Tags: FDIC | bankruptcy | resolution | risk

FDIC Bankruptcy Resolution Plan Is Bankrupt

By    |   Tuesday, 17 December 2013 06:46 AM

The FDIC hosted a meeting on Dec. 10 of its Systemic Risk Advisory Committee, a group of distinguished experts from industry and academe. This committee meets only about once a year to hear presentations on what the FDIC is doing to implement provisions of the Dodd-Frank Act that are supposed to ensure that financial institutions can be liquidated, rather than bailed out, whenever the next episode in the ongoing financial crisis strikes.

Unfortunately, it is much too late for such a program to do any good. After the savings and loan crisis, which peaked in the 1980s with a spate of costly bailouts in 1988, the financial regulators recommended legislation to give them new powers, to ensure that such an event would "Never Happen Again." Sound familiar?

The result was the enactment of two bills that at the time were hailed as landmark legislation — the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989 and the FDIC Improvement Act (FDICIA) of 1991.

FIRREA abolished the Federal Home Loan Bank Board (FHLBB) and replaced it with the Federal Housing Finance Board (now Agency) and the now-defunct Office of Thrift Supervision (OTS). It also gave new mandates to Fannie Mae and Freddie Mac to support mortgage credit for low- and moderate-income borrowers. Both Fannie and Freddie were placed in government conservatorship during the 2008 crisis episode. As Sarah Palin would ask, "How's that workin' out for ya?'"

So by 2008 the FDIC had over a decade and a half of experience as an "improved" agency, but it implemented provisions calling for risk-based premiums, least-cost resolution of failed banks and prompt corrective action to avoid a buildup of unrealized losses, selectively and with an eye to industry opposition and client interests.

This year's meeting consisted of four sessions, each problematic in its own way:

• Bankruptcy of a Covered Financial Institution. The FDIC presents this as the preferred option, but after a presentation intended to reassure the audience that this is the case, even the presenter, Barry Adler of New York University Law School, admitted that it might not be possible to resolve a failing institution without a government subsidy, and former Federal Reserve Chairman Paul Volcker observed that it doesn't look like the possibility of a failing institution is going away, as the FDIC has contended it would.

• Single Point of Entry Strategy (SPOE). The FDIC presents this as a backup plan, to use the holding company as an SPOE and restructure it, but cynics see this as the FDIC's preferred option, because it gives the agency, rather than a bankruptcy judge, the power to determine which creditors would be paid, once again in deference to client interests.

• U.S. Bank Holding Company Action.
A representative of Moody's (Moody's!) sought to assure the group that ratings reflect acceptance that a rescue of firms is less likely than it was before. Why anyone would believe this, given the track records of both Moody's and the FDIC, remains a mystery.

• International Coordination. FDIC Chairman Martin Gruenberg spoke confidently of progress that has been made in coordinating with foreign regulators, including bonding through "tabletop exercises." (Perhaps they are doing yoga or playing ping-pong.) Critics pointed out that even if this is true, it does not entail coordination with foreign bankruptcy authorities and counterparties, whose actions are unpredictable and likely to give primacy to local interests.

(Archived video and related materials can be found here. The press release and the text of the proposal can be found here.)

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The FDIC hosted a meeting on Dec. 10 of its Systemic Risk Advisory Committee, a group of distinguished experts from industry and academe.
Tuesday, 17 December 2013 06:46 AM
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