FDIC skirts law, projects no losses from Public-Private Investment Program

Andrew Ross Sorkin deserves an award for "'No-Risk' Insurance at F.D.I.C."

By checking facts with securities lawyers he exposes the dubious legal reasoning behind the FDIC's loan-guarantor role in the Public-Private Investment Program:

"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.

Sorkin also allows FDIC head Sheila Bair to prove to the world that she still believes in Santa Clause and the Tooth Fairy:

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.)

As Sorkin explains, the FDIC's position is essentially that it is incapable of losing money because it can always assess financial institutions to make up for any losses.

But by definition, wouldn't losses be the justification for any such assessments? So doesn't that mean that the FDIC really is capable of losing money?

Alice has nothing on Sheila in Wonderland.

The "I win-you lose" partnership

In "Obama's Ersatz Capitalism" economist Joseph Stiglitz shreds Tim Geithner's Public-Private Investment Program.

Shooting the messenger: bank analysts pay price for being right

Chinese walls and paeans to analyst independence are for other industries, apparently.

Mark DeCambre of the New York Post reports that snubs, cold shoulders, legal action, and muzzles are the rewards for prominent securities analysts who spoke the truth about bank financial performance.

Public pension fiasco: fun with mortality tables

Bloomberg reports that the "Hidden Pension Fiasco May Foment Another $1 Trillion Bailout." Its account of the games played by public actuaries are astounding. I especially loved this bit about the Puerto Rico system:

Gaitan says the retirement system’s underfunding may actually be an additional $1 billion or more than the fund reports, because the board relies on outdated mortality tables based on 1960s statistics to compute its future obligations. The shorter life spans in those outdated tables reduce the apparent size of the fund’s liabilities.

Bank "stress test" a mockery of the term

Dealbook pours cold water on the notion that the proposed stress tests of large banks will answer any meaningful questions:

The government will be stress-testing the banks under two economic scenarios to determine how much capital they might need: a baseline scenario and a “more adverse” scenario. The more-adverse scenario assumes that the economy will shrink 3.3 percent this year, followed by growth of 0.5 percent in 2010. It also assumes that unemployment rises as high as 8.9 percent in 2009 and 10.3 percent in 2010.

Is that pessimistic enough? The government sees the downturn bottoming out in the second quarter of this year — making it long as recessions go, but nowhere near as bad as what the nation experienced during the Great Depression.

In 1930, the first full year of the Great Depression, United States gross domestic product declined 9 percent. Gross domestic product then fell by another 6 percent in 1931, followed by a 13 percent drop in 1932.

The administration repeatedly invokes the Great Depression in seeking to rally popular support for its economic spending programs. Some economists may find it puzzling why it doesn’t use a more Depression-like set of assumptions in its “more adverse” stress tests.

These stress tests are public theater, nothing more.

Elbow room on the NYSE trading floor

Serena Ng and Geoffrey Rogow of The Wall Street Journal report that the NYSE will implement rebates for order flow and faster technology in response to market-share losses to BATS and other venues.

According to their report, the population of the NYSE trading floor has declined from 5,000 to 1,200 over the past five years. The floor will become more crowded today when 370 options traders from the American Stock Exchange join the fray.

The NYSE will also try to narrow the performance gap between its technology and that of its rivals. From the Journal:

In coming weeks and months, NYSE plans to roll out technology to reduce trading times and narrow the gap with its rivals, who up till recently have been able to execute trades in less than a fifth of the time. By streamlining and upgrading its systems, NYSE has so far reduced latency, or the time it takes to execute an order, by about 28% to 62 milliseconds from 86 milliseconds in the past three months. Later this quarter or early next, NYSE expects to further drop latency into the single-digit milliseconds, closer to some of its peers.

Where is Europe's contribution to AIG rescue?

Reuters reports an AIG failure would still be disastrous for global markets and provides a litany of excuses for the latest bailout of the firm imposed on U.S. taxpayers. According to the Reuters report:

"The government really does not have the option of letting AIG totally blow up," said Robert Haines, senior insurance analyst at CreditSights,

AIG's foray into the roughly $28.5 trillion credit default swap market left it heavily exposed to losses on toxic mortgage assets that it had guaranteed against default.

AIG, through a financial products unit, sold more than $450 billion of protection on securities to U.S. and European banks. With government support, some of those derivatives have been unwound, but the company still has about $300 billion of this exposure, according to Credit Sights.

Haines said that European banks in particular, counterparties on many of AIG's outstanding derivative contracts, "would be hammered if the U.S. walked away."

Donn Vickrey, an analyst with Gradient Analytics, who has closely followed the financial deterioration at AIG said while "European banks are about two-third of the problem ... it would be a domino effect across the globe.

"The ensuing panic would be disastrous," he said.

If European banks have two-thirds of the remaining exposure to AIG financial guarantees, why are U.S. taxpayers footing the entire bill? AIG has operations in more than 100 countries. As I understand it, the subsidiary that did the serious damage is British, not American. Have U.S. politicians made any attempt to extract help from other central banks and national treasuries?