FDIC Posits Alternate History for Lehman Collapse

Would new powers have made a difference?

By Joe Adler

To support its case that the Dodd-Frank Act has ended “too big to fail,” the Federal Deposit Insurance Corp. engaged in an activity usually reserved for Civil War buffs, painting an alternate history detailing how it might have handled the collapse of Lehman Brothers if its new powers had been in place.

In a study released Monday, the FDIC argued that had the regulatory reform regime been law in 2008, market chaos would have been avoided and losses would have been smaller. The study also provides specifics on how the FDIC intends to use its additional authority in a real-world scenario, including resolution of creditor claims and marketing the institution to bidders.

The study is “clearly designed to validate the [resolution] approach … against all of the assertions that continue that Dodd-Frank permits bailouts,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc. “This is a highly, highly complicated new regime with a lot of unanswered questions.”