The Geithner Plan: Turning The FDIC Into Another AIG?

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

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    There's a reason why I've been (5.00 / 10) (#1)
    by inclusiveheart on Tue Apr 07, 2009 at 10:27:47 AM EST
    harping on the role of the FDIC in all of this.

    Instead of being used as a regulatory agency to respond rationally to financial collapse as was intended, they're being used as an ATM.

    The FDIC was never meant to protect the banks themselves or market speculators - it was meant to protect the depositors and the banking system.

    Well (none / 0) (#2)
    by Big Tent Democrat on Tue Apr 07, 2009 at 10:29:04 AM EST
    It just dawned on me I admit.

    slow on the uptake on this issue.


    I noted that the FDIC was described (5.00 / 2) (#15)
    by inclusiveheart on Tue Apr 07, 2009 at 10:59:00 AM EST
    as having "expanded power" in the Geithner Plan when it was released, but reserved my judgment because I wanted to see exactly what those powers would be.  For all I knew then, the powers were going to somehow allow the FDIC to get at the toxic assets and sort them out properly.  As it turns out, the FDIC is going to be used in this totally perverted way to protect market speculators.  It is in a word scary.

    I was not at all trying to make you admit anything though - just saying why I have been rambling on of late about the FDIC's role in all of this.  


    I am slow on the uptake on financial (none / 0) (#16)
    by TeresaInPa on Tue Apr 07, 2009 at 11:11:44 AM EST
    matters.. do you think this means that, for instance, if someone has 100,000 in a CD insured by the FDIC, that insurance may not be reliable?

    No - I don't actually think (5.00 / 1) (#19)
    by inclusiveheart on Tue Apr 07, 2009 at 11:36:53 AM EST
    that your FDIC insurance is at risk at this point.  My problem with what is happening to the FDIC is that it was chartered to cover a limited amount of risk at time when commercial banks were siloed from the speculative financial markets.  It was meant to protect "the little guy" - not the big depositors.  There has always been a cap on the insurance which was a really pretty genius part of the plan in the sense that us poor folks would not have to worry about putting our money in the bank while the banks would be able to enjoy the benefits of our deposits.  It was a win-win - and not for nothing - it made our banking system attractive to foreign depositors who did not always have that kind of protection in their markets.  But it was never meant to cover the banks themselves.  

    After the repeal of Glass Steagall no one reconcilled the fact that the FDIC was insuring the Bank Holding Companies' banking operations, but within the context of the newly "modernized" system the banks were exposed to the risk of speculators.  Then comes this collapes where the speculators' activities have suffered such great losses that they've fundamentally threatened their commercial banking operations.  So in the event that some of these banks do go into receivership, we will via the FDIC be paying for the losses generated by the speculators.  I likened this to being like you taking insurance out on your first home and making a claim on that policy on your second uninsured home.

    Now Geithner it seems wants to go even further in the wrong direction - away from the original mission of protecting the depositors and not banks - and have the FDIC directly prop up the Bank Holding Companies' speculators.  That's scary because that is not a "little guy" focused plan by any stretch of the imagination and it is scary because it signals to me that the interests of the people are not a big priority for this Administration.

    Fortunately for all of us - for the moment anyway - that FDIC insurance on your bank account is considered a valuable asset to the Masters of the Universe - so I don't think you have to worry that it will go away - unless of course in the unlikely event that the US goes bankrupt - but then that will about be much more than bank accounts as you can imagine.


    But the FDIC (none / 0) (#20)
    by Big Tent Democrat on Tue Apr 07, 2009 at 11:47:20 AM EST
    does not insure BHCs.

    Nope but they insure their banks (5.00 / 1) (#23)
    by inclusiveheart on Tue Apr 07, 2009 at 12:02:56 PM EST
    and if the commercial banking operations are in trouble because of unregulated speculation in other areas in the BHC, then the FDIC is insuring them by default too - that's the problem with allowing the BHC's to drop their firewalls without addressing the role of the FDIC in this new system - or the fact that the bank assets are subjected to far greater risks - none of which are regulated the way the banking operations are.

    Summers and Greenspan both posited that the realization of the full potential of the Bank Holding Corps would create less risk for their commercial banking operations.  They argued that the additonal businesses would add value to the banks.  They didn't consider what would happen if the other business lost substantial value apparently.


