How Do You Justify Taking On More Risk? Project No Losses.

There is an interesting article by Andrew Ross Sorkin over at the Dealbook blog (see article here), discussing how the FDIC is justifying its participation in the Public-Private Investment Program (PPIP). In effect, the FDIC is insuring the PPIP in the name of mitigating systemic risk. While the FDIC is not suppose to guarantee obligations of more than $30 billion, for the PPIP it is not considering total obligations, but contingent liabilities, or what it expects to lose - which conveniently, they project to be nothing. This form of logic essentially allows them to lend an unlimited amount of money. Yet under the PPIP plan, the public-private pool will be financed at a ratio of 6-to-1 public-to-private money, with half of the "1" coming from the private buyer, and the other half coming from the Treasury. With this debt being non-recourse and guaranteed by the government, the risk to the government (i.e., tax payers) would be significant and fully felt. In some ways, it appears that the program will either work wonderfully, or end horribly. Maybe I am missing something, but this sounds like as risky a leveraged bet as I have ever heard. Regrettably, this appears to be just another example of solving a problem caused by taking on too much debt and risk by, you guessed it, taking on too much debt and risk. Why does the term "double down" come to mind? I don't know about you, but I am hoping we hit 21. Otherwise, it may be a long bus ride home.