Bullet Dodged ?

Robert Waldmann

It may turn out that the value of the Geithner put given to banks in the PPIP will not be huge. Many people including me worried that the legacy loan program was a huge scam, because loans were to be bought with up to 85% of the money a no recourse loan from the FDIC.

When I finally read the Geithner plan fact sheet, I discovered that there are 3 parts of the Geithner plan and that the FDIC was given the tools to protect itself.

The program which involves the FDIC, provides a large no recourse loan to buy pools of loans. The FDIC must approve the pool. The the pool is auctioned, then the FDIC decides how big a loan to make (if any).

The FDIC can (try to) protect its trust fund by not allowing pools with (predictably) huge variance. FDIC bosses do not want to have to go to congress to beg for a top up of the fund (I think that’s putting it mildly).

Now I read that the FDIC is, indeed protecting itself and has no intention of giving its trust fund to banks. Masaccio writes “it turns out the FDIC’s Sheila Bair has a spine and isn’t going to let that happen. “We’ll show you,” say the banks, “we won’t participate.”” OK so Masaccio is a great painter but I don’t know if he is right about the final outcome of the legacy loan portion of the Geithner plan. If he is I will write a post entitled “I Told You So.”

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