Reuters: Regulatory News: FDIC says capable to take down US financial giant

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FDIC says capable to take down US financial giant May 10th 2012, 21:09 Thu May 10, 2012 5:09pm EDT * FDIC lays out strategy for liquidation * Republicans want to repeal liquidation powers * Markets skeptical government bailouts would not occur By Dave Clarke WASHINGTON, May 10 (Reuters) - The head of the Federal Deposit Insurance Corp on Thursday sought to convince skeptical financial markets and politicians that U.S. regulators can effectively liquidate a large financial institution without resorting to taxpayer bailouts. In recent months the agency has been trying to highlight the efforts it has made to turn the concept of a government-run liquidation into a working, d e tailed plan. The concept -- laid out in the 2010 Dodd-Frank financial oversight law -- is to avoid the market chaos that followed the bankruptcy of Lehman Brothers in September 2008 and end the need for taxpayer bailouts. On Thursday Acting FDIC Chairman Martin Gruenberg laid out the mechanics of how such a liquidation would work in an attempt to show skeptics his agency is ready to act if U.S. regulators decide to seize a failing financial giant and have the FDIC preside over its funeral. "There is a very strong public interest in the FDIC developing the capability to carry out its new systemic resolution responsibilities in a credible and effective way," he said in a speech to a Federal Reserve conference in Chicago. Supporters of the law view widespread faith in the liquidation powers as key to ending the idea that some banks are "too big to fail" and that if they are at risk of failing the government will flinch and rescue a failing giant. Large banks are still able to fund themselves at better rates than their smaller competitors partially because of the belief that the government will make investors whole if the bank runs into trouble. "There is a lot of skepticism in the market," former Federal Reserve Chairman Paul Volcker told a Senate Banking subcommittee on Wednesday. "I think that skepticism is overdone, but it's got to be dealt with." The challenge of winning over skeptics was on stark display on Thursday. While Gruenberg was delivering his speech in Chicago the U.S. House of Representatives was busy in Washington passing a bill that would strip the FDIC of its new liquidation, or resolution, powers as part of a larger budget savings package. [ID: nL1E8GAE42] Republicans contend a liquidation cannot be done without risking taxpayers dollars and instead want changes made to the bankruptcy process to better accommodate large banks and other financial firms. The bill is not likely to be enacted this year due to opposition from Democrats in the Senate. Supporters of the Dodd-Frank law have been at pains to dispel the notion that taxpayer money could be jeopardized, pointing out the law specifically prohibits bailouts. Under the law the FDIC can borrow from the Treasury to keep important functions of a bank or financial firm running during the liquidation so that its failure does not cause major ripples in financial markets and the economy. Whatever money is borrowed, however, has to be recouped either through the assets of the failed firm or through an assessment on large financial firms. "Taxpayers cannot bear any loss from the resolution of a financial company under the Dodd-Frank Act," Gruenberg said. The FDIC first laid out its specific strategy for liquidating a failing firm in January at a meeting of an advisory panel it created. In an interview earlier this year Gruenberg said the FDIC will meet with financial institutions, investor groups, public interest groups and academics to sell them on the FDIC's plan. [ID: nL2E8EDIRB] "I don't know that we're going to persuade everybody, but if we can even move the center of gravity a little bit in terms of persuading people that we are really quite serious about this ... we really will have accomplished a lot," Gruenberg said. Link this Share this Digg this Email Reprints

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