WASHINGTON — The Federal Deposit Insurance Corp.'s growing involvement in efforts to rescue the financial system is raising concerns that its core mission may be blurred.
The agency's role has greatly expanded as the Treasury Department has turned to the FDIC to run a critical piece of a plan to remove toxic assets from bank balance sheets. Congress is also weighing whether to grant the FDIC the power to resolve systemically important nonbanks, and its borrowing authority from the Treasury is poised to more than triple, to $100 billion.
What's more, the agency has guaranteed $335 billion of debt issued by banks and holding companies, and is providing unlimited coverage for $684 billion of deposits that do not bear interest.
Some observers say all these changes pose risks, including a loss of independence and a dilution of the FDIC's focus on protecting depositors.
"They're moving away from being an insurer and really becoming a backdoor funding agency of the Treasury Department," said Kenneth Guenther, the former longtime head of the Independent Community Bankers of America.
Until now much of the focus during the financial crisis has been on the Federal Reserve Board, with critics raising the same question about independence and alleging the central bank has put its balance sheet at risk.
The Treasury announced last month that the FDIC and the Fed would split duties under the Public-Private Investment Program. The FDIC would guarantee and hold auctions for debt used to buy toxic loans through the Legacy Loans Program, while the Fed would oversee a program designed to create a market for illiquid securities.
Late last month the administration unveiled a legislative proposal for the FDIC to handle resolution duties for all systemically risky institutions, including bank holding companies and nonbanks.
Some former FDIC officials worry these new roles could make the agency too political.
"It's never been a political agency. Whether you had a Democratic or Republican administration, it's basically been full of people that have focused on doing the job that the FDIC was assigned to do, and doing it well," said John Douglas, a partner at Paul, Hastings, Janofsky & Walker LLP and a former FDIC general counsel. "There's some danger that the longer you're in the room with the Fed and the Treasury and the administration, dealing with systemically important institutions, you wind up getting pressured to do things that maybe you wouldn't do if you were just focused on banks and the insurance function."
Putting the cleanup of failed holding companies and nonbanks — now handled by the bankruptcy courts — in the FDIC's hands would be transforming, Douglas said.
"Instead of having a holding company bankruptcy at Washington Mutual, where you have creditors and bankruptcy judges, it would all be in the hands of the FDIC to resolve in accordance with its procedures," he said. "You'd have the FDIC hiring contractors and outside managers, and would be accountable to no one. That would be a huge change."
FDIC Chairman Sheila Bair is trying to distinguish between the agency's proposed new role and its traditional work. During a speech last week at an American Bankers Association meeting, she floated the idea of creating a separately named entity under the FDIC to run systemic resolutions.
Julieann Thurlow, the president of the $269 million-asset Reading Co-Operative Bank in Massachusetts, heard her speak and in an interview said she is concerned recent moves will confuse consumers.
"If consumers start seeing the FDIC dabbling in nonbank institutions, does that brand start to bleed, and does the FDIC endorsement start to spread elsewhere, where it doesn't belong?" she said.
Though all three programs are funded separately from the Deposit Insurance Fund — through special fees — some fear the fund could eventually be on the hook if there were high losses.
"The FDIC, as I understood it, was there to protect" depositors, Rep. Michael Capuano, D-Mass., said in a hearing last month. "That's what they are there for, yet in this case, they are being used to finance the purchase of toxic assets. … I think you are jeopardizing the FDIC fund."
But an FDIC spokesman said an expanded role for the agency in a period of turmoil is not new, nor are ties between the agency and Treasury, which must sign off whenever the FDIC uses a systemic-risk determination.
"There is an ongoing dynamic that has always been the case in terms of the FDIC's role during a crisis," the spokesman, Andrew Gray, said. "We were borne of a crisis, and that's when our visibility is increased, as it should be. In terms of our FDIC brand, it's as strong as ever, and it's something we will continue to guard religiously."
Some have argued that the agency should create a separate reserve for its various programs. That idea has some precedent. After the FDIC shut down the Resolution Trust Corp., which was created to manage the assets of failed savings and loans, it continued to manage thrift reserves apart from bank reserves in two separate funds (which were merged in 2006).
"When they start dealing with these other things, they're beyond their insurance mandate," said Kevin Stein, a managing director in Friedman, Billings, Ramsey Group Inc.'s FBR Capital Markets and a former associate director in the FDIC's resolutions division. "Do these large systemic organizations start paying premiums into some fund like the Deposit Insurance Fund. Does it become not the Deposit Insurance Fund anymore? Does it become a Financial Services Fund? Maybe they just manage multiple funds."
Many former FDIC officials say it is well positioned to handle new responsibilities, in part because of its experience during the savings and loan crisis, and has a record of managing troubled assets.
"The profile of the FDIC has risen substantially; it does whenever there are crises," said Andrew "Skip" Hove, a former FDIC chairman. "The FDIC went through a similar process in the early 1990s with the savings and loan problems."
Ross Delston, a former assistant general counsel at the FDIC who is now in private practice in Washington, said that even though the current crisis is bigger, the FDIC does have a record of resolving large institutions.
"The FDIC's handling of the last crisis … engendered an enormous amount of confidence in its abilities," Delston said. "That confidence has continued under the current financial crisis."
But others said that this crisis is also more complex and difficult than previous ones, and that the FDIC is being asked to resolve institutions with a far greater magnitude than anything it has handled previously.
"Jamming a tremendously different function under the current statute, which has built an FDIC and funded an FDIC for deposit insurance, creates significant risk for the agency, which … is staffed up to support deposit insurance and [bank] resolutions, not bank and nonbank guarantees, let alone any resulting resolutions that would come from that," said Karen Shaw Petrou, a managing partner of Federal Financial Analytics Inc.
Some observers are asking whether the FDIC should continue to oversee the thousands of state-chartered banks for which it is the primary federal regulator, similar to questions about the Fed's supervision of banks if it is given systemic oversight authority.
"Let the FDIC be the receivership and conservatorship agency, … and consolidate within a banking agency the prudential oversight that's needed," said Cornelius Hurley, a former Fed lawyer and now a Boston University law professor.
Others argued that the FDIC should continue to handle its supervisory role.
Robert DeYoung, a University of Kansas finance professor, said the agency's workload would be lighter once the economy improves. "It's not the case that an agency can't do multiple tasks," he said.
