FDIC's new tools to close troubled banks offer opportunity, challenge
Monday, January 17, 2011; 8:43 PM
Few regulators understand as well as Jim Wigand the mechanics of closing down a troubled bank quickly and successfully.
During his decades at the Federal Deposit Insurance Corp. and at the Resolution Trust Corp., which was formed by the government in the wake of the savings and loan crisis in the 1980s, he has served as a sort of deal maker on behalf of the government. He sorted through the wreckage of hundreds of banks, directing the sale of failed firms and their assets to try to minimize the economic fallout and safeguard depositors.
This month, the 54-year-old career civil servant is taking on a new role, one that lies at the heart of preventing another crisis like the one that crippled the economy in 2008. As director of the FDIC's new Office of Complex Financial Institutions, Wigand will be responsible for keeping an eye on some of the nation's largest and most complex financial firms and making sure the government is prepared to seize and liquidate them should they falter.
This "resolution authority," created under the landmark financial regulation bill enacted last year, gives the government broad powers it didn't possess two years ago when companies such as Lehman Brothers and American International Group spiraled toward bankruptcy. Back then, federal officials faced an unenviable choice - allow the firms to collapse into bankruptcy, possibly dragging others down with them, or put billions of taxpayer dollars at risk to bail them out.
"This process is just starting, but the key point is that we now have a tool that didn't exist," Wigand said.
An important part of that new tool allows government officials, should a large failure occur, to create a "bridge" institution that would keep critical parts of a firm operational while it is dissolved and liquidated over time.
"It keeps the lights on," said Karen Shaw Petrou, managing partner of the research firm Federal Financial Analytics. Without such a mechanism to unwind large, interconnected firms in an orderly manner, "consumers might not be able to cash out of an ATM; it's that simple. And that's what a bridge institution is designed to provide."
At the same time, the new powers represent a daunting challenge for the FDIC, which has plenty of experience shutting down troubled firms but has dealt primarily with small banks. Focusing on some of the nation's financial behemoths, observers say, will require a different set of skills.
"Big banks are different than small banks. And big non-bank financial companies are different than both," Petrou said. "The FDIC could create more risks than it resolves if it [merely] extrapolates its small-bank experience and applies it to big ones."
In granting the new powers, Congress wanted to ensure that no financial firm is "too big to fail," though some lawmakers and academics argue that the legislation does not eliminate that problem entirely. The bill's architects wanted the government to be able to seize a large, faltering firm, fire its management, impose losses on shareholders and liquidate its assets while preventing widespread harm to the financial system and protecting taxpayers.
The Office of Complex Financial Institutions will have a staff of about 150, composed of FDIC employees and outside hires.
"There will be people dedicated to looking at individual entities, and there will be people dedicated to looking at risk that could be posed across the financial services industry," Wigand said.