FDIC Chief: Banks That Are "Too Big to Fail" Should Be Downsized
Speaking at a finance summit this week, FDIC Chief Sheila Bair said giant, multinational banks that are considered "too big to fail" should be forced to either restructure or prove they could be easily broken up during a financial crisis. "If they can't show they can be resolved in a bankruptcy-like process... then they should be downsized now," she said. "There is no reason in the world why they should get some special treatment backstop that other businesses in this country don't have."
Multinationals will need to set up more foreign subsidiaries and realign their legal structures to make it easier for regulators to liquidate them if necessary, Bair told the Reuters Future Face of Finance Summit....
She also said investors need to accept that they will get lower returns from banks that hold higher capital and run safer operations.
The aim of orderly liquidation is to avoid a repeat of 2008, when the Bush administration bailed out American International Group and other firms but not Lehman Brothers. Lehman's bankruptcy virtually froze capital markets.
The "living will" requirement mandated by last year's Dodd-Frank financial reform law is also designed to end the idea that some firms are too big to fail. It would put the greatest burden on banks with complex businesses and big international presences such as Citigroup, Bank of America, JPMorgan Chase, Goldman Sachs and Morgan Stanley.
Avoiding a repeat of 2008 is certainly a worthy aim. To that end, big banks will have to file plans with U.S. regulators by year end detailing "how they can be closed down if they face a liquidity crisis."
That's great and all, but the question remains: why aren't the big bank executives who helped created the 2008 disaster already in jail?