    Well (none / 0) (#24)
    by Big Tent Democrat on Tue Apr 07, 2009 at 12:08:14 PM EST
    I disagree with you there.

    No need to save the "non-banks" at all.

    Just take the bank into receivership. that's what the Black/Geek debate was about.


    I think you're misconstruing (5.00 / 1) (#25)
    by inclusiveheart on Tue Apr 07, 2009 at 12:25:30 PM EST
    my point - it isn't about need - it is about the reality of how the losses would be resolved.  

    Here is an interesting article discussing the FDIC's role and under funded position:

    FDIC Insurance Commitments

    FDIC deposit insurance is an even more insidious guarantee, the "crack cocaine of American finance" as Martin Mayer put it in his definitive book on the S&L crisis. He showed how deposit insurance was to blame for that episode as risky bankers leveraged FDIC insurance to attract funding to finance ill-conceived investments.

    Depositors didn't care how much risk bankers took with their money. It was federally-insured. Might as well go with the bank offering the highest interest rate. One of my favorite contemporary examples is the ad I see for GMAC's above-market CD rates in WSJ's A section every week. GMAC is insolvent. It's asinine for depositors to keep funding them.

    The government is encouraging precisely that with $5 billion of TARP bailout money and the protective wrap of FDIC deposit insurance. GMAC now operates courtesy of the government's promise to insure its creditors.  This is true of the entire banking system at this point...

    You have to remember (5.00 / 2) (#26)
    by Militarytracy on Tue Apr 07, 2009 at 12:42:01 PM EST
    If you are talking to BTD.....the repeal of Glass-Steagall has nothing to do with any of this :)

    The repeal of Glass Steagall (none / 0) (#36)
    by Big Tent Democrat on Tue Apr 07, 2009 at 04:11:31 PM EST
    does not require the FDIC to backstop BHCs.

    That would be Geithner's doing.


    True, but it provides opportunity (5.00 / 1) (#37)
    by Militarytracy on Tue Apr 07, 2009 at 04:30:11 PM EST
    and reason to have to consider why the two entities must remain intact.  It provides unhealthy opportunity for situations like the ones we are in where cowards scurry all over feeding monsters to avoid having to take harsh actions that could hurt Wall Street.  Is it really healthy for the economy and investors for investment banking to be able to use the FDIC guaranteed wealth of their banks to leverage against?

    I don't understand this statement. (none / 0) (#28)
    by Green26 on Tue Apr 07, 2009 at 01:15:17 PM EST
    "if the commercial banking operations are in trouble because of unregulated speculation in other areas in the BHC, then the FDIC is insuring them by default too"

    How can banking operations in trouble due to speculation in other areas of the BHC?

    How does the FDIC insure BHC's by default?


    The holding companies use the (5.00 / 1) (#29)
    by Militarytracy on Tue Apr 07, 2009 at 01:46:56 PM EST
    "insured" health and wealth of their banks to leverage against.  So the holding company is using the FDIC insurance of the banks it owns (which is what creates all that health and wealth) as its asset.

    The Republicans are going to have a (5.00 / 1) (#5)
    by Militarytracy on Tue Apr 07, 2009 at 10:35:14 AM EST
    field day in two years and a hay day in four!  This is positively nuts.  It's as nuts as any Axis of Evil ever was.  And there still isn't any risk in the markets.......it's just looneytoons.

    Probably right.... (none / 0) (#14)
    by kdog on Tue Apr 07, 2009 at 10:58:55 AM EST
    I guess it is too much to ask of the American people to throw both these parties that are building a modern-day fuedal system out on their gluttonous arses in 2010 and 2012.

    All I know is... (5.00 / 1) (#6)
    by kdog on Tue Apr 07, 2009 at 10:37:43 AM EST
    the guys at OTB who say "this horse can't lose" are usually the biggest losers in the joint.

    Any bet can go to three ways...win, lose, or draw.  No exceptions.

    More smoke and mirrors-- (5.00 / 1) (#7)
    by KeysDan on Tue Apr 07, 2009 at 10:38:41 AM EST
    "contingent liabilities".  Ms. Bair seemed for a while to be among the saner heads, but, apparently, she just wanted to become a greater part of the action.

