Obama Praises the FDIC -- So Now Can We Let the FDIC Do Its Job?

Wed, 25 Mar 2009 01:45:26 +0000

Some parts of the President's press conference (transcript here) came as quite a surprise. Consider his response to the first question about whether there needs to be a federal regulator for companies like AIG:

Well, keep in mind that it is precisely because of the lack of this authority that the AIG situation has gotten worse. Now, understand that AIG’s not a bank, it’s an insurance company. If it were a bank and it had effectively collapsed, then the FDIC could step in, as it does with a whole host of banks -- as it did with IndyMac -- and in a structured way renegotiate contracts, get rid of bad assets, strengthen capital requirements, resell it on the private marketplace.

So we’ve got a regular mechanism whereby we deal with FDIC-insured banks. We don’t have that same capacity with an institution like AIG, and that’s part of the reason why it has proved so problematic. I think a lot of people understandably say: Well, if we’re putting all this money in there, and if it’s such a big systemic risk to allow AIG to liquidate, why is it that we can’t restructure some of these contracts? Why can’t we do some of the things that need to be done in a more orderly way? And the reason is -- is because we have not obtained this authority.

If this is what he thinks, then why hasn't he used the FDIC to do precisely this for all of the banks that have taken TARP money (and many others that cannot demonstrate their solvency)? Why has he continued this policy of bailout in lieu of bankruptcy? And given the lack of willingness to unleash the FDIC to use its full authority, why does he believe that we would have allowed some new regulator for the likes of AIG to dish out the harsh medicine of bankruptcy to its equity holders and uninsured debt holders?