This mornings must read piece is Joe Nocera’s exit interview with FDIC Chair Sheila Bair in the NYT Sunday Magazine: Sheila Bair’s Bank Shot
“They should have let Bear Stearns fail”
Market discipline meant bank “shareholders and debt holders would take losses ahead of depositors and taxpayers”
The F.D.I.C. should wind down, not bail out, TBTF banks.
[Treasury & Fed] requests were excessive, putting taxpayers at risk while bailing out undeserving debt holders.
and these are the coup de grâce:
“Let’s face it,” she said. “Bear Stearns was a second-tier investment bank, with — what? — around $400 billion in assets? I’m a traditionalist. Banks and bank-holding companies are in the safety net. That’s why they have deposit insurance. Investment banks take higher risks, and they are supposed to be outside the safety net. If they make enough mistakes, they are supposed to fail. So, yes, I was amazed when they saved it. I couldn’t believe it. When they told me about it, I said: ‘Guess what: Investment banks fail.’ ”
“When the F.D.I.C. shuts down a failing bank, the unsecured bondholders always absorb some of the losses. That is the essence of market discipline: if shareholders and bondholders know they are on the hook, they are far more likely to keep a close watch on management’s risk-taking.”
Go read the whole thing NOW!
Sheila Bair’s Bank Shot
NYT, July 9, 2011