In the fall of 2007, when the U.S. economy first seemed in peril, I began answering reader queries here on the Business Desk. I still do so, but this page has expanded to include posts from eminent economists, "far-flung correspondents," and a variety of voices that have intriguing and/or useful things to say about economics, broadly defined. Please feel encouraged to respond to any and all of them.
If Big Banks Were Allowed to Fail, Would the FDIC Need a Bailout?
City & State:
Question: Some have said that big banks, like Citi or Bank of America, should have been allowed to fail. Given their size, could the FDIC really have covered the insured deposits? Or would the FDIC have to have been bailed out, with the possibility of taxpayers not getting the money back?
Paul Solman: The FDIC will not be allowed to fail. So being "bailed out" means, in fact, "replenished." With taxpayer money, of course. Or more debt, OWED by the taxpayers of the future.
Whether or not the FDIC gets money back is an entirely separate matter. It depends wholly on the eventual value of the "assets" (loans) that the FDIC assumes when it takes over a bank. Presumably, they're worth a lot less than the bank put into them. Otherwise the bank wouldn't have gone under. But as we've seen with this week's announcement that the Fed has made some $14 billion on a group of its emergency interventions, a government bailout doesn't necessarily wind up in a loss. (See Monday's Financial Times for a brief, clear write-up of the "profits.")
As to why Citi and/or BofA weren't taken over -- well, the government put money into them, remember, and hoped that would be sufficient. Had they failed, the government felt it would have had an administrative nightmare on its hands. Maybe. Who knows?