Bankruptcy

How Well the FDIC Works Re: Failed Banks

By J. Michael McBride

“It is a tale of two systems. One system, the one used to process failed and faltering banks, works really well. It's been in place and evolving for 75 years, since the Federal Deposit Insurance Corp. was founded (over the opposition of bankers, it must be added). Since then, not a penny of depositors' money has been lost, and the banks continue to insure themselves against their own incompetence. The FDIC insurance fund contains about $45 billion, and analysts had feared that the failure of a bank the size of WaMu (it had $188 billion in deposits) would swamp the fund. But the FDIC has a professional staff, run by a highly competent and intelligent manager, Sheila Bair. Having already handled a baker's dozen of failures this year, the FDIC has the drill down. There are also, thankfully, a few competent bankers left in the world. Many of them work at J.P. Morgan Chase, which has agreed to acquire WaMu's business. WaMu's failure will cause real dislocation—stockholders and many bold-holders are likely to be wiped out. But WaMu's depositors will be made whole. The FDIC won't have to dip into the insurance fund. J.P. Morgan Chase is assuming WaMu's troubled mortgage business. It will take a charge for those bad debts and raise new capital from the private sector to deal. It's a big headline and a big story, but in the scheme of things, a blip. A large boat slipping silently below the sea while all the passengers escape with their lives. This system is a force for order…. The other system—the process by which Congress and the White House make legislation—is an OK system in the best of times and a completely FUBAR one at the worst. It has many competent and well-meaning professionals in it. But it also has a bunch of incompetent malefactors.”

Here is a link to this interesting story on slate.com:
http://www.slate.com/id/2201009/

Michael

Full post as published by Texas Lawyer Blog on September 26, 2008 (boomark / email).