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February 2, 2012

Progress on Letting Big Banks Fail

“The drafters of the Dodd-Frank financial reform law got an important thing right. Despite fierce pushback from the banks — and lackluster support from the White House at critical moments — the legislators communicated a key new intent: megabanks must be able to fail, and the Federal Deposit Insurance Corporation should be in charge of that liquidation process.”

“The F.D.I.C. was an inspired choice for this role, because it is less captivated by the “magic” of Wall Street and less captured by its money and influence than any other group of officials.”

“The F.D.I.C. has also long been in the business of shutting down banks while limiting the damage to taxpayers, although it did not previously have complete jurisdiction over the largest banks when they got into trouble. It could only deal with those parts that had federally insured “retail” deposits, and this turns out not to be where the biggest problems have occurred in recent times.”

“Charged with this mandate involving the too-big-to-fail banks and with the difficult task of potentially shutting one or more of them without disrupting the economy, the F.D.I.C. took the remarkable step of opening up its decision-making process.”

Read the full column here.

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