FDIC Chair Advocates Bail Out to Save Insolvent Banks' Bondholders

In yet another act showing complete disregard for market discipline, fiscal restraint or prudence with taxpayer funds, FDIC Chair Sheila Blair is advocating for the taxpayers to spend more money to buy bad assets from insolvent banks. Blair claims the Bad Asset Plan will jumpstart the economy.  

FDIC chairman Sheila Bair told the newspaper that the cost might exceed the $700 billion Congress approved to bailout the U.S. financial system and that the greatest challenge is persuading banks and taxpayers to accept the necessity of the costly program.

"This takes courage to do, but if we don't do it, history shows that this kind of mechanism -- recognize the losses, get at the root of it and move on -- this is how you jump-start the economy," she said in a discussion with Washington Post reporters and editors. "The other option, just to park those assets on the balance sheet, I don't think that gets us very far."

In other words, instead of letting the insolvent banks and shareholders take the losses, the FDIC is suggesting to let the taxpayer take the losses.  The Calculated Risk Blog posted an excerpt from a 60 minutes article showing the FDIC seizing a bank.  In the excerpt, Blair admits that the government seizes and closes down small banks, but is ill equiped to close larger banks.  

So instead of liquidating the larger banks, we keep funneling more and more taxpayer dollars to support these insolvent institutions.  Buying "troubled assets" - which are nothing more than bad loans and bad investments - is subsidizing the loss. We tried before to purchase the loans and realized there was a disagreement as to value.  Bernanke wanted to buy the assets at a premium over current value in order to induce the banks to sell.  Blair is proposing more of the same.  

Make no mistake about it, capital infusions into these financial institutions as well as premium purchases of bad loans is the use of taxpayer funds to bail out bondholders and stockholders.  It is not making sure innocent depositors are made whole.  The ramifications to the financial system are not devistating.  Certainly, no one is advocating a disorganized, free-for-all liquidation of the banks, but if we are using government resources at all, it should be to facilitate an orderly break-up of the companies,  sell off the assets, and let the bondholders and stockholders take the losses.  Not the taxpayer.