The ever-expanding FDIC

By Felix Salmon
April 7, 2009

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.

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3 comments so far

What qualifies the FDIC to take on increased supervision? You will remember that there was a massive failure by the banking regulators in this regard. I am a
former senior bank regulator and I spent many years in the investment banking world involved in risk management, risk reporting and risk technology. There
appears to be a failure to recognize that the regulatory process can only work if there are good regulatory people looking at the matters every day. If I may let
me offer the following comments:

1. The bank regulators had the authority to examine any aspect of a bankĀ¹s activities. They had the authority to figure out what was going on at the banks and to limit it. The regulators did nothing. So all the new regulations on paper will mean nothing if the regulators cannot or will not do their jobs.

2. Consolidating regulators or setting up an international cooperative coalition will not likely achieve the desired goals. Sending a regulator who makes $50,000 dollars a year to examine the activities of sophisticated financial traders who make millions of dollars a year is not a fair battle. And if you have ever worked in a government agency, as I did for over 4 years, you will be intimately familiar with the viciousness of the turf battles among the senior officials. There is a lot of deadwood at the top of the agencies and it needs to be cleaned out. A Herculean task if there ever was one.

Posted by S. Hellinger | Report as abusive

Once again, the real loser here is the rule of law.

If we had to go through an actual, you know, legal process to ensure that saving the world was, well, legal, then we might actually have to put all the facts on the table, consider alternatives, and come up with a solution that our citizens have vetted and approved.

But that wouldn’t deliver a result within the cable news cycle, and that somehow wouldn’t make our leaders extraordinary heroes.

Oh, and it might prevent a multi-trillion dollar disaster that, well, legally, our citizens will have to pay taxes to make good. But to today’s journalists, that consideration, as welll as the law, are irrelevant.

When did that happen?

Posted by DollarEd | Report as abusive

Gosh, I’m not yet done with emoting about this.

If Andrew Ross Sorkin is right, then the FDIC is doing exactly the kind of thing that we are chastising the banksters for – incurring massive contingent obligations without clear ability to repay them (if you don’t have legal authority you can’t legally spend the money).

If we did this with our checkbooks for a $100 check, we are clearly committing a crime, and we’d risk a jail term. We are all asking what it is when a bunch of corrupt MBAs do this at AIG FP for $1-2T in contingent obligations. What is it when a government agency does it for a similarly sized set of contingent obligations?

Let’s ask Congress, and let’s insist that they stop posturing and make a decision about whether they will or won’t solve the problem. The worst thing about this flouting of the law is it gives the political class air cover.

Posted by DollarEd | Report as abusive
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