FDIC skirts law, projects no losses from Public-Private Investment Program

Andrew Ross Sorkin deserves an award for “‘No-Risk’ Insurance at F.D.I.C.

By checking facts with securities lawyers he exposes the dubious legal reasoning behind the FDIC’s loan-guarantor role in the Public-Private Investment Program:

“Nobody is paying any attention to how they’re pulling this off,” said a prominent securities lawyer who has done work for the government. Not surprisingly, he, along with others I asked to review the program, declined to be quoted by name. “They may not be breaking the letter of the law, but they’re sure disregarding its spirit.”

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.

The exact legalistic language says that it “may not issue or incur any obligation” over that limit.

Sorkin also allows FDIC head Sheila Bair to prove to the world that she still believes in Santa Clause and the Tooth Fairy:

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.)

As Sorkin explains, the FDIC’s position is essentially that it is incapable of losing money because it can always assess financial institutions to make up for any losses.

But by definition, wouldn’t losses be the justification for any such assessments? So doesn’t that mean that the FDIC really is capable of losing money?

Alice has nothing on Sheila in Wonderland.

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