The Ever-Expanding FDIC

Andrew Ross Sorkin has been digging around in the FDIC’s charter, and has discovered that it is barred from incurring any obligation greater than $30 billion. Which is a bit inconvenient, seeing as how it’s about to guarantee as much as $1 trillion as part of the PPIP bank bailout program.

The sneaky way that the FDIC is getting around this obstacle is to say that the value of those obligations is actually zero, since zero is the “expected cost to the corporation”. And the FDIC’s chairman, Sheila Bair, is coming out with some very peculiar statements in trying to justify the massive expansion in her agency’s power and budget:

She also defended her agency saying that the F.D.I.C. has not experienced mission creep: the various programs that it is participating in are meant to insure the stability of the financial system, which she says was always the goal of the agency.

No, Sheila, the goal of the Federal Deposit Insurance Corporation was always, quite narrowly, to insure deposits. Deposit insurance is one way in which governments help to insure the stability of the financial system, but it’s not the only way, and it’s disingenuous in the extreme to say that just because you were insuring deposits in the past, you’re qualified and legally allowed to do anything else which might make the financial system more stable.

After all, the OCC and the OTS and the Federal Reserve and even the SEC are all involved in insuring the stability of the financial system too, and no one’s suggesting that they can therefore take on hundreds of billions of dollars of contingent obligations.

But this is all academic, really; just as the FDIC isn’t really able to take on these debts, there’s no one remotely able to stop it from doing so, not when it’s all part of Treasury’s grand plan. All it needs is the thinnest veneer of legality, and it seems to have found that. It’s a fait accompli.

Comments

[Adam O.:]

Do you know if the FDIC will be fronting this cash to complement the purchases of the PPIP? Because that's what is sounds like.

If so, why are they calling it a 'guarantee'? If they're flat out paying for it up front, it's not really a guarantee. It's a plain subsidy.

Apr 07 09:51 AM

[HerrHansa:]

Any CDS on FDIC?

Apr 07 11:05 AM

[huskerbob:]

Qouth Sheila Bair Nixon: If the FDIC does it, it's not illegal.
They really need to get taxpayer dollars to the banks, and it's soooo irritating to get Congressional approval. Especially since they seem to have lost their appetite for bailouts after the first few trillion.
Maybe the misused and abused Office of Thrift Supervision can get into the act next. They helped cause the crash, and it might cheer them up to hand out billions of dollars.

Apr 07 11:29 AM

[jt77:]

It will be a frightening day indeed if the FDIC losses the trust of American depositors.

Apr 07 12:01 PM

[Ricard:]

The justification of this move seems to resemble the justification of why we invaded Iraq. Of course, we know how the latter turned out...

Apr 07 01:50 PM

[PPY:]

What are you all talking about? Don't you all know that even though our administration has to follow laws FDIC doesn't?

This was our government's response regarding AIG bonus-

"The administration official said the Treasury Department did its own legal analysis and concluded that those contracts could not be broken. The official noted that even a provision recently pushed through Congress by Senator Christopher J. Dodd, a Connecticut Democrat, had an exemption for such bonus agreements already in place"
www.huffingtonpost.com...

So under contractual laws President Obama, Geithner, etc cannot stop AIG from giving out bonuses.

FDIC, the agency with the leader who really cares about homeowners, on the other hand, is so special it doesn't need to honor contracts

"F.D.I.C.'s October agreement with JPMorgan Chase and Washington Mutual allows Chase to pick and choose which of the city's 148 Washington Mutual branches it will keep. Chase will then turn over the rejects to the F.D.I.C. But here's the kicker: According to sources, the F.D.I.C. [CAN THEN SIMPLY TERMINATE THE LEASES OF THOSE REJECTED BRANCHES, ALL CONTRACTUAL OBLIGATIONS VOIDED]...

