FDIC chief says financial regulatory reform bill ends taxpayer-funded bailouts

Taxpayer-financed bailouts would end under pending financial regulatory reform legislation being worked out in the Senate, according to a leading federal regulator.   

The measure is under fire from Republicans including Senate Minority Leader Mitch McConnell (R-Ky.) have argued that the bill perpetuates bailouts and he is trying to mount support against it. Republicans and Democrats are trying to get back to the negotiating table to work out major details. 

The bill "makes them impossible and it should," said Shelia Bair, chief of the Federal Deposit Insurance Corp., in an interview with The American Banker. "We worked really hard to squeeze bailout language out of this bill. The construct is you can't bailout out an individual institution, you just can't do it."

If the bill were in place in 2008 it wouldn't have been possible to help AIG or Bear Stearns because the bill provides only systemwide liquidity support and could not be targeted at an individual or firm. The bill would goes a long way to end "too big to fail," she said. 

"You can't do capital investments at all, period," she said. 

During a conference call Thursday morning with reporters, Republican staffers noted several provisions that would allow for the FDIC and the Treasury Department to decide which failing or struggling firms to help. They said the bill also anticipates that more bailouts will be needed down the road. 

There's a moral hazard with the language that would allow financial firms to continue to take on risk knowing there is help available, the staffers said. 

In a liquidity crisis that the FDIC and the Federal Reserve could provide systemwide support in "terms of liquidity support -- lending and debt guarantees -- but even then, a default would trigger resolution or bankruptcy," Bair said. 

The FDIC has always chosen creditors to pay back in a resolution, Bair explained. She said when bridge bank is set up when a bank is closed to maintain critical functions designed to "preserve value of assets to benefit all creditors." That doesn't include bondholders or shareholders, she said. 

"We will keep them running while your shareholders and debtors take all your losses," she said. "And oh, by the way, we are getting rid of your board and you, too. The whole idea is to get market discipline back."