Historically, the appearance of recursive exceptionalism is a highly predictive harbinger of republican (and, as it happens, imperial) decline, eventual fragmentation (typically violent in character) and collapse. It was no accident that the Roman Republic's decline followed hard upon the unspoken disposal of two-consul rule (no matter if you believe that this actually began with Pompey, Caesar or Octavian). Likewise, it is instructive that the progression towards The Principate after 400 some years of a Roman republic was also driven significantly by the conflict between the remnants of Roman monarchy, the aristocracy, and the plebes. If you find yourself a supporter of Ludwig von Mises, you might also note currency debasement, price controls, tariffs and restrictions on the free movement of labor and goods among the similarities to contemporary conditions. Self-inflicted economic wounds notwithstanding, once you stop following your own rules, "all bets are off," and it can only be a matter of time before you find that rem ad Triarios redisse (or rem ad Federal Reserve redisse, as the case may be).



In this connection, today we find it instructive to direct the modest beam of the Zero Hedge searchlight onto the boxy, greenroof-topped, marble facade of the Federal Deposit Insurance Corporation. This post marks the beginning of a week-long Zero Hedge series on the FDIC.



On September 28, 2009, Arthur J. Murton, Director of the FDIC's Division of Insurance and Research penned a memo to the Board of Directors on plans to prevent the Deposit Insurance Fund from total depletion (which threatens imminently even as we type this). That memo is actually most interesting primarily for its quick summary of the exceptions made to the general statutory requirement that the DIF maintain a minimum reserve ratio of 1.15%. In short, the memo noted that an October 2008 exception permitting the FDIC to take five years to return to statutory compliance was modified only four months later to grant seven years of extension only to be boosted three months later to an eight year respite. The prospect of almost a decade of non-compliance with the original (and clearly already insufficient) statutory reserve ratio is instructive.

If you are reminded of the now obviously useless national debt ceiling originally set in 1917, you are not alone. In 1919 that limit was $43 billion. By 2001 it stood at just under $6 trillion. Today, obviously, it floats just above $12 trillion (and just above the total debt figure as well). The ritualistic farce that now accompanies the regular and totally unopposed raises to the limit is, unfortunately, characteristic of recent statutory shenanigans by Federal authorities in the United States in legal disciplines ranging from bankruptcy to bailout authorization to agency finances.



The FDIC, (along with the Federal Housing Administration, Fannie, and Freddie), appear to have been so totally co-opted from their original purpose as to make a mockery of the authorizing legislation for the entities (not that these were organized properly- or indeed, justifibly- in the first place). But this should not surprise us. Moreover, looking deeper, and touching on an increasingly common theme here on Zero Hedge, we find that agencies and departments of the Federal government appear to enjoy a great deal of latitude with respect to setting their own rules (and self-non-enforcing them). A footnote in the above referenced memo is illuminating in this regard:

In setting assessment rates, the FDIC’s Board of Directors is authorized to set assessments for insured depository institutions in such amounts as the Board of Directors may determine to be necessary. 12 U.S.C. §1817(b)(2)(A). In so doing, the Board shall consider: (1) the estimated operating expenses of the DIF; (2) the estimated case resolution expenses and income of the DIF; (3) the projected effects of the payment on the capital and earnings of insured depository institutions ; (4) the risk factors and other factors taken into account pursuant to 12 U.S.C. §1817(b) (1) under the risk-based assessment system, including the requirement under such paragraph to maintain a risk-based system; and (5) any other factors the Board of Directors may determine to be appropriate . (Emphasis added).

We would point to the absolute insanity of permitting "projected effects of the payment on the capital and earnings of insured depository institutions" as a criteria for determining what amount to risk-based insurance premiums as item (3) above explicitly authorizes, but item (5) pretty much allows the Board of Directors to use any criteria they like in any event, so it is not clear to us what the point of the preceding assessment rate criteria limitations are, other than as a continued employment act for government attorneys. Similarly, we might ask why...

...the term ‘disaster-recovery FMAP adjustment State’ means:



a State that is one of the 50 States or the District of Columbia, for which, at any time during the preceding 7 fiscal years, the President has declared a major disaster under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act and determined as a result of such disaster that every county or parish in the State warrant individual and public assistance or public assistance from the Federal Government under such Act and for which— ‘‘(A) in the case of the first fiscal year (or part of a fiscal year) for which this subsection applies to the State, the Federal medical assistance percentage determined for the State for the fiscal year without regard to this subsection and subsection (y), is less than the Federal medical assistance percentage determined for the State for the preceding fiscal year after the application of only subsection (a) of section 5001 of Public Law 111–5 (if applicable to the preceding fiscal year) and without regard to this subsection, subsection (y), and subsections (b) and (c) of section 5001 of Public Law 111–5, by at least 3 percentage points; and ‘‘(B) in the case of the second or any succeeding fiscal year for which this subsection applies to the State, the Federal medical assistance percentage determined for the State for the fiscal year without regard to this subsection and subsection (y), is less than the Federal medical assistance percentage determined for the State for the preceding fiscal year under this subsection by at least 3 percentage points.

...immortalized in recent health care legislation isn't simply written in its more commonly known form ("Louisiana"). It becomes increasingly difficult not to feel that one's intelligence is being insulted.

This bit of language is quite telling with respect to the entity's view of the public confidence it [lacks/enjoys]...

The final rule also provided that if, after June 30, 2009, the reserve ratio of the DIF were estimated to fall to a level that the Board believes would adversely affect public confidence or to a level that shall be close to or below zero at the end of any calendar quarter, the Board, by vote, may impose up to two additional special assessments in 2009...

..in that it anticipates that a lack of public confidence criteria alone once the reserve ratio falls below zero might not be enough to trigger special action. Could it be that the public has already priced in total FDIC insolvency?

Why, exactly, do we tolerate this bit of FDIC folly? We're not sure, but watch this space in the days to come to follow our exploration of exactly this topic.