The Federal Deposit Insurance Corporation is pushing back against criticism that the administration's toxic asset relief program would put it on the hook for hundreds of billions in taxpayer funds. In a little noticed letter to the editor in Saturday's New York Times, the FDIC's public affairs department upbraided the paper's business reporter, Andrew Ross Sorkin, for accusing the institution of "mission creep" and participating in a bank-relief program with scant oversight.
Sorkin had written last week that the FDIC was "elbowing its way into the middle of the financial mess as an enabler of enormous leverage." The Times scribe reasoned that by insuring 85 percent of the debt that private investors were using to purchase toxic assets, Treasury and the FDIC had provided "the closest thing to risk-free investing -- with leverage! -- around."
Naturally, the FDIC disagreed. In its letter to the Times, Andrew Gray, the director of the office of public affairs, wrote that he expects the "Legacy Loans Program" to "have zero net cost."
The F.D.I.C. is providing financing and operational support for a Treasury program to remove troubled assets from bank balance sheets. The leverage contemplated under the Legacy Loans Program is significantly less than that of banks relying on F.D.I.C.-insured deposits.
The F.D.I.C. is seeking public comment on the program and has reached out to Congress, bankers and investors, as we did with the Temporary Liquidity Guarantee Program.
Both programs draw on tools authorized by Congress to address systemic risk in concert with the Treasury and the Federal Reserve.
We expect that the Legacy Loans Program will have zero net cost after losses covered by equity investments, collateral and the fees collected. Our accounting is consistent with the law, principles of business accounting and budgetary treatment of other government guarantees.
If the F.D.I.C. ultimately incurs losses, the statute requires repayment of shortfalls through assessments on the entire banking industry. Zero net cost should not be confused with the absence of risk. We have never said the program is without risk.
Without a mechanism to remove troubled loans from banks, we can expect more to fail, with the cost of those failures to be borne by the industry-backed deposit insurance fund.
Director, Office of Public Affairs
Federal Deposit Insurance Corp.
Washington, April 7, 2009
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