Maybe calling the thing a “bailout” wasn’t the best idea. As we wrote last week, we were waiting for the House to overcome its distaste for a Wall Street “bailout” and save the world from a financial meltdown. As we write this week, the House has finally done so — but on the second try, having first voted the bill down. The perception that Congress was working on a “bailout” turned what should have been an economic issue into a political one, with the result that what looked like a sure thing a week ago turned into a major soap opera.

Of course, a few things changed in the last week. The world experienced at least a near-meltdown, which was enough to concentrate the minds of many House members. Everyone began calling the thing a “rescue,” which sounded nicer than a “bailout.” In addition, the Senate helpfully provided a new, face-saving version of the “rescue,” this time sweetened with enticements to comfort House members as they considered whether to vote yes or no.

Among the sweeteners the Senate wrote into the bill are extenders for expiring tax provisions, temporary relief from the alternative minimum tax, aid for rural school districts adversely affected by the tax-exempt status of federally owned lands, and new requirements for health insurance companies regarding the treatment of mental illnesses. An odd mix, but the items were calculated to appeal to House members’ political appetites, not their logic.

Deposit Insurance Ceiling Raised

One sweetener may actually be relevant to the nature of the crisis. The Senate added a provision that would temporarily increase deposit insurance coverage from $100,000 to $250,000. That would help insured financial institutions compete with money market mutual funds, which now enjoy a new Treasury guarantee.

More importantly, the deposit insurance increase would help stabilize conditions for community banks, which face increasingly difficult times as what promises to be a serious recession gets under way.

As provided in the legislation, the boost in deposit insurance coverage would be temporary — extending for just one year. Many here are taking the time limit with a large grain of salt — after all, what are the chances the economy will be so healthy in 2009 that there would be no risk in reducing deposit insurance coverage back to today’s $100,000 level?

The legislation also clearly establishes that the FDIC can borrow whatever it needs from the Treasury to make the new deposit insurance ceiling work. That’s all well and fine, but many banks would like a clearer picture of exactly who is going to pay for what promises to be a difficult and costly time ahead for the Federal Deposit Insurance Corporation’s (FDIC’s) Deposit Insurance Fund.

As it happens, the FDIC board is scheduled to meet on Tuesday (Oct. 7) to set premiums for the coming year. There is a great deal of talk about the BIF reserve being at a “record low,” and it is certainly below the target level set by Congress in the FDIC Improvement Act.

However, the board does have considerable flexibility in developing a plan to restore and maintain the DIF. Banks will be watching to see how the agency applies that flexibility in the face of what will surely be big increases in the projected costs of future bank failures.