Felix Salmon

The ever-expanding FDIC

Felix Salmon
Apr 7, 2009 13:02 UTC

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.


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.

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How much extra money is really in the G20 package?

Felix Salmon
Apr 7, 2009 11:42 UTC

First, there was the G20 communique:

The agreements we have reached today, to treble resources available to the IMF to $750 billion, to support a new SDR allocation of $250 billion, to support at least $100 billion of additional lending by the MDBs, to ensure $250 billion of support for trade finance, and to use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries, constitute an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy.

That word “additional” is important. But what does it mean? Liam Halligan thinks it means much less than you think:

The much-vaunted “$250bn [£169bn] in new trade finance” is a mere $4bn of extra money if you look in the communiqué annex.

Doing the maths, even the “$1,100bn stimulus package” – the figure that drove a thousand headlines – turns out to be nonsense. There is less than $100bn of new money, most of that agreed before the G20 convened.

And now Mark Landler is trying to get to the bottom of all this:

About $500 billion of the $1 trillion represents increased direct financing for the International Monetary Fund. But, by Mr. Prasad’s count, less than half of that has so far been committed by Japan, the European Union, Canada and Norway. China is expected to kick in $40 billion, which it may do by buying bonds issued by the fund.

Treasury Secretary Timothy F. Geithner has committed the United States to $100 billion. But that must be authorized by Congress, which, administration officials acknowledge, is skeptical of foreign aid and may be doubly so this time, given its heavy spending on domestic stimulus.

Even counting the United States, Mr. Prasad said that left a shortfall of $145 billion of the $500 billion in donations…

The leaders agreed to commit $250 billion in trade credit over two years, on top of $100 billion in loans from multilateral development banks, which lend to poorer countries…

But of that $250 billion, experts said, only a quarter represents fresh cash: trade financing is rolled over every six months as exporters get paid for their goods and repay the agencies that lent them the money. The agencies then lend out the same money again. There is also some double-counting between the $250 billion and the $100 billion from the development banks.

In perhaps the most novel move, the Group of 20 authorized the monetary fund to issue $250 billion in Special Drawing Rights… The I.M.F. will issue the S.D.R.’s to all 185 of its members, and they in turn can lend them out to poor countries.

Special Drawing Rights are not cash but a form of credit, against which a country can borrow. The Obama administration, which conceived the idea and sold it to the Group of 20, figures it would create between $15 billion and $20 billion in additional credit for the poorest countries.

Where does this all leave us? It’s all rather murky, but some things are more obvious than others: it seems a bit rich to take $62.5 billion in six-month trade finance, for instance, and declare that it represents $250 billion of trade credit.

On the other hand, if the IMF issues $250 billion in SDRs, how can that create only $15 billion to $20 billion in new credit for poor countries? What happens to the rest of the SDRs?

And the biggest question marks of all surround the $500 billion in extra money for the IMF. Where will that money come from? When will it arrive? And did the G20 heads of state actually commit to providing the cash or not? Does Congress have a veto over the US portion? Will it use it?

Net-net I’m inclined to believe that any hard-and-fast statement about how much new money there really is in the G20 package is almost certain to be false: the fact is that no one knows for sure, and won’t for some time yet. But I think that Halligan is overshooting on the pessimistic side, while I’m inclined to optimism here. Maybe I’m being naive, but if the G20 says that there’s $1.1 trillion of additionality, then going by Landler’s article, I’d assume that will work out to at least $400 billion in reality, and possibly more.


Maybe you get to $1T by including macroeconomic multipliers — and including new private spending and investment by people who heard the headline and thought it meant the economy was going to get better. Some of what we have to fear is fear itself.

Another reason why inflation is a good idea

Felix Salmon
Apr 7, 2009 09:32 UTC

Megan McArdle is unhappy with the state of green consumption:

When I look back at almost every “environmentally friendly” alternative product I’ve seen being widely touted as a cost-free way to lower our footprint, held back only by the indecent vermin at “industry” who don’t care about the environment, I notice a common theme: the replacement good has really really sucked compared to the old, inefficient version.

(Scare quotes Megan’s, natch.)

The problem, as Megan admits, is that she’s looking at the “cost-free” replacements: the bottom-of-the-line green products which can be used to replace legacy products which are the result of decades of development and economies of scale. It’s hardly surprising that these first- and second-generation products can’t compete on price.

But my feeling is not that the new products are too expensive, so much as that the old products are too cheap. That’s certainly the case with food: chicken, beef, and other corn byproducts — including the famous high-fructose corn syrup — are so underpriced that their cultivation is destroying the planet and causing mass obesity.

And more generally, the story of both Greenspan bubbles is that the Fed was happy to bring interest rates down to extremely low levels because of the massive amounts of disinflation being imported to the US by China (again, at huge environmental cost).

