Does the Geithner Plan Violate the FDIC Charter?

Andrew Ross Sorkin's column in this morning's New York Times comes tantalizingly close to the conclusion that the Geithner bank plan -- which uses FDIC-backed loans -- violates the FDIC charter:

The F.D.I.C. is insuring the program, called the Public-Private Investment Program, by using a special provision in its charter that allows it to take extraordinary steps when an "emergency determination by secretary of the Treasury" is made to mitigate "systemic risk."

Simple enough, but that language seems to bump up against another, perhaps more important provision. That provision clearly limits its ability to borrow, guarantee or take on obligations of more than $30 billion. [...] The exact legalistic language says that it "may not issue or incur any obligation" over that limit.

But a couple of thoughts on this.



First, I'm not sure what Sorkin means when he says the provision "clearly limits [the FDIC's] ability to borrow, guarantee or take on obligations of more than $30 billion." The FDIC obviously guarantees deposits that are vastly in excess of $30 billion -- indeed, the FDIC guarantees several trillion dollars in deposits. Sorkin is probably referring to the $30 billion limit on how much the FDIC can borrow from the Treasury. But it's not clear how the borrowing limit would affect the bank plan.

Second, I'm not sure the two charter provisions Sorkin cites really "bump up" against one another. If the administration is in fact invoking an "emergency determination" provision that lets them take "any action...necessary" to avoid systemic risk, then it's more like one provision trampling the other in a brawl. You might not think that's desirable, but "bump" doesn't seem like the right word.

A separate question is whether the administration has the authority to invoke the emergency provision in the first place. If the administration is invoking the "systemic risk" clause of the FDIC charter, then it needs to take steps besides a simple "emergency determination by the Treasury Secretary." The FDIC charter only lets the secretary claim the "systemic risk" powers when he has:

(1) The "written recommendation of the Board of Directors" of the FDIC;

(2) "a vote of not less than two-thirds of the members of the Board of Directors" of the FDIC; and

(3) "a vote of not less than two-thirds of the members" of the Federal Reserve Board of Governors.

When I asked the FDIC if the board had approved the Bank plan, an official said: "if there was some form of board action, it would have been done at a closed meeting." The FDIC did not say whether the bank plan had the written recommendation of the board.

The Federal Reserve did not respond with a comment. And, as far as I can tell, there is no mention of an FDIC or Federal Reserve vote in the various fact sheets, white papers and assorted gospels on the bank plan's website.