November 16, 2009 - .... Yet, the FDIC’s loan guarantees are probably worse than the TARP capital injections. TARP was passed by Congress and signed by the President. What Congressional or Presidential authority did the FDIC have to get into the credit default swap business? The Congressional Oversight Panel (COP) stated in its November 2009 report estimates on page 69 (71) that the FDIC’s loan guarantee program amounted to a $13.4 billion to $28.9 billion subsidy to the banks. The impact of this subsidy is that banks such as Goldman Sachs (GS) and Morgan Stanley (MS), which may have received subsidies of $2.3 billion and $3.7 billion under that program, will be encouraged to be over-reliant on the short-term, repo financing that brought down Lehman Brothers and Bear Sterns. If short-term creditors get nervous, the FDIC or the Federal Reserve will step in through discount window loans and bail them out.
For all its problems, the U.S. Treasury has been much more transparent in its efforts to shore up the financial system. It publishes term sheets and contracts in a timely manner. Not so with the FDIC. The FDIC is flaunting the Freedom of Information Act (FOIA) by not disclosing basic details of the loan guarantees and lines of credit that have granted a group of hedge fund and private equity investors that bought the failed assets of Corus Bank. My research shows that these loan guarantees inflate asset prices, yet the cheap loans may not hurt taxpayers and the deposit insurance fund if the toxic asset sales are from failed banks.
