Is Sheila Bair Now Proposing A New RTC?

Maybe I’m wrong but it seems as if Sheil Bair, Chairwoman of the FDIC, is proposing that we go back to the future.

“Under this scenario, you’d take over the troubled firm, imposing losses on stockholders and unsecured creditors,” she said. “Viable portions of the firm would be placed into the ‘good bank’ using a structure similar to the FDIC’s bridge bank. The nonviable or troubled portions of the firms would remain behind in a ‘bad bank,’ and would be unwound or sold over time.”

“The cost of the bad bank would be partially paid for by the losses imposed on the stockholders and unsecured creditors,” she added. “Any additional costs would be borne by assessments on other systemically risky firms. This has the benefit of quickly recognizing the losses in the firm and beginning the process of cleaning up the mess.”

“The stockholders and managers of some big banks might not like this process,” she said. “They might prefer a too-big-to-fail subsidy or investment from the government. (And some regulators might fear it because it would give an independent body the ability to close institutions for which they are responsible.)”

This sounds an awful lot like the RTC to me. If that’s the case then I’m all in. This tiny blog and lots of bigger fish have been arguing a return to that regime since the beginning. Is it possible that after all the acronyms we will go back to something we know works?

Now I’m not sure I’m crazy about her idea to dun the other members of the industry for the cost. It may be more than they can bear. I also wish she had been a bit more definitive about how much existing shareholders and creditors of failed banks will have to take in losses. Hopefully she means that they will be wiped out. If so, say so. If not then that needs some debate.

Ms. Bair is lobbying to have the FDIC be the agency charged with this job. I guess they have as much experience as anyone in winding down banks, so why not. Perhaps the President could step in and in a presidential way stop the inter-agency bickering about who gets the assignment.

It’s past time to get on with this.

more: here (WSJ Real Time Economics Blog) and here (my last post on this)

You can leave a response, or trackback from your own site.

Leave a Reply