FDIC Mulls Ending Debt Guarantee Program
News is out today that the Federal Deposit Insurance Corporation is considering ending a program that allowed firms to issue debt that it guarantees. This program was an important part of the equation in stabilizing the markets. According to the Associated Press, there is currently over $300 billion in outstanding debt that was issued through the program. This move is a good sign; the plan is a smart one; and the market's stability should be unaffected.Here's some details of the news, from Reuters:
The Federal Deposit Insurance Corp voted to put out for public comment one approach that would have the program expire on Oct. 31, as planned. It also proposed to have the program expire on that date but to establish a limited six-month emergency guarantee program that would be available to institutions suffering from market disruptions beyond their control.
"It has been a successful program but we would like to end it," FDIC Chairman Sheila Bair said.
First, this is a very good sign. That the FDIC is comfortable ending a program of this magnitude shows that the credit markets are much healthier than they were a year ago. Bair is smart enough to understand the consequences for killing a program like this before the market is ready. And the market needs to gradually learn to walk on its own again, so by October it should be about time to remove the training wheels.
Second, this plan sounds like a good one. It adheres to the planned end date of October 31st, so the market shouldn't be surprised. It also provides nearly two months advanced notice that the planned end date will be enforced. Finally, it may provide for an emergency option, which is really all you should need by now. The climax of the financial crisis seems well past at the point, so at worst it would only be a few isolated firms who would need such emergency debt guarantees going forward.
Finally, it should not have much effect on the market. That $300 billion in outstanding debt already issued will be unaffected: that debt's guarantee still remains in place until the end of 2012. The proposal in question just ends the issuance of new debt guaranteed by the FDIC. With the economy stabilizing, firms should be able to begin going back to the market to issue debt.