My hope is that the world which emerges from the present crisis will be one where goods, in general, have a price which is commensurate with their cost. I remember walking down Broadway last year, in Soho, and overhearing a woman coming out of H&M explaining to her friend that the clothes there were great: they were so cheap that you could wear them once and simply throw them away, without having to worry about how they stood up to washing or dry-cleaning. And although it was easy to conjure up lots of high moral dudgeon to direct at the woman in question, the fact is that incentives matter, and the prices at H&M were clearly incentivizing her to feel that way: as a general rule, it’s not good for the planet when a frock costs roughly the same as the cost of dry-cleaning it.

So it would be great to have some targeted inflation here: not just to help solve the housing mess, but also to bring the cost of many everyday products up to a point at which people become much more careful about using them — and much more inclined, too, to pick a green alternative.


inflation is a good idea for banks and funds managers; for 90% of the population as well as for the REAL economy, the inflation is destructive

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Stanford’s last days of freedom

Felix Salmon
Apr 6, 2009 22:27 UTC

Allen Stanford has given an interview to ABC news, and it makes for compelling viewing. He’s tearful, he’s aggressive, he’s delusional, he’s hilarious: he seems entirely convinced that he wasn’t running a Ponzi scheme, even as he complains about being “forced to fly on a commercial plane for the first time in almost two decades”. My favorite bit:

“I always lived very frugally. I flew around in a private jet, I had a boat, but I always lived very frugally.”

Stanford says he expects to be indicted in two weeks. If you listen carefully during the interview you can hear a cover of Cole Porter’s Night and Day playing in the background. I wonder if Stanford, struggling to retain his dignity, knows the lyrics, or has wondered if they apply to his remaining days as a free man:

Like the tick tick tock of the stately clock
As it stands against the wall

Which is worse, the pyramid scheme or the PR firm?

Felix Salmon
Apr 6, 2009 21:01 UTC

I just got this press release from Ashley Wallace, of Ronn Torossian’s notorious 5WPR firm:


With the summer months approaching and unemployment inching closer and closer to the predicted 10 percent – recently reaching 8.5% and a 25-year high – more than 13 million unemployed Americans will be looking for ways to stay afloat during these tough economic times.

And with more than 5.1 million jobs lost since the beginning of 2008 and 630,000 jobs lost in March alone, and with millions vying for the same rare and elusive job openings, more and more are turning to direct selling…

[Redacted pyramid scheme] has grown rapidly recently, with over 2,000 independent sales representatives across the country. These consultants enjoy the advantages of working in direct sales while in-between jobs, such as flexible schedules, gaining valuable sales experience, and being their own boss – all the while making money and preventing gaps on their resume…

Recruitment has skyrocketed in recent months, with recruitment up nearly three times in recent months, including “leads” soaring (prospective consultants) 3 months in a row…

To arrange an interview with CEO [Redacted] about direct selling and how laid off workers can get a quick and easy start in the business, please contact me.

I suppose that if you’re in the business of exploiting the recently laid-off by getting them to send you their precious cash (and, of course, recruit their friends and family to the pyramid as well) as a result of their desperation to make ends meet, then, yes, your business might be doing quite well these days.
On the other hand, if you’re a PR firm and you’re reduced to flacking pyramid schemes, there might be less hope for you. Especially if you give the game away in your very own press release by referring to your own would-be sales people as “leads”. In a legitimate business, you might be surprised to hear, it’s the potential customers who are the leads. Not the potential sales staff.


What’s with all the redactions? Both you and Gawker feel the need to protect the name of this pyramid scheme?

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Monday links are fiscally expansionary

Felix Salmon
Apr 6, 2009 18:27 UTC

So let’s see if this stuff really works: Baruch on fiscal policy, making the point that while we can’t ignore the Great Depression, we also can’t use it as a useful precedent.

FDIC’s Insurance Commitments 34% Higher Than Reported: $1.4 trillion of FDIC guarantees are considered “temporary” and therefore aren’t worthy of inclusion on the FDIC balance sheet. Shifty.

Capella Resources: A fraudulent scam for the ages: Otto does some snooping around a Canadian mining penny stock, and follows up here.

NYT News Blog Forgets It Should Not Be ‘Snarky’: It’s pretty much impossible for higher-ups to legislate what the tone of a blog should be. These things emerge organically, and if you leave them alone, they can flourish. Anything else is a recipe for tension and unhappiness.

Useful foreign word of the day: herenakkoord

Felix Salmon
Apr 6, 2009 15:59 UTC

One of the handier concepts to have come out of a foreign dictionary during this crisis is that of Anstaltslast, the German idea that if the state owns a company, then there’s an implicit government guarantee on that company’s liabilities. Essentially, it means that once a bank is nationalized, you can lend to it as much as you like, safe in the knowledge that you’ll get all your money back in full and on time.

