Is the FDIC’s ‘Single-Point’ Resolution Plan a Stealth Bailout?
By Joe Adler
Even if the Federal Deposit Insurance Corp.’s strategy detailing how it would seize and dismantle a troubled megabank works as promised, experts are worried it could be perceived as a stealth bailout by the government. Under a plan detailed on Tuesday, the agency would use Dodd-Frank’s “orderly liquidation authority” to wipe out a failed parent company along with shareholders while preserving and restructure subsidiaries in a bridge funded by creditor haircuts and industry-backed government loans. The result would be a new, safer holding company under new management and ownership. The strategy document has sparked questions about whether it can actually work, but even if it does, some warn that a system in which remnants of the old company survive could make it unpopular. But other outside observers said the expectation that all remnants of the prior company would be wiped from memory is naïve. Karen Shaw Petrou, managing partner at Federal Financial Analytics, said the concern Volcker raised makes political sense, but that he was “substantively wrong.” “The goal of Dodd-Frank — ill-expressed in some ways — was not necessarily liquidation or resolution. Dodd-Frank’s goal was ‘bankruptcy-plus,'” she said in an interview. “I don’t think the law then says the ‘plus’ must be … vengeful or destructive in that you need to make the entity go away.”