    This is not the only (5.00 / 1) (#13)
    by standingup on Tue Apr 07, 2009 at 10:53:22 AM EST
    way the FDIC is making their books look better.  See Rolfe Wknkler's FDIC's Insurance Commitments 34% Higher Than Reported.  

    Please direct me to the accountants that (5.00 / 1) (#21)
    by coast on Tue Apr 07, 2009 at 11:53:53 AM EST
    "have signed off on no net losses".  No idenpendent accountant would ever sign off on such a statement.

    Question for Bair (none / 0) (#22)
    by Big Tent Democrat on Tue Apr 07, 2009 at 11:55:13 AM EST
    Nothing said about "independent" (none / 0) (#27)
    by KeysDan on Tue Apr 07, 2009 at 01:06:03 PM EST
    accountants.  Ms. Bair is quoted as saying: "Our accountants have signed off on no net losses."  Guess that means those on her payroll.

    I would have expected SB to object (none / 0) (#3)
    by andgarden on Tue Apr 07, 2009 at 10:30:09 AM EST
    Perhaps she has?

    Umm (none / 0) (#4)
    by Big Tent Democrat on Tue Apr 07, 2009 at 10:31:36 AM EST
    Did you read her comments?

    RTFL, right? (none / 0) (#8)
    by andgarden on Tue Apr 07, 2009 at 10:39:05 AM EST
    Well, she was being criticized 6 months ago for her expansive view of what the FDIC could do (cramdown, IIRC). She's just signing on to a bizarre and risky strategy now.

    Um (none / 0) (#9)
    by Big Tent Democrat on Tue Apr 07, 2009 at 10:40:52 AM EST
    that the FDIC can cramdown is controversial? Really? I think it is 101 of the receiver playbook.

    Of course, you can't discriminate within a class of liability but surely the concept of cramdown is basically what happens in a receivership.


    OK, more generally (none / 0) (#10)
    by andgarden on Tue Apr 07, 2009 at 10:45:20 AM EST
    she wanted leverage to fix foreclosures. I think she was also trying to do other stuff.

    So he's going to try to (none / 0) (#11)
    by SOS on Tue Apr 07, 2009 at 10:50:35 AM EST
    reflate the global economy with more swindles in an effort to revive the good old days?

    Yes. Weird but I guess Marx was right. (5.00 / 1) (#17)
    by masslib on Tue Apr 07, 2009 at 11:24:32 AM EST
    This is the era of financial capitalism and they've found a new way to churn out money for the elites.

    You can pump more blood into a zombie... (5.00 / 1) (#30)
    by lambert on Tue Apr 07, 2009 at 02:13:05 PM EST
    ... but it's still a zombie. Despite the flush of, er, health.

    Hey lambert (none / 0) (#31)
    by Militarytracy on Tue Apr 07, 2009 at 02:18:05 PM EST
    did you hear the Young Turk/Black interview?  I'm just finishing it.  In his opinion, if we go forth with the Giethner plan it is going to destroy the Obama presidency.  I couldn't see how it wouldn't either but when Black says it as he's explaining everything else......to include exactly where Geithner gets his methodology from and how it failed with Asia.......

    Frankly (none / 0) (#32)
    by Ga6thDem on Tue Apr 07, 2009 at 02:50:38 PM EST
    I doubt destroying the Obama presidency is the worst thing that will happen. The worst thing would be a right wing facist take over of the US which Obama going ahead with this would allow this to happen. This thing is way bigger than Obama.  

    Go left, young man! (5.00 / 3) (#33)
    by lambert on Tue Apr 07, 2009 at 04:00:55 PM EST
    I always felt that the Republicans weren't even trying in 2008 --I mean, they were talking about swiftboating Obama un October where, IIRC, the Bushies started in May.

    What they WERE doing, IMNSHO, was laying the groundwork for the nastiest right wing populist campaign you can imagine in 2012. And every smirk and sneer from the "creative class" on Palin just plays right into that....


    Isn't it what they always do? (none / 0) (#35)
    by Militarytracy on Tue Apr 07, 2009 at 04:06:17 PM EST
    I mean, for as long as I have been able to keep track that seems to be exactly how they go about things.  And if any of the Obama hating economists is right they are coming for us loaded for bear.

