Dodd FDIC

Senator Dodd of Connecticut was chairman of the Banking Committee and when he suddenly decided not to seek reelection, I became curious. One of the things I discovered happened in 1991 when Dodd revised the FDIC rules that determined how the Federal Reserve made loans to banks. These were commercial banks the kind that most of us are familiar with and one of the main provisions is the government guarantee of each account up to $250,000. The purpose of the revisions, were to reduce the risk to the taxpayers if banks made bad decisions. Near the end of the hearings Dodd inserted a section in the bill without notice that allowed the government to bailout insurance companies and investment banks. Recall that investment banks are not like the commercial banks in your neighborhood but they are the big Wall Street banks. The net result was that instead of reducing the risk to taxpayers it greatly increased the risk. This is something that economist refer to as, “moral hazard”. It means that if the government is going to back up your mistakes then you are likely to take greater risk with your investments and of course this is exactly what happened. When the mortgage crisis hit the big banks like Bank of American and big insurance companies like AGI got billions from the taxpayers and this would not have happened without the Dodd amendment. Now some say this was not just an honest mistake on Dodd’s part but was a planned strategy since Connecticut is home to a number of large insurance companies. It has been suggested that Dodd retired knowing that as the mortgage fiasco was examined his change to the FDIC would come out.