Death knell for high interest rates? FDIC board meeting this Friday to finalize new rule(s).

This is the exchange between Cramer and FDIC president Susan Blair that occurred today.

Jim Cramer:

We have a whole lot of financial institutions between the range of $5 billion and $25 billion that are screwing up the whole profitability of the system...you can go to a lot of web sites, it's all public. And you see that some of these banks are offering much higher rates for deposits than others.

We know these banks are killing profitability and hurting the system. Why don't we seize em'?

Susan Blair Head of FDIC:

Well, I will, I will tell you, you should look at our board meeting on Friday, because we're gonna be finalizing some rules to try to get a better handle on some of these, uh, high, uh, uh, high rate, uh, deposit takers. Uh, we don't like those. We don't like high rate deposits, uh, they cost us a lot of money. It's very difficult to sell off those deposits if we have to resolve an institution that's paying those high rates. So we are going to be more aggressively using the tools that we have to try to get those deposit rates down and and we'll be finalizing the rule(s) on Friday just, just for that very purpose.

After talking about other stuff, at the end, Cramer says:

Ok, the money's safe, but I sure wish they would close some of these banks that are bleeding the system.

They used to complain abut the low rate of savings*, but now that we've been stuffing our money in high-interest-rate deposit accounts, they want us to jump-start the economy by spending money so they're going to lower the interest rates. At what point does the nationwide rate of savings go back down to zero?

*low rate of savings = how much people save, not interest rate.

What bank is paying these high rates? If the FDIC thinks that the 1.5% rates that some online banks are paying is too high they don't understand that these banks haave to pay a better rate to keep their customers.

How are these banks bleeding the system?

Do they have any data to base the discussion off of? Or are they just assuming they know what the problem is and shooting in the dark (like our entire government has been doing)?

Sorry if this is OT, but a person I was speaking with today said something I was wondering if anyone else has heard about...he said, China is beginning to sell their US bonds like crazy fearing they wont be any good...and when the US runs out of bonds to sell, or I think he might of said when China runs out of bonds to sell, that is when the interest rates will go back up. The sell off now is what is keeping interest rates low.

Sorry if I mucked this up, but I was curious to see if anyone heard the same thing, or close to it above. I remember reading something here a while ago close to this subject, but can't remember where...maybe the World's greatests treasury guy down in Australia.

The FDIC has to guarantee your RATE? Why? I thought they just gave you your money.

raderator said: The FDIC has to guarantee your RATE? Why? I thought they just gave you your money.

As far as I know, the FDIC doesn't have to honor rates. But it does make it harder for them to sell off accounts to some other bank.

Think of the recent case of WAMU offering 5% CD's as they were going under. FDIC was able to get Chase to take them over, but the more money is sitting in high yield accounts/CDs, the more reluctant others will be to take over: it puts them in the dilemma of choosing between ticking off customers by breaking the CD's/lowering rates, or keeping customers happy by paying the rates promised by the failing bank.

I agree with dcwilbur, this will only affect banks in trouble. Banks and Credit Unions that are well-capitalized will continue to be able to offer high rates to attract customers if they choose.