    I think Lambert is ... (none / 0) (#38)
    by Robot Porter on Tue Apr 07, 2009 at 04:36:49 PM EST
    differentiating between establishment Right Wing candidates like Bush I and II, and the populist Right Wing which would be typified by people like Huckabee and Palin.

    Further financial collapse caused by Obama failure could get enough of the establishment Right Wing to back a Right Wing populist candidate, and ensure a nomination for such a candidate.


    I can hope you are right (none / 0) (#39)
    by Militarytracy on Tue Apr 07, 2009 at 04:46:52 PM EST
    but understand where I live right now and how this state usually votes and who they support and understand that it is hard for me to imagine moderate Republicans fighting for the sanity of their party.  I mean sh!t, very few Democrats even want to fight for the sanity of their freakin party.  They just want to vote and cheer until they've become voiceless.

    I see (5.00 / 1) (#43)
    by Ga6thDem on Tue Apr 07, 2009 at 05:20:15 PM EST
    the same thing here too. The GOP moderates just go along to get along while the fundies run everything. They're a bunch of zombies who show up and pull the lever for any joker with an R to their name.

    Oh No, that wasn't what you were saying (none / 0) (#40)
    by Militarytracy on Tue Apr 07, 2009 at 04:49:54 PM EST
    at all.  It was only what I wish you were saying.  I never thought of Dubya as establishment.  He wasn't a McCain or his father by a longshot.

    I think it goes farther back than (none / 0) (#45)
    by Inspector Gadget on Tue Apr 07, 2009 at 09:09:14 PM EST
    the 2008 election. The grooming had been underway for years. The puzzle pieces are almost all in place.

    I want none of the above (5.00 / 1) (#34)
    by Militarytracy on Tue Apr 07, 2009 at 04:01:23 PM EST
    And I wonder if all the mindless screaming cheerleaders ever take one moment to even attempt to comprehend what is stake here if even one of these economists (whose only incentive in saying the things that they say is that they hate Obama) is correct.

    No (5.00 / 2) (#42)
    by Ga6thDem on Tue Apr 07, 2009 at 05:17:46 PM EST
    they don't even comtemplate things like this. They are simply thrilled that we have a "multicultural" president. His policies probably matter none to them. I imagine that the "creative class" has largely been unscathed by the economic situation so far so they really don't comprehend the magnitude of it all. Me? All I have to do is walk down my street. Almost 1/2 of the houses are in foreclosure.

    I do not care for (5.00 / 1) (#46)
    by AX10 on Tue Apr 07, 2009 at 10:34:48 PM EST
    one's gender, race, skin color, or sexual orientation.  What I do care about is the policies and philosophy.  The "Creative Class" (sadly, I know many of these types) to me is just as extreme, and shallow as the "Joe the Plumbers" who listen to Sean Hannity.

    Obama is not now (none / 0) (#41)
    by cal1942 on Tue Apr 07, 2009 at 04:54:08 PM EST
    nor has he ever been nor could he ever be big enough to handle this thing or any of the other things hanging over us.

    True (none / 0) (#44)
    by Ga6thDem on Tue Apr 07, 2009 at 05:20:39 PM EST

    I think they're trying to (none / 0) (#12)
    by Militarytracy on Tue Apr 07, 2009 at 10:52:39 AM EST
    head off the deflation galloping toward us but I can't see how it can work.

    Underlying assumptions... (none / 0) (#18)
    by santarita on Tue Apr 07, 2009 at 11:30:59 AM EST
    I believe that the article is premised on an unstated assumption that the entire amount set aside for the Geithner Plan will be used and that the Geithner Plan fails engendering huge losses for the FDIC.

    One of the assumptions of the Geithner Plan is that the first few pools will be sold under PPIP and that will serve to jump start the market for the assets once investors see the possible upside.  So the entire amount will not necessarily be used up.  And if it succeeds then the loss potential is severely reduced.

    If, on the other hand, the Geithner Plan fails (either because no investor buys into the pool, the banks don't sell,  the first few pools sold don't jumpstart the market and/or toxic assets lose value after sold), I would hope that Geithner and Obama are smart enough to stop the PPIP and go on to Plan B.