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FDIC Still Plans 'Too Big To Fail' Action

The FDIC punted a decision on 'too big to fail' , giving a new regulatory commission more time.



) -- In the first sign of regulatory bureaucracy stemming from the Dodd-Frank bill, the

Federal Deposit Insurance Corp.

punted a decision on "too big to fail" until next week, giving a new regulatory commission time to weigh in on the decision.

On Monday, the FDIC's board delayed a vote on the issue after staffers presented a draft proposal. The board cited a request by the Financial Stability Oversight Council for more time to review issues surrounding regulators' new resolution authority.

FDIC Chairman Sheila Bair has been a big advocate of ending the "too big to fail" issue, and related bailouts, as quickly as possible.

"The FDIC strongly believes that it is essential that these regulations be in place as soon as feasible to enhance preparedness for any future crisis," Bair said during testimony before the Financial Crisis Inquiry Commission on Sept. 1. "These resolution plans will help to ensure that systemically risky companies take responsibility for reassessing the complexity of their operations and the risks it creates for the firm and the financial system."

During financial-reform proceedings, Bair was the champion of a so-called "bank funeral" measure, which requires large financial firms to plan their own liquidations. She also advocated for the resolution authority that the Dodd-Frank measure ultimately granted to an assortment of regulators. The Federal Reserve must determine which institutions are "too big to fail," while the FDIC will be in charge of liquidating or selling firms that are about to collapse. They must work hand-in-hand with the newly formed Financial Stability Oversight Council, which has 10 voting members from different regulatory agencies and is charged with monitoring systemic risk.

Regulators have 18 months to get all the processes in place from July 21, when President Obama signed the bill into law. However, Bair has said she'd like to work quickly on hammering out the details because of the importance of the issue. The disorderly collapse of Lehman Brothers turned the markets into a free-for-all and bailouts of other giant firms have angered the taxpaying public - particularly the most expensive ones, of

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, which quickly turned profits after relying on bailout crutches to survive.

But Bair's wish for speedy action seems to have been stymied by the tangled web of regulators that must now consult with one another before making any grand decision. The oversight council doesn't hold its first meeting til Oct. 1.

The council is chaired by Treasury Secretary Timothy Geithner, who has often been at odds with Bair's grassroots policy goals. Its voting members also include Fed Chairman Ben Bernanke;

Securities and Exchange Commission

Chairman Mary Schapiro; John Walsh, the acting comptroller of the currency; Gary Gensler, chairman of the Commodity Futures Trading Commission; Edward J. DeMarco, acting director of the Federal Housing Finance Agency; Debbie Matz, chairman of the National Credit Union Administration.

Also among voting members are the yet-to-be-named director of the Bureau of Consumer Financial Protection, which is only in its early stages of development, and a yet-to-be-named independent member whom the president must choose and Congress must approve. There are also five non-voting members: The yet-to-be-named director of the yet-to-be-created Office of Financial Research; the yet-to-be-named director of the yet-to-be-created Federal Insurance Office; a state insurance commissioner; a state banking supervisor; and a state securities commissioner. John Huff, who heads Missouri's insurance department, William Haraf, who heads California's banking agency and David S. Massey, who heads North Carolina's securities agency, will be filling those roles.

Ultimately, the FDIC must decide how various creditors are treated in a liquidation process - something the investment and financial industry has expressed concern about. Bair hasn't expressed much sympathy for creditors and shareholders and seems inclined to move toward a bankruptcy-like process in which most stakeholders are wiped out.

It's also unclear how the FDIC will go about selling or winding down firms that have multi-trillion-dollar balance sheets.

At an event on Sept. 14, JPMorgan CEO Jamie Dimon poked fun at the complexities with

a slide showing an array of regulators connected by multi-colored lines titled "strengthened, but not simplified." He pointed out that there will be 285 rule makings, 95 studies and 44 periodic reports stemming from the Dodd-Frank legislation.

"I put this slide and the next one in for fun," said Dimon. "This is our regulatory system."

"We wished it had been simplified...

and I think some of them were ill-conceived," he went on later. "That is life. We all have to deal with legislation that we maybe don't agree with."

Getting all the various constituencies in line for a hot-button issue like "too big to fail" will be a difficult task to achieve in the full 18 months, much less a single board meeting. Yet the FDIC says it plans to vote on the matter next week and have the process in place by the first quarter of 2011.

-- Written by Lauren Tara LaCapra in New York


Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.