirty word.
Derivatives are not necessarily bad; essentially they’re like insurance policies to protect investors against sudden and major price swings, sort of like how options can mitigate losses in the stock market.
The lurking problem with derivatives is that it’s easy for some institutions to take on WAY too much risk. And if a single Black Swan event arises, it only takes a handful of irresponsible boneheads to wreck havoc in the financial system.
The Treasury Department’s most recent report states that there’s $221 trillion in total derivatives contracts in the US financial system. This is obviously a lot of money… though in fairness it was twice that amount in 2008.
The real issue is that it’s extremely difficult to assess the real risk, or to stress test scenarios in which a Black Swan event may trigger another derivatives chain reaction meltdown of the financial system.
In theory the FDIC should be looking at all of these risks. They should be looking at derivatives. They should be looking at commercial real estate defaults. They should be looking at banks’ massive bond losses.
Yet at the moment they’re apparently too busy sending dick pics and getting so boozed up that they literally puke off the roof of their own hotel.
The good news for the US banking system is that there’s still a fair amount of equity– totaling just over $2 trillion.
But that’s across the entire banking system. Many individual banks– including a few large ones– have taken on way too much risk and have suffered far too many losses.
So I wouldn’t be surprised to see more bank failures down the road, especially if interest rates remain high and the economy contracts. And once again the FDIC will be caught with its pants down… apparently in more ways than one.