FDIC and the magical accountant: a financial fairytale

Once upon a time there was a princess called Sheila.




Sheila was in charge of a small but important slice of the Kingdom, known as FDIC.

All was well in Sheila’s fiefdom. Since the Glass-Steagal Revolution she had ruled over FDIC, charged with insuring the resources of the land and watching over her member subjects — a curious group of residents called the Banks.

Then one day things started going wrong in the Kingdom.

A mysterious and terrible illness was wiping out the Banks. It was called the curse of the myriad writedowns. The financial white knights and fund squires were no match for the curse. Monsters called ‘ponzis’ roamed the land and all was doomed.

King Geithner decided to take matters into his own hands. He gifted upon the financial white knights and fund squires a trillion magic beans. They were to use the trillion beans to heal the Banking elite and free them from the curse of the myriad writedowns, feeding the legumes to the Banks one by one.

Princess Sheila was to play a role too. She was to insure 85 per cent of the beans provided by the King to the financial white knights and fund squires.

But there was one small problem. Under Sheila’s Princess mandate she was not allowed to insure more than 30 billion of magic beans. What was she to do?

Sheila paced back and forth in her palace until she came upon an idea.

“I know,” she cried. “I shall travel to the Kingdom magician — the accountant. He’ll know what to do!”

So Princess Sheila set forth that very day to meet the accountant, who resided in a far and dark corner of the land.

“What shall I do?” the Princess asked the accountant, after explaining her predicament. “I can’t insure more than 30 billion magic beans but I must find a way to do so to save the Banks.”

“Simple,” replied the mystical accountant. “You can value the magic beans based on contigent liabilities — not the actual number of beans.”

“How does that work?” asked Sheila.

“Just pretend you will never lose any of the beans,” said the accountant.

And Princess Sheila went forth into the Kingdom and insured the 85 trillion magic beans

She watched as the financial white knights and fund squires fed the magic beans to the Banks, one by one. The Banks grew strong again and all rejoiced.

The Kingdom was healed by the force of King Geithner, the efforts of Princess Sheila and the mystical powers of accounting.

http://ftalphaville.ft.com/blog/200...the-magical-accountant-a-financial-fairytale/

Related story :

‘No-Risk’ Insurance at F.D.I.C.

The Federal Deposit Insurance Corporation was set up 76 years ago with the important but simple job of insuring bank deposits.

Now, because of what could politely be called mission creep, it’s elbowing its way into the middle of the financial mess as an enabler of enormous leverage.

In the fine print of Treasury Secretary Timothy F. Geithner’s plan to lend as much as $1 trillion to private investors to help them buy toxic assets from our nation’s banks, you’ll find some details of how the F.D.I.C is trying to stabilize the system by adding more risk, not less, to the system.

It’s going to be insuring 85 percent of the debt, provided by the Treasury, that private investors will use to subsidize their acquisitions of toxic assets. The program, extraordinary in its size and scope, is the equivalent of TARP 2.0. Only this time, Congress didn’t get a chance to vote.

http://www.nytimes.com/2009/04/07/business/07sorkin.html?_r=2

Ha, ha, ha....LOl !