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Wednesday, September 30, 2009

Guaranteed by the FDIC!

The point of my post yesterday about the FDIC was not to point out that the FDIC is broke - everyone knew that. The FDIC's release yesterday gave us some serious insight into just how bad the financial situation is: the FDIC's estimates for losses continue to grow, and their time frame for replenishing the DIF (Deposit Insurance Fund) continues to be pushed out. In addition, the assets held by the FDIC are deteriorating in quality. The scariest thing to me is that the FDIC continues to try to disguise the health of the banks by using accounting tricks - like allowing them to spread out the prepayment of FDIC fees over three years when recognizing the costs, and failing to charge the banks a special assessment to replenish the DIF.

Then, after I wrote the post, I came across this gem via Calculated Risk:
"Citigroup Inc. (C) priced a $5 billion government-backed bond Tuesday, its second benchmark-sized bond offering this month under the U.S. Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program, according to a person familiar with the situation."

Wow. Wow. Can I say WOW again? If the FDIC is broke, which they are, then why is the TLGP program still going?!! Ken Lay would be proud - Citibank issues debt guaranteed by the (broke) FDIC. Then, Citi prepays a few years worth of fees to the FDIC, so that they'll have money to, amongst other things, be able to make good on the debt they just guaranteed for Citigroup! If you plugged this into Excel, you'd get a "#N/A" circular reference error.

Perhaps it went down something like this:

the players:
Vikram Pandit: Citi CEO
Sheila Bair: FDIC chair

Pandit: "Hey Sheba - what's shakin'? Look - We need to issue some debt under the TLGP - no problem right?"

Bair: "Hi Vik - ummm - actually, I don't know if you got the memo - we're broke."

Pandit: "That's ok Sheba - you won't actually have to pay out on the debt - it's guaranteed."

Bair: silence... "Sorry Vik - I don't follow."

Pandit: "It's guaranteed - RISKLESS! The full faith and credit of the FDIC stands behind it."

Bair: annoyed... "But Vik, I don't have any money to guarantee it."

Pandit: "You old fuddy duddy - don't worry about that - we'll use the proceeds of the debt sale to prepay our FDIC fees for the next three years - then you'll be able to cover us - simple math!"

Bair: hesitant... "ummm. Ok Vik - what happens when you need to payback the debt?"

Pandit: "Where have you been Sheba? We'll just issue new debt! Voila!"

Bair: "Genius, Vik. Do it up! GUARANTEED!"

Ponzi lives. Smoke and mirrors.

-KD

4 comments:

Sam said...
This comment has been removed by the author.
Sam said...

Looks like if the equity markets are OK, everything else can be swept under the rug and no one cares anymore. This has to be the greatest PR move by all the players in recent history starting with the "stress" test results.

Trillions of debt issued and still yields remain ridiculously row, commodities/equities/junk going parabolic...weird times indeed.

For the first time in a while, I have no opinion as to where this thing is headed, a few months from now.

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