In praise of the FDIC
As readers know I think the FDIC did a terrible job with the WaMu takeover. In the WaMu case the FDIC without seemingly any justification and with no appeal took away the rights of the senior creditors.
My view is that the financial crisis will be over when people will lend unsecured to US financial institutions and not before.
Removing the rights of unsecured lenders without appeal hardly aids that cause. The FDIC thus made it much worse.
With Wachovia it was again open to the FDIC to confiscate Wachovia and sell it without the acquirer taking over the obligations to senior bond holders. This would mean that the government would have got away without risk of loss.
Instead Citigroup has assumed those obligations. The FDIC has offered (for a large fee of 12 billion in Citi preferreds) an insurance policy against fat-tail losses at Wachovia. It has – admittedly at some risk to government – not removed rights from the senior.
This is a darn good thing for America because the sooner the government protects the rights of the senior the more likely it is that people will lend again to American financial institutions. And when American financial institutions can borrow again the crisis will be over.
On Friday I did not think the FDIC was that competent or creative.
I am eating my words now. I withdraw my call for Sheila Bair to be sacked.
John Hempton