Now Justin Fox has found another handy foreign concept: the Dutch herenakkoord, or “gentleman’s agreement”. That’s what the Dutch government has come to with the Dutch banking industry: the upshot is that the top 12 financial institutions won’t be giving themselves whopping great bonuses any time soon.

As Justin says, the very fact that it’s all a bit hand-wavy and vague is a strength: it’s definitely principles-based rather than rules-based, as it were. Trying to legislate executive pay never works. Signing a herenakkoord seems like a much better idea.


There’s nowt foreign about a gentleman’s agreement; as my father said, the problem with a gentleman’s agreement is that anyone who offers you one usually isn’t a gentleman.

It’s a wonder anything ever gets done in Washington

Felix Salmon
Apr 6, 2009 14:09 UTC

I’m late to Phillip Swagel’s must-read account of the history of the financial crisis through the eyes of a Treasury official; David Wessel and Nemo have good summaries.

I got through a chunk of Swagel’s paper on the plane on the way over to London, and I haven’t finished the whole thing yet, but there’s no doubt it provides an eye-opening view of how the Washington sausage is made. One theme running through the paper is that of tension between all manner of Washington agencies: Treasury was constantly at war not only with Congress but also with the White House, with the Fed, and with the FDIC.

And that’s not even counting the Treasury departments which were at war with each other: Swagel says that the MLEC, for instance, an abortive attempt to solve the SIV problem in 1997 2007, was widely disparaged even within Treasury, and he clearly was opposed to the second Citigroup bailout, too.

It’s worth remembering that all of this infighting came at the end of a famously disciplined administration which had had the best part of eight years to sort out any glitches and get everybody pulling in the same direction. Today, by contrast, most senior Treasury positions are still unfilled, the White House has a great deal of interest in the minutiae of economic policy, thanks to the presence there of Larry Summers and others, and in general Obama likes to encourage debate — which is another word for disagreement.

The lesson here, I think, is not to place too much faith in Treasury. No matter who’s in charge, there will always be a multitude of institutional constraints which prevent it from (a) putting in place what it considers to be the ideal policy, and (b) executing efficiently any policy which is put in place. And anything which goes for Treasury, of course, gets multiplied by an order of magnitude if you start looking at any efforts to achieve multilateral coordination. As Swagel puts it, “there is an evident gulf in the understanding of policy actions in moving from Washington to New York or Boston; this deficit of clarity grows only more severe across borders and oceans”.

This is something for anybody who was disappointed in the results of the G20 meeting to bear in mind. It might not have produced the ideal policy response, but even if it had done, you can be sure that there would have been all manner of nasty slips and stumbles in the attempted execution.


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The Geithner Death Star

Felix Salmon
Apr 6, 2009 12:12 UTC

Mike at Rortybomb has a very scary and quite compelling post about the Geithner bank bailout scheme. Basically, he says, it looks very, very similar to the kind of schemes that Enron used to game the market back in the bad old days.

The Death Star strategy (yes, they called it that) was where Enron would take a fee for relieving a congested market of its excess supply by moving it elsewhere. Just like our legacy assets! There are too many of them, it is clogging up trade, let’s get them to someone else who wants them. However Enron would just move the energy in a circle, collecting a fee for not doing what it was supposed to. As their memo famously said, they are paid “for moving energy to relieve congestion, without actually moving any energy or relieving any congestion.” And, it appears, that the large banks are gearing up to do just that; with the Geitner Death Star that they’ll just be collecting a large fee to run them in a circle, without actually moving any of them off their collective books. For old time’s sake, I hope they route their loan bids through Oregon and then Utah before putting them back right where they started.

Mind you that was the electrical grid of California – this appears to be at the scale of the entire financial market. In case you are wondering, traders out there are licking their lips to try and find ways to game this even better than Enron.

The potential hazards here are, clearly, enormous — even without the Administration explicitly rejecting criticism that the banks are going to end up shamelessly bidding on each others’ assets. If the banks get a green light to do this, you can be sure that any number of greedy traders will take that as a green light to get up to as many shenanigans as they can. Many of those greedy traders will try their hand in any event — but if the PPIP is structured so as to try to stop them, then it’s conceivable that they might not do a lot of damage. If the PPIP is structured on a laissez-faire system of all bids being assumed to be legitimate, then this could be an utter disaster.


Going forward, my believers will no longer be so obsessed about fornicating-harlots and “those people”, but will instead worry about how much debt they personally have, and how much debt their government borrows on their behalf.

For the next 200 years GREED will be the focus of my wrath, replacing shame.

Thank you, carry on…

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