Bair: FDIC Can Handle This Crisis

On the heels of the New York Times profile of Geithner that repeatedly juxtaposed his apparent affinity for the bankers he was supposed to be monitoring with Sheila Bair's reported concern about protecting the taxpayers comes this speech from Bair calling for greater power for the FDIC to deal with troubled financial institutions. Was this timing a coincidence? With all the behind the scenes jockeying going on between the different agencies, it is certainly not implausible that FDIC officials anonymously leaked unflattering anecdotes about Geithner to set the stage for their boss' big speech.

Regardless, the substance of Bair's speech deserves attention. Rather than promoting endless subsidies for the banks, Bair suggests closing down failed financial institutions. Imagine that! Failure being punished - it's so...capitalist. The main points of her proposal:

• Allow the FDIC to shut down bank-holding companies and other financial institutions (read: AIG) in addition to commercial banks
• Use a good bank-bad bank model for seized firms. Equityholders and unsecured creditors would take the losses for the bad bank, which would be either be sold off to private investors or held by the government. The healthy assets of the company would go into the good bank.
  

Unsecured creditors taking losses before the taxpayers? It's almost as if Bair has been listening to Joe Stiglitz. There may yet be hope that Bill Gross won't continue to shamelessly gorge himself at the public trough. Still, the bankers are predictably against inflicting such harm on the banks, and they still rather unfathomably seem to call the shots on Capitol Hill. From Bloomberg:

The American Bankers Association has challenged the idea of giving the authority to the FDIC, saying the agency’s mission would be jeopardized and banks may bear unnecessary costs.

“The direct use of the FDIC for resolutions of non-banks would severely confuse the public about FDIC deposit insurance,” Edward Yingling, the Washington-based industry group’s president, wrote in an April 14 letter. He suggested instead giving the authority to a council of the FDIC, Fed and Treasury to avoid giving too much power to the FDIC.

No doubt a Treasury department seemingly staffed exclusively by ex-Wall Streeters and the clubby Fed would serve as powerful checks on the FDIC taking a firm stand against too-big-to-fail financial institutions. We can only hope that Bair wins the backroom political game for control over this process. At least she gets it, that taxpayers should not be used to make bondholders whole on their bad investments - a point which certainly seems to elude Geithner.