Yesterday's New York Times had a very interesting article on the role the FDIC will play in the Public-Private Investment Plan, Treasury Secretary Geithner's new and improved version of the original TARP "Cash for Trash" plan. For a discussion of the over all outline of the plan and how it will work/not work go here and here.
The Times article focuses on one element of the plan, which is the FDIC's guaranteeing of the non-recourse loans to the public private partnerships. The first question that springs to mind is: Why the FDIC? The simple answer is that it is an end-run around Congress. This is, however, not what the FDIC was set up to do. It was set up to guarantee bank deposits, which lowers the economic impact if a bank fails, and also helps prevent bank failures by minimizing the potential bank runs.
Being able to do this at all requires a very broad interpretation of the FDIC's mandate (see the NYT article for details). It appears that the FDIC is getting into this a bit blind, or is not being straight with the taxpayers. Here is a key quote from the article:
"So how is the F.D.I.C. planning to insure more than $1 trillion in new obligations? This is where things get complicated and questions are being raised. The plan hinges on the unique, and somewhat perverse, way the F.D.I.C. values the loans. It considers their value not as the total obligation, but as 'contingent liabilities' -- meaning what it expects it could possibly lose. As the F.D.I.C's charter dictates: 'The corporation shall value any contingent liability at its expected cost to the corporation.' So how much does the F.D.I.C. think it might lose? 'We project no losses,' Sheila Bair, the chairwoman, told me in an interview. Zero? Really? 'Our accountants have signed off on no net losses,' she said."
