The FDIC Should be Proud

The FDIC should be proud this morning for, over the past week, resolving not one but two large institutions with little market effect. In both cases, the FDIC managed to arrange substantially whole-bank purchase and assumptions that avoided a straight deposit insurance payout. The FDIC’s recent deals are important, since whole bank P&A’s are the gold standard of FDIC resolution policy. Their success in these transactions should be applauded.

While whole bank P&A’s do not necessarily entail zero losses on behalf of the FDIC, they ensure a smooth transition of authority from the failed institution and virtually uninterrupted access to consumer deposits. This is the way the system is supposed to work. Chairman Bair, please promote the FDIC’s success in this regard, as it is one of the most meaningful confirmations of the current system’s ability to handle the existing crisis with aplomb – promoting confidence in the banking sector among depositors and investors alike.

Don’t get me wrong. Total resolution costs from this crisis will still exceed current reserves and the FDIC will most likely need to access additional credit (beyond its existing lines) at Treasury, but we will not need to invent any new procedures to do so and the FDIC will recover additional outlays from increased insurance premiums after the fact. Not a perfect system, but it will work and we will have time to improve it incrementally after the crisis – and it will cost substantially less than $700 billion. (Yes, I know, the official line is we’ll have a “small profit.” But modifying loans to “minimize foreclosures” as I discussed in my previous commentary, “Notes on the House Draft Bailout,” will eat that up fast.)

If anything, get more banks on the problem list where they belong and resolve them in a similarly well orchestrated fashion to restore confidence and get us out of this crisis – hopefully without wasting $700 billion on politically-strongarmed forbearance programs that will only make your job more difficult in the long run.

A final note. The FDIC is the source of the greatest amount of expertise on dealing with distressed financial institutions assets anywhere in the regulatory system. Hence, one of my biggest complaints in recent months has been their omission from the proposed Treasury resolution and bailout plans. If we really mean business and want to get beyond the crisis without a Japan-style recession, let the FDIC do their job and close offending institutions like they did last week. And if we really need authority to extend regulatory resolutions beyond depository institutions, the FDIC is a better choice than adding yet another ad hoc regulatory agency to the mix.

3 Responses to "The FDIC Should be Proud"

  1. Guest   September 29, 2008 at 2:39 pm

    The FDIC should be proud The FRB should be abolishedVote HR2755 ABOLISH the corrupt FRB blackmailing the american people, forfeiting their future Nationalize the Central Bank system

  2. Guest   September 30, 2008 at 5:21 am

    The Fed pumped 630 billion into the system without oversight yesterday but they’re looking to stick the garbage onto the taxpayer. What a con job.