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As you know, virtually all of the actual funding for Tim Geithner's $1 trillion bank bailout program (PPIP) comes from Treasury debt backed by the FDIC. It's a sneaky alternative to Obama and Geithner having to request the funds formally from Congress, which is not in the bailout mood at present.
The problem for Sheila and the FDIC is that means approximately $850 billion might need to be guaranteed. (It's actually likely to be much smaller because very few firms seem to be willing to play ball considering the future political risks of profits at the expense of taxpayers.)
Turns out there is a legal impediment that prevents the FDIC from making any obligations of any sort greater than $30 billion. So how do you get around such a law. Simple in Sheila's case. Have your lawyers make the determination that your guarantees of Treasury debt are actually guarantees of contingent liabilities. Then determine that these contingent liabilities have an expected loss of (hold for effect) ZERO.
My reaction: Sheila Bair is on acid and so are her lawyers. They are apparently looking for Ken Kesey's magic bus and band of Merry Pranksters.
We have the complete story from Andrew Sorkin after the jump.
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