(WASHINGTON) — The U.S. government has launched a plan to deal with large failed companies that could touch off another Lehman-like disaster, hoping to prevent instability in the financial markets.
The Federal Deposit Insurance Corporation’s (FDIC) acting chairman Martin Gruenberg on Thursday outlined steps that the federal financial agency will take to allow the subsidiaries of a failed financial institution to operate while taking over a parent company — without a taxpayer bailout in accordance with the Dodd-Frank Act.
In the event of a failing or failed institution, Gruenberg said the FDIC’s resolution strategy has three key goals.
“The first is financial stability, ensuring that the failure of the firm does not place the financial system itself at risk,” Gruenberg said in his prepared remarks in Chicago at the Federal Reserve Bank of Chicago’s Bank Structure Conference. “The second is accountability, ensuring that the investors in the failed firm bear the firm’s losses.”
James Chessen, chief economist with the American Bankers Association, said Gruenberg and the FDIC sent an “important” message to investors that there is an agency prepared to deal with a troubled, systemically important institution so disruptions will be minimal but investors will take losses.
“I think it’s clearly a message that says that if you’re expecting the government to protect your investment in a large financial firm, you should readjust your thinking,” Chessen said. “The plan is not to protect you and you should take care in really analyzing the risk of your investment.”
The third goal of the FDIC’s strategy is “viability” by converting the failed firm through a “receivership process,” similar to the manner in which the FDIC converts a failed, federally insured depository institution to another working bank.
The FDIC’s new strategy deals directly with these large financial companies, or “systematically important financial institutions” (SIFI), which critics describe as “too big to fail.” Those include a number of the rescued companies during the recent recession, like American International Group Inc. The U.S. government rescued AIG in 2008 with $125 billion in taxpayer money, and this week the Government Accountability Office released an estimate that the government could make a profit of $15.1 billion from the bailout.
The Group of 20′s enforcement agency, the Financial Services Board, published a list of about 30 SIFIs in November, which include eight American companies. Those banks face a number of requirements, including submitting a plan by the end of 2012 detailing how their businesses should be spun off if they collapse.
“By definition, these are institutions whose failure could, if not handled effectively, have ripple effects in the economy,” Chessen said. “The goal is to understand how you would resolve that.”
Copyright 2012 ABC News Radio
Jackie Wattles, CNN
Paul R. La Monica, CNN
Parija Kavilanz, CNN