FDIC's Bair: 'Too Big to Fail' Must End

By Marcy Gordon

WASHINGTON -- The head of the Federal Deposit Insurance Corp. said Thursday that the government's strategy in the financial crisis of bailing out huge institutions deemed "too big to fail" must be replaced by a new model.

FDIC Chairman Sheila Bair told Congress a new system of supervision that prevents institutions from taking on excessive risk and becoming so large their failure would threaten the financial system is needed. A mechanism is needed to resolve troubled financial institutions similar to what the FDIC does with federally insured banks and thrifts, she added.

Testifying at a packed Senate Banking Committee hearing, Bair said simply creating a co-called systemic risk regulator -- a central idea in the discussion of overhauling the U.S. financial rules -- "is not a panacea."

Bair appeared with other top regulators to discuss the high-stakes issue of modernizing oversight of America's financial institutions amid the crisis gripping the U.S. and the global economies.

The government's rescue of insurance giant American International Group Inc., its pumping of tens of billions of dollars into Citigroup (C) and Bank of America (BAC) in more than one instance, and other actions in the crisis have put a "too big to fail" stamp on U.S. policy.

The committee's chairman, Sen. Christopher Dodd, said that possibly the most important lesson to take from the crisis is that "no institution should ever be 'too big to fail.'"

"Replacing Citibank-sized financial institutions with Citibank-sized regulators would be a grave mistake," he said.