The Obama Administration tried to portray the plan as no big deal, akin to simply filling in a loophole. The idea was to provide the FDIC with authority to seize failing “non–banK” financial institutions such as holding companies, insurance firms and hedge funds, similar to the powers they already have to take over failing banks. Such power, it argued, is necessary to avoid disruptive failures of huge institutions, which could threaten the financial institution as a whole. In particular, the Administration pointed to the AIG debacle, saying that the proposed new powers would have allowed the government to wind down the affairs of that firm more smoothly.
But, to the White House’s chagrin, Rep. Barney Frank yesterday said he would delay consideration of the idea in the House, likely for several months. As it turned out, the case for the new powers wasn’t as clear as supporters claimed, as outlined here and by Peter Wallison of the American Enterprise Institute. Not only did the idea of government takeover of “failing” (read: “not yet failed”) institutions raise constitutional qualms, but the broad ranging discretion to be exercised by the FDIC and others — free from the norms associated with the establish bankruptcy process — raised legitimate fears. The Administration did get points for acknowledging that failure must be an option for troubled firms. But the proposal as a whole seemed less an alternative to further bailouts than a way to grease the track for them to proceed.
Still, despite the problems, Frank isn’t yet rejecting the idea. Instead, he says it will be considered later as part of a broader package addressing systemic risks. Stay tuned.