- Associated Press - Thursday, December 13, 2012

A federal program giving unlimited insurance guarantees to some no-interest bank accounts, enacted at the height of the financial meltdown, will die out at the end of the year after the defeat of a Senate plan to extend it.

Senate Majority Leader Harry Reid, Nevada Democrat, led efforts to add two more years to the life of the Transaction Account Guarantee program, but Republican opponents used a procedural vote on the bill’s budgetary impact to effectively kill it.

Non-interest-bearing transaction accounts are used by businesses, local governments, hospitals and farmers who need a safe place to keep money on a short-term basis for such recurring expenses as payrolls. Critics of open-ended government backing of the program say the accounts have also become a haven for the wealthy and a deterrent to people investing in more risky job-creating enterprises.

With the measure’s demise, federally backed insurance for so-called TAG accounts will revert to the $250,000 level that applies to most other bank accounts. The increased insurance protection was put in place in October 2008 as the financial crisis raised fears of a run on banks. It was revised and renewed in the 2010 Dodd-Frank financial overhaul act.

At the end of September, about $1.5 trillion was guaranteed in transaction accounts at U.S. banks and thrifts, according to the Federal Deposit Insurance Corp.

The two-year extension was pushed by smaller community banks that argued that the financial recovery is still fragile and that the shrinking of federal protections would result in depositors moving their money to big banks that are less vulnerable to future financial downturns.

The extension was opposed by credit unions seeking the same advantages as banks and by conservative groups who associate the TAG program with the federal bailouts of 2008 and 2009 and say the program is no longer needed.

“We are not in a financial crisis anymore,” said Sen. Patrick J. Toomey, Pennsylvania Republican. “I don’t understand how you can justify it now.”

Republicans were also angered that Mr. Reid used parliamentary tactics to keep them from amending the bill.

The administration gave only qualified support to the bill.

The White House, in a statement issued Tuesday, said it supported the bill but was re-evaluating “the use of this emergency measure created during extraordinary times and a responsible approach to winding down the program.” In July, Treasury Secretary Timothy F. Geithner, asked about the program at a Senate banking committee hearing, said that “our judgment so far has been it’s not necessary to extend it.”

The bill failed after Republicans, led by Mr. Toomey, said it did not meet a requirement that legislation not add to the federal deficit. The vote to waive that requirement was 50-42, well short of the 60 needed. Opponents said the TAG program had cost the FDIC almost $2.5 billion, although supporters argued that those losses are covered by insurance premiums banks pay the FDIC.

Even with Senate passage, the legislation would likely have gone nowhere in the Republican-led House.

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