-I am Lanlord for on of the WAMU Location I don't know who to talk to about this Lease or how to pay my Mortgage.
SOMEONE PLEASE HELP ME
-I believe we spoke with each other. WaMu moved out as of 2/10/,leaving me with an empty building and half a million loan with Chase-WaMu. FDIC legalized the cherry pick by Chase without obligations.Jamie Dimon is really a very smart banker and good bzman,but at the price of all WaMu contractors, landlords,shareholders...
-I got the same situtation. They stopped rent payment. I can not pay the mortgage and will lose the property."
www.observer.com/2008/...

*imho*

Apr 07 04:12 PM

[PPY:]

At the end of 2008, FDIC had $19 billion to guarantee over $4 trillion in deposits. Not only is Sheila Bair using this same $19 billion to back bonds to help banks raise capital (this is because after FDIC wiped out Wamu bondholders nobody would buy bond unless it comes with government support), she was also expecting FDIC to "finance as much as $500 billion in purchases of residential and commercial real estate loans” for PPIP.
www.nbcnewyork.com/new...

"JP Morgan launches $5.85 bln FDIC-backed notes-IFR"
"Citigroup Raises $12 Billion in FDIC-Backed Bond Sale"
"Goldman's inaugural $5 billion sale is the first test as U.S. banks line up to sell bonds guaranteed by the Federal Deposit Insurance Corp"

uk.reuters.com/article...
www.bloomberg.com/apps...
www.reuters.com/articl...

How did she come up with that $500 billion number?

SURPRISE!

Introduced by Chris Dodd and backed by Barney Frank, Depositor Protection Act of 2009 (now unethically and sneakily has been inserted into Credit Card Accountability, Responsibility and Disclosure Act) will give FDIC the authority to "borrow" up to $500 billion instead of the original limit of $30 billion.
www.reuters.com/articl...)

If Geithner wants tax money for his toxic assets, tell him to go before Congress and ask directly instead of using FDIC.
This was not the ORIGINAL reason for which Bair wanted to raise bank fees and the increase in credit line. She tried to increase bank fees because in a letter to banks she wrote FDIC may be insolvent this year as more failures are expected; from the higher fees she planned to collect about $27 billion, not $100 billion House gave her, not $500 billion Senate plans to give her. In fact, within just a few days Bair made several contradictory statements regarding FDIC’s potential insolvency and her concern for using taxpayers money as a solution to that problem. Bair completely disregarded the fact that her misleading statement about FDIC insolvency could have caused a huge bank runn because, as we all know, FDIC really has no money but our deposits are fully backed by the US government.

March 4, 2009
“No Taxpayer Funds Bair rejected arguments that the agency should use government aid to rebuild the fund. The FDIC has authority to tap a $30 billion line of credit at the Treasury Department and legislation pending in Congress would boost the amount to $100 billion.“Banks, not taxpayers, are expected to fund the system,” Bair said. Asking for taxpayer support “could paint all banks with the ‘bailout’ brush.” ”
www.bloomberg.com/apps/…..refer=news

By the way, can Chris Dodd stop inserting items into bills that would cost taxpayers? This is getting ridiculous. What does FDIC have to do with credit card reform?

*imho*

Apr 07 04:33 PM

[oops2:]

obviously the fdic is part of this becasue another bank bailout is not politically feasible. however, it would be hard for the public to say no to bailing out the fdic.

you can see the one-liners now: we can;t have a banking system wothout the fdic guaratee! we never realized this would happen but we just have to bailout the fdic! ect...

we are getting scammed hard here!

Apr 07 07:45 PM

[Roger Knights:]

I've said it before and I'll say it again: "Necessity knows no law."

Apr 08 04:27 AM

[fireball:]

i guess the laws apply only to "the people?" it seems tax evasion, perjury, pedophelia, soliciting prostitution, are o.k. if you are one of the politicians or beauracrats. when was the last time one upheld the oath to defend and protect the constitution? i guess exemptions? dispensations? now apply to whole agencies?
felix i may not agree with some of your taxation ideas but i appreciate your matter of fact articles.

Apr 08 03:03 PM