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."

Consider the following facts in light of what might be the appropriate behavior of a federal agency:
  • The FDIC, with virtually unlimited Treasury backing, makes a deal with a Wall Street partnership in which the partnership receives a 0% loan and a 1% management fee;
  • The best outcome for the newly formed partnership (FDIC owns a 60% interest) is to hold all of the assets until the real estate markets recover;
  • Because it has a 0% loan, the partnership entity does not want any of the assets to be sold at current prices, so it fights with a developer who appears to be able to save his project from foreclosure. That is, the partnership entity, because it has no interest carrying costs and gets a 1% management fee, desires to take this property in foreclosure, betting it will be worth much more in the future, and having all the time in the world to wait.
  • It is quite clear that the FDIC has become a player in the private sector with profit interests competing with, and diametrically opposed to, those of private citizens. And, with unlimited funding, no taxes to be paid, a 0% cost of capital, and apparently, not answerable to anyone, how can the private citizen compete?

    FDIC spokesman Andrew Grey said of this situation: "What we're trying to avoid is creating the kind of financial incentives that cause the rapid liquidation of the portfolio at fire-sale prices, which could further depress already distressed markets. The structured transaction enables the FDIC's managing partner to take a longer-term approach to the loans, allowing for an orderly workout period."

    It's time for America to wake up to what the FDIC is doing! Small banks received very little TARP funds, mainly because most of them were filtered through the FDIC which refused, in many cases, to forward small bank TARP applications to the Treasury. Now, partnering with Wall Street, the FDIC not only unnecessarily discounts the assets they commandeer, but they now find themselves competing in the private sector and justifying their actions by indicating that their Wall Street partners need "time" for the real estate markets to heal.

    Why don't they give that precious "time" to the five banks they close every week? As long as they are giving out "time," such a process would surely result in a better outcome for the FDIC insurance fund since they wouldn't have to unnecessarily discount assets to attract Wall Street partners.

    With unlimited funds, the ability to discount assets to any level they desire, and the capacity to make 0% loans to their Wall Street partners, the FDIC has become an unfair competitor, motivated by greed (the desire for a maximum profit) to the detriment of the private sector and private citizens like Mr. Astani.

    Wake up America! Reform is much needed at the FDIC!