toxic asset plan

Some of the details of the US Treasury’s latest plan to invigorate the banking industry are listed in the following article:

http://www.reuters.com/article/topNews/idUKTRE52M31Q20090323?pageNumber=1&virtualBrandChannel=0

I was shocked to read the following 2 paragraphs:

“The Treasury plans to leverage that money to buy $500 billion worth of toxic assets with financing from the Federal Deposit Insurance Corp, a U.S. bank regulator, and the Federal Reserve, with the potential to reach to up to $1 trillion.”

“These investment funds could purchase these loans by raising FDIC-guaranteed debt. The agency will offer up to a 6-1 debt-to-equity leverage ratio for these loans. So if investors and the Treasury each contribute $1 billion in equity to a fund, that entity can raise up to $12 billion in FDIC financing to purchase $14 billion in loans.”

It has been my understanding that the FDIC is an independent agency that oversees a depositor insurance program. It has also been my understanding that the FDIC collects insurance premiums from the insured banks to fund its depositor insurance. The most recent annual report for the FDIC is available from this link:

http://www.fdic.gov/about/strategic/report/2007highlight/2007highlight.pdf

On page 1 of this report you will find the following:

“Mission
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.”

Has Congress amended the charter for this organization to reflect the Treasury’s new loan guarantee scheme?

This paragraph from page 34 of the above report is noteworthy:

“A Continuing Record of Prudent Stewardship
The FDIC relies primarily upon interest earned on the investment of the Deposit Insurance Fund for its operations. It is notable that the Corporation has reduced its operational spending even as the interest earned on the DIF (and its predecessor funds) has increased significantly. As a result, the FDIC’s annual spending has dramatically declined as a percentage of interest revenue on the DIF. The combined interest earned by the DIF and FRF grew to $2,696 million in 2007 ($2,540 million for DIF and $156 million for FRF), while combined operating and investment budget spending fell to 37.6 percent of interest revenue, down from 49.4 percent in 2003.”

Like all insurance underwriters the FDIC depends on income from its investments to pay its expenses and claims. According to the above paragraph the total income from investments for FDIC in 2007 was $2,696,000,000. On page 37 the total revenue from all sources (investment income plus assessments from member banks plus other revenue) for the FDIC in 2007 is listed as $3,196,233,000. On page 36 of the above report the total assets of the FDIC on 12/31/2007 totaled $ 53,005,327,000. Therefore the Treasury’s new toxic asset plan would involve an insurance fund with 53 billion dollars in assets and 3.2 billion dollars in income in a program of loan guarantees totaling 500 billion dollars!

I welcome all comments and clarifications that you can provide on this subject.