The Dodd Bill: Bailouts Forever

The Wall Street Journal reports:

There are many reasons to oppose Sen. Chris Dodd's (D., Conn.) financial regulation bill. The simplest and clearest is that the FDIC is completely unequipped by experience to handle the failure of a giant nonbank financial institution.

The country should be grateful for the determination with which the FDIC Chair, Sheila Bair, has thus far guided the agency through the financial crisis. But it is wrong to think that because the FDIC can handle the closure of small banks it is equipped to take over and close a giant, nonbank financial firm like a Lehman Brothers or an AIG.

Consider first that the largest bank the FDIC closed in the recent financial crisis, IndyMac, had assets of $32 billion. The largest bank ever to fail, Continental Illinois in 1984, had assets of $40 billion. At $639 billion, Lehman Brothers was nearly 15 times bigger; AIG had over $1 trillion in assets when it was kept from failing by the Federal Reserve.

The assets of a large, nonbank financial institution are also different. Neither Lehman nor AIG had insured depositors—or depositors of any kind—and their complex assets and liabilities did not look anything like the simple small loans and residential and commercial mortgages the FDIC deals with.