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Five Things: A Beautiful Scheme


It's no callow conspiracy. It's an epidemic of willful dumbness spawned by the Age of Self-Evidence.

1. A Beautiful Scheme

Bad Real Estate Bets May Lead More Local Banks to Fail
- USA Today, April 9, 2009, "How Big Gambles Took Down Small Banks"

That's the grim headline screaming across the top of the USA Today Money section. So far this year, 21 banks have failed, and the Federal Deposit Insurance Corp. is "keeping an eye on" at least 250 more "problem institutions" it believes are at risk of collapsing.

Making the list of FDIC "problem institutions" is a bit like having your photograph quietly circulated among Atlantic City casinos for getting caught palming chips at the craps table. The FDIC, like casinos, demonstrably has a high tolerance for cheating, but this is key: it must be the right kind of cheating. Palming chips is a clumsy and embarrassing way to get banned from a casino, an act that reeks of reckless desperation. Which is why it's so hated. No one likes a dishonest cheater.

And that brings us back to the FDIC. Earlier this week NY Times writer Andrew Sorkin reported that the FDIC is going to be insuring 85% of the debt - funneled through the Treasury - that "private" investors will use to acquire assets via the Public-Private Investment Program, or PPIP.

Although this is way beyond the scope and charter of the FDIC, certainly well above the provision that limits the FDIC to insuring no more than $30 billion, it's okay, we're told, because the FDIC can pretty much do whatever the hell it wants if the Treasury Secretary thinks it is necessary. Which he does.

It this sounds complex, don't worry... It's not. The nut of the thing is this: The FDIC, which was forced in March to raise fees to bolster its $15.7 billion bank insurance fund, and despite an increasing list of at-risk banks with deposits it will likely be be forced to cover, is being used to "guarantee" loans to investors.

Why? That also isn't very complex. The FDIC has effectively been hijacked by Wall Street to protect banks, shoving the FDIC's original mission -- to protect depositors -- a notch or 2 down the financial food chain.

Naturally, the FDIC "projects no losses" on these loans, as Sorkin reported in his original article. Because if they did, they wouldn't be able to insure them in the first place.

So what happens if, for some unexpected reason, the loans do show some losses? Good question. And if you think about it for a moment, you can begin to see precisely why the FDIC is being used in this way: Congress won't authorize $1 trillion dollars in loan guarantees to finance the PPIP, because that would be a direct ripoff, and people would get upset. Seats would be lost.

But, if the FDIC guarantees the loans, and makes a mistake, well... We have to save the FDIC - they guarantee all our deposits.

It's a beautiful scheme. Indeed, in the most perverse way imaginable, it's the kind of scheme Americans can be proud of.

2. What Is the FDIC?

According to its charter, it is this:

"The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress that maintains the stability and public confidence in the nation's financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships."

3. ... And Therein Lies the Problem

Nassim Taleb, author of Fooled by Randomness and The Black Swan, earlier this week penned a list of Ten Principles for a Black Swan-proof World for the Financial Times. The one I'm most interested in is number 7: "Only Ponzi schemes should depend on confidence." Unfortunately, that's in direct opposition to the FDIC's mission.

All of this is insanity, of course. And deep down we know it. Which is why one day, maybe as soon as 10 or 15 years from now, people will look back in astonishment and with wild-eyed wonder at the depraved charades we created - all for the express purpose of hiding from ourselves the magnitude of systemic looting we are engaged in. It's not a callow conspiracy. It's a viral infection of willful dumbness spawned by the Age of Self-Evidence.
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