Remember Sheila Bair’s comments about how the FDIC would experience $0 in losses from guaranteeing loans as part of the bailout scheme?
Well, we weren’t the only ones who thought the statement seemed totally out to lunch.
Actually, Zacks analyst Dirk van Dijk (via SeekingAlpha) goes much further than that, basically calling her delusional:
If only America’s inventors, entrepreneurs, artists, musicians and film industry had the creativity of our accountants, then America would once again be the undisputed master of the world. The idea that there would be no net losses from this program is optimistic to the point of insanity. The plan is set up so that on each individual transaction, if the private investors win and make money, then the Treasury/FDIC makes money (mostly the Treasury) and vice versa.
Except only in the wins private investors make out like bandits, while collectively the government makes modest profits — and on the losses, the private investors lose a little bit, and the government loses big. On the government side, the losses would be mostly borne by the FDIC while the Treasury would get most of the gains.
The more transactions there are, the higher the probability that overall the program loses money. After all, having four out of five coin flips turn up heads is not all that astonishing, but if it happened 400 out of 500 times, you just might want to have a close look at the coin. Does Ms. Bair have a two-headed coin she plans to use for this exercise?
He goes onto point out that losing money is practically the whole point of the program, since the goal is to get hedge funds and the like to overpay for assets and stuff banks with as much extra capital as possible.
The FDIC could end up guaranteeing up to almost $1 Trillion in very risky non-recourse loans, for which they will get a small fee, and they are projecting no net losses! Seriously, Shelia, there is this bridge I have in lower Manhattan, a real landmark property — care to make a bid on it? Are the accountants that signed off on “no net losses” the ones that signed off on Enron’s books or the ones that signed off on WorldCom’s? Does Bernie Madoff’s bean counter have a new gig?
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