The ever-expanding FDIC

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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