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FDIC’s New Resolution Authority Rules Would Still Have to Be Triggered By Others

The FDIC has put together a new format for how they would wind down a systemically important financial institution that got itself into trouble. This is part of the resolution authority granted by the Dodd-Frank financial reform law.

When the next crisis brings a major financial firm to its knees, U.S. regulators will seize the parent company but allow its units around the globe to keep operating while the mess is cleaned up, according to a planned announcement Thursday from the Federal Deposit Insurance Corp. […]

If several federal agencies and the Treasury Department agree to seize a firm, the FDIC will unwind the parent bank holding company of the faltering firm, placing it in receivership and revoking its charter. The firm’s subsidiaries around the world would continue to operate, supported with liquidity the FDIC-held parent company can borrow from the government under the Dodd-Frank financial overhaul.

Next, the FDIC would transfer most of the firm’s assets and some of its liabilities into what’s known as a “bridge company,” according to FDIC officials. There, regulators would oversee a debt-for-equity swap akin to what occurs under a Chapter 11 restructuring: Equity holders would be wiped out, but creditors would get equity in exchange for the claims they held. The company eventually would emerge from the process as a new, recapitalized private entity.

This actually looks like as good a plan as you can come up with, given the difficulties that will ensue from the US trying to wind down a financial firm that’s international in scope. But in order for the FDIC to get their hands on a firm, the Financial Stability Oversight Council, led by the Treasury Department, would have to OK the resolution authority. And that’s really the problem here. It’s not that I doubt the abilities of FDIC to scale up their operations and dismantle a megabank – I actually do – it’s that I doubt that the powers that be would ever let it get to that point.

And this is part of what Matt Taibbi talks about today when he discusses how Wall Street killed financial reform – not the bill itself, but in the implementation process. Taibbi actually puts a bit more emphasis on the legislative channel but it’s among the regulatory apparatus where Wall Street has really succeeded. They were able to de-fang the worst aspects and ensure that the rest would be decided by the most bank-friendly elements of the federal government. That’s basically what you see with the FSOC. This paragraph is representative of the banks’ strategies:

Wall Street’s first big win involved a small-but-important change known as the “proxy access” rule, which made it easier for people who own stakes in a company to remove directors from the board – giving shareholders more power to rein in corrupt or overpaid company executives. More democracy in business sounded like a good idea to almost everyone. But Wall Street has a dependable playbook for getting rid of any reform, no matter how small, that leads to greater accountability. “First, they hire a shit-ton of lobbyists to go to the regulators,” says Jim Collura, spokesman for the Commodity Markets Oversight Coalition. “Then, they beat the crap out of them during the rulemaking process. And then, when that’s over, they litigate the hell out of them.”

I don’t totally agree with everything in Taibbi’s article – I still have some hopes for CFPB. But there’s no question that the financial lobby ran this play, and on balance, they have succeeded.

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David Dayen

David Dayen