FDIC Announces Plan For How To Handle Failed Banks

Nearly four years on from the collapse of Lehman Brothers, Merrill Lynch and a number of other large financial institutions, the Federal Deposit Insurance Corporation is announcing its plan for what will happen the next time a too-big-to-fail bank goes kaput.

In basic terms, regulators would assume control of the bank’s parent company while still allowing associated units to continue operating. Equity stakeholders would be wiped out, and bonds would be swapped for equity in the new entity.

More details from the Wall Street Journal, which was briefed on the plan in advance of today’s announcement:

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.

The FDIC’s goal is to safely wind down the bank and thus avoid future taxpayer-funded bailouts.

One former Federal Reserve governor has expressed skepticism over the FDIC’s involvement, saying the organization “is unlikely … to be up to the task” of avoiding similar meltdowns that resulted from the bank failures in 2008 and 2009.

Avoiding the Next Big Bailout [WSJ.com]

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  1. Cat says:

    “If several federal agencies and the Treasury Department agree to seize a firm, Blah, Blah, Blah… The company eventually would emerge from the process as a new, recapitalized private entity.”

    No mention in this plan of prosecuting evildoers.

  2. josephbloseph says:
    • josephbloseph says:

      Just occurred to me that I shouldn’t post videos without a comment. The linked video is south park’s take on deciding what to do.

  3. Blueskylaw says:

    “Equity stakeholders would be wiped out, and bonds would be swapped for equity in the new entity.”

    They forgot to mention whether the C-level executives would also get equity in the new company even though they would be the ones responsible for the whole fiasco.

    • Lyn Torden says:

      Their equity stakes would be wiped out, too. But this seems to leave open the opportunity for them to negotiate a deal to “return” to the new company under some equity plan. I hope they have a process to lock out any C-level and lower executives that are responsible for bad decisions. Even better would be to block them from employment at any government insured or regulated bank. Just be careful when shopping for a new or used car as you may encounter them there.

      • Blueskylaw says:

        This happened with an airline that declared bankruptcy a while ago (can’t remember which one), where stockholders were wiped out, union contracts were broken, fuel costs owed were wiped out, pensions were wiped out, bond holders were somewhat screwed and yet the executives who caused this disaster walked away with something like 15-20% of the new company for all of their troubles.

        • Coelacanth says:

          Sounds like nearly every airline company. (Except JetBlue and possibly South West.)

    • Loias supports harsher punishments against corporations says:

      Clarification: C-level?

  4. lovemypets00 - You'll need to forgive me, my social filter has cracked. says:

    I quit reading at “Dodd-Frank financial overhaul”. That was all I needed to know.

    • StarKillerX says:

      isn’t that the law that one of the drafters, Barney Frank, made sure didn’t apply to Fannie and Freddie, and then proceeded making sure they got 100’s of billion more of tax dollar while they were giving out massive bonuses to their executives?

      I’m sure that was for the good of the country and nothing to do with all the money his campaign gets from them, or the high paying “job” I’m sure he’ll get with them after he retires.

      • DFManno says:

        No.

        This has been another edition of “Simple Answers to Stupid Questions.”

      • NorthAlabama says:

        no, it’s the one where dodd made sure all of his financial buddies would not be held responsible for bringing down the world economy…

  5. AllanG54 says:

    You would have thought they would have learned something from the banking debacle in the late 80s. Things got bad enough that FSLIC actually went broke and the government merged it into the FDIC. The RTC (Resolution Trust Company) bought all those crappy assets (mostly mortgages and junk bonds) and eventually sold them off. In some instances they didn’t do too badly but it took years to recover from that and that wasn’t half as bad as what happened recently. Ah well, those that don’t learn from history are doomed to repeat it.

  6. ARP says:

    Still waiting on the rules preventing banks from becoming too big to fail. Then we’d have a lot less to worry about re: bailouts.

    • RvLeshrac says:

      You can prevent companies from becoming “too big to fail” by making board members and executives legally liable for the actions of their organisations.

  7. NorthAlabama says:

    here, here!

    much better idea than what happened last time, and a lot for bankers to think over while they are gambling our savings and retirement away for anticipated “quick profit”.

    if you’re sure you’re going bankrupt the next time, maybe there won’t be a next time…

  8. SilverBlade2k says:

    I say do what they do for every failed business: Let them fail, let them go bankrupt. It’ll be like pulling off a band-aid. It hurts for a bit, but it’s a quicker recovery.

    • NeverLetMeDown says:

      That’s pretty much what they’re doing – a chapter 11 style process – equity holders get wiped out.

    • RvLeshrac says:

      Good idea. Because that worked so fucking well during the Great Depression.

  9. gman863 says:

    Better plan:

    * Pay deposit account holders full value.

    * Fire all executives, give them free toaster as severance pay.

    • Cor Aquilonis says:

      Toaster shall be delivered by firing from a rail gun pointed at the executives head. If rail gun is unavailable, trebuchet will suffice.

  10. frodolives35 says:

    Yah right they will just change the rules when it comes up again. For your enjoyment yet another scene from the political theater up next “how we will provide free health care to everyone and make ssi solvent without it costing anyone anything.”

    • RvLeshrac says:

      Hint: When you create a large health insurance co-op, it reduces prices for individual patients because you can negotiate with the care providers.

  11. MarkFL says:

    And yet, just today the CEO of JP Morgan Chase announced that the company blew huge amounts of money. And how did they do it? Bad derivatives.

    I’m experiencing a major case of deja vu.

  12. nocturnaljames says:

    simple, let them fail. if banks are deemed too big to fail, then they are too big and there must be regulations to limit size.

  13. damicatz says:

    I have a novel idea.

    Rather than stealing money from the “tax” payers (if I take money from someone at gunpoint, it is called armed robbery but if the government does it, it is called tax), we can just let the banks fail.

    And when the banks fail and go bankrupt, the CEOs do not get their bonuses and then the banks that do not go bankrupt will see the banks that do as an example of what happens when you engage in the kinds of fraudulent shenanigans that Lehman Brothers et. al did.

    Stealing money from other people to bailout someone else’s mistake only re-enforces their behavior and sends a message that no matter how much of a flim flam operation you run, no matter how badly you run your business, no matter how many people you scam, the government will be there to bail you out with other people’s money.