FDIC chair: "We need to end 'too big to fail' "

Good.<blockquote>ISTANBUL (Reuters) – The head of the U.S. Federal Deposit Insurance Corp. said on Sunday that she wanted to end the "too big to fail" doctrine and shrink the shadow banking system that operates outside the reach of regulators.

FDIC Chairman Sheila Bair, speaking to the Institute of International Finance meeting here, said a U.S. proposal to create the authority to shut down failing systemically important financial firms may need to be extended to insurers and hedge funds.

"We need to end 'too big to fail' and this needs to be an overarching policy that applies to everyone," Bair said.

Bair said she believed that bank holding companies with subsidiaries that are shut down by regulators also should be made to pay the price of failure by being subject to the same wind-down process.

"I believe that the new regime should apply to all bank holding companies that are more than just shells and their affiliates regardless or not whether they are considered to be systemic risks," she said, adding that including only systemically important firms in the shut-down regime could reinforce the 'too big to fail' doctrine.</blockquote>http://news.yahoo.com/s/nm/20091004/bs_nm/us_imf_usa_bair_3

 

"Too big to fail" encourages excessive risk because there is no possibility of failure -- you know the taxpayers are going to bail you out if your investments/risks go bad.

That's precisely why the mortgage market collapsed. There was an implicit belief that Fannie/Freddie would get a taxpayer bailout (which it did), which encouraged ridiculously excessive risk in mortgage lending, which led to more issues.

 

Works for me. Maybe that will bring some reason back into the process.

 

Precisely why? Please. The Fed had the ability to step in at any time while the mortgage bubble was building to stop the high-risk, sub-prime lending practices that disproportionately affected lower middle class, first-time home buyers.

Alan Greenspan could have invoked the 1994 Home Ownership and Equity Protection Act -- which obligates the agency to stop unfair and deceptive lending practices by federally and state-regulated mortgage lenders -- at any point from, say, 2003 on, but instead did nothing. When the Fed raised interest rates to stave off inflation, the foreclosures began to mount. By then, it was too late.

 

All laws should be enforced fairly and uniformly.