財經觀察 1928 --- No-Risk Insurance at FDIC

THERE IS NO SUCH THING AS A FREE LUNCH.
‘No-Risk’ Insurance at F.D.I.C.
By ANDREW ROSS SORKIN
Published: April 6, 2009
The Federal Deposit Insurance Corporation was set up 76 years ago with the important but simple job of insuring bank deposits.

Now, because of what could politely be called mission creep, it’s elbowing its way into the middle of the financial mess as an enabler of enormous leverage.

In the fine print of Treasury Secretary Timothy F. Geithner’s plan to lend as much as $1 trillion to private investors to help them buy toxic assets from our nation’s banks, you’ll find some details of how the F.D.I.C is trying to stabilize the system by adding more risk, not less, to the system.

It’s going to be insuring 85 percent of the debt, provided by the Treasury, that private investors will use to subsidize their acquisitions of toxic assets. The program, extraordinary in its size and scope, is the equivalent of TARP 2.0. Only this time, Congress didn’t get a chance to vote.

These loans, while controversial, were given a warm welcome by the market when they were first announced. And why not? The terms are hard to beat. They are, for example, “nonrecourse,” which means that if an investor loses money, he owes taxpayers nothing. It’s the closest thing to risk-free investing — with leverage! — around.

But, as we’ve learned the hard way these last couple of years, risk-free investing is an oxymoron.
So where did the risk go this time?
To the F.D.I.C., and ultimately, to us taxpayers. A close reading of the F.D.I.C.’s statute suggests the agency is using a unique — some might call it plain wrong — reading of its own rule book to accomplish this high-wire act.

Somehow, in the name of solving the financial crisis, the F.D.I.C. has seemingly been given a blank check, with virtually no oversight by Congress.

“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. (You can read a highlighted version of the F.D.I.C.’s charter at nytimes.com/dealbook.)

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. As the F.D.I.C’s charter dictates: “The corporation shall value any contingent liability at its expected cost to the corporation.”

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.)

By this logic, though, 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.

Here’s the F.D.I.C.’s explanation: It says it plans to carefully vet every loan that gets made and it will receive fees and collateral in exchange. And then there’s the safety net: If it loses money from insuring those investments, it will assess the financial industry a fee to pay the agency back.

But think about this for a moment: if the program doesn’t work — and let’s hope it succeeds — the F.D.I.C. would be forced to “assess” banks it is hoping to save, possibly bankrupting them in the process. After all, if the F.D.I.C. starts losing money, it will probably be because the broader economic environment is deteriorating further. So those fees will a new burden at a time when key financial players can least afford them.

Ms. Bair said that she can not imagine the F.D.I.C. losing money on the scale I suggested in my doomsday scenario. She said that before announcing the program, the F.D.I.C.’s lawyers determined that the statute allowed it to guarantee loans by valuing them as contigent liabilities. “That’s how we’ve interpreted it,” she said, adding that the determination was made back in October when the F.D.I.C. first introduced the Temporary Liquidity Guarantee Program, which is also backed by the F.D.I.C.

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. She also pointed out that under the Temporary Liquidity Guarantee Program, so far, the agency hasn’t lost a dollar — and more important, she said, the program has worked to stabilize the banking system.

All true, but that has come as the burden on the F.D.I.C. has increased as it pays out more to cover losses of failed banks.

In a letter to the financial industry last month seeking an assessment that could be as much as $27 billion, Ms. Bair wrote, “Without these assessments, the deposit insurance fund could become insolvent this year.” Ms. Bair seems to recognize that the borrowing limit of $30 billion makes her job difficult. And two officials with a lot of sway in this area have sought to raise the F.D.I.C.’s borrowing limit (by $100 billion, according to a bill introduced by Representative Barney Frank, and by $500 billion, in a bill introduced by Senator Christopher Dodd).

But then again, who needs a borrowing limit when the potential liabilities from the new program seem to be zero?
If the P.P.I.P. program works — and again, it’s in everybody’s interest to cheer it on — it will be a boon for the economy and participating investors, who will likely make off like bandits.

If the program fails, however, there will be heavy losses on us. In other words, taxpayers could be the ones stuck with billions of dollars in “contingent liabilities.”

And these days, whenever anybody talks about risk-free investing, it’s not hard to hear the famous line uttered by Joseph J. Cassano of A.I.G. in 2007: “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.”

Regards,