Legal Commentary

The Geithner Plan: Turning The FDIC Into Another AIG?

By Big Tent Democrat

This aspect of the Geithner Plan is not one I had considered -- turning the FDIC into AIG:

The F.D.I.C. is insuring the program, called the Public-Private Investment Program, by using a special provision in its charter that allows it to take extraordinary steps when an “emergency determination by secretary of the Treasury” is made to mitigate “systemic risk.” Simple enough, but that language seems to bump up against another, perhaps more important provision. That provision clearly limits its ability to borrow, guarantee or take on obligations of more than $30 billion.

MORE . . .

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. 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. (Well, that’s one way to stay under the borrowing cap.)

(Emphasis supplied.) That's the AIG way. As Andrew Ross Sorkin notes:

By this logic . . . the F.D.I.C. appears to have determined it can lend an unlimited amount of money to anyone so long as it believes, at least at the moment, that it won’t lose any money.

What the FDIC is really doing however is providing insurance in unlimited amounts without making reserve for potential liabilities. As AIG did in the CDS market. This is of dubious legality, to say the least. But as Felix Salmon writes:

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.

Yet another reason to hate the Geithner Plan.

Speaking for me only

Full post as published by TalkLeft on April 07, 2009 (boomark / email).