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Contingency

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FDIC's debt isn't contingent; it already exists.

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I would like to make one more point about the FDIC claim that they can make $1 trillion in guarantees for debt assets that banks are trying to offload to "private investors."

The reason the FDIC claims that they are not limited to $30 billion in guarantees as dictated by charter is that they are guaranteeing "contingent" liabilities. I suppose that makes a difference to a sophist, but I won't argue the point.

The point I will argue is that these are not contingent liabilities. A contingent liability in the economic sense is a debt that's owed if and only if another economic event occurs. For example, selling an option is a contingent liability in the sense that a debt is owed if and only if the price of an asset rises above a strike price (if the option is a call) or below it (for a put). There is no debt if a separate and uncorrelated economic event does not occur. The point is the debt does not currently exist; it only comes into existence if something happens.

The FDIC is guaranteeing all kinds of debt in various forms, but the point is there is no separate and uncorrelated economic event that would trigger the debt to come into existence. It already is in existence. If these are contingent liabilities then the debt of all companies is contingent (only on loss), and therefore there would be no liabilities only assets and contingent liabilities.

If someone took the FDIC to court over this issue, I believe the FDIC would lose. Of course, if they lost, they could go to Congress and change the charter, but then Congress would demand something in return.
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