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Reform Is Needed at the FDIC

NEW YORK ( TheStreet ) -- Wal-Mart (WMT) is often criticized because when they put up their store in a small community, they drive out small businesses and mom and pop stores which cannot compete on price. Nevertheless, Wal-Mart still pays taxes and has a cost of capital, so they cannot go everywhere.

Imagine if a Wal-Mart like competitor to small business existed that had virtually unlimited resources, paid no taxes, and had a 0% cost of capital. No small business could survive if such an entity targeted a particular business or set of businesses. Enter, the FDIC!

For more than a year, I have written blogs criticizing the Federal Deposit Insurance Corporation's approach to America's Community Banks and what I have termed the "Unholy Washington-Wall Street Alliance" (see, for example, Health Care Bureaucracy May Be Like FDIC and Where is the Outrage II . In one blog, I observed that if she wasn't careful and continued such policies, when the history of this depression is finally written and analyzed, Shelia Bair would be portrayed as a government bureaucrat whose policies and practices deepened the depression.

My colleague and I recently wrote a blog entitled Moral Hazard at the FDIC in which we observed that, in the case of the disposition of the failed Corus Bank assets, among others, the FDIC had now become a private sector competitor, had chosen Wall Street partners and provided subsidies to them, and had assumed the role of entrepreneur and risk taker.

We observed through our models that, in the FDIC's resolution of the Corus Bank assets, only under a significant rise in real estate prices was the recapture of FDIC insurance funds greater than if they just held the assets or sold them at current values.

In a Sept. 8, 2010 Los Angeles Times piece ( Downtown L.A. Condo Developer Takes on Investors, FDIC by Roger Vincent) we now learn that the FDIC and the Starwood investor group are fighting with Hassan "Sonny" Astani, a real estate condominium developer in Los Angeles. In an interview, Mr. Astani stated: "I face an unholy alliance between government and Wall Street."

Corus Bank was Mr. Astani's lender on his condo project in downtown L.A. When Corus failed, the FDIC stopped funding his project which was 95% complete. So, Astani auctioned off 77 units he had completed to garner enough cash to finish his 30-story project near the Staples Center. But, Starwood and the FDIC objected. According to L.A. City Councilwoman, Jan Perry, this is "a showdown between a local developer trying to finish a big project and high rollers with federal backing determined to grab his $260 million project at a discount."

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