Mission Creep: The Incredible Expanding Power to Bailout

I’ve been watching the three big regulators in the Financial Crisis (the Fed, the FDIC, and the SEC) start doing things bank-holidayunheard of only a year ago.  What has been baffling is no one has changed any laws or charters while these things keep happening.  I’m not a lawyer and I don’t have the time to go poking around a lot of the charters and laws surrounding these institutions, but you have to start wondering if some of their more unconventional moves are technically legal.

I’ve been watching the Fed Open borrowing at the Discount Window and accepting some really strange collateral.  The Discount Window used to be exclusive to member banks.  I’ve been looking over what they now accept as collateral and am surprised. Take a look at the list and see if you’d like to be left holding the bag on some of these things.  I’m not sure I want these off budget quasi agencies turning their balance sheets into dumping grounds for some of the most heinous looking gambles available on the market.

The NY Times Reporter Andrew Ross Sorkin has been poking around the charter and law concerning the FDIC.  The FDIC was chartered to provide deposit insurance to bank deposits.  You would think that is a fairly straight-forward task.  However, when the charter was written, the size of the task at hand today was  unfathomable and it seems the FDIC is tiptoeing around some of its charter provisions.   The FDIC is barred from incurring any obligation greater than $30 billion and its about to take part in guarantees that would commit $1 trillion in the PPIP bank bailout program. Sorkin reports on what he calls “mission creep” here.

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.

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