Some revisionists, like Tim Geithner, would want you to believe that if only regulators had FDIC-like wind-down authority for big institutions, the crisis could have been handled a lot better.
The ability to have wound down Citigroup in some methodic way would have accomplished nothing. It might have even made the problem much worse.
First, the big problem we faced was not an ability (or inability) to wind-down large institutions. The concern was whether the failure of said institutions (AIG, Citigroup, etc.) would have crippled their counterparties, leading to a horrible chain reaction in the financial sector.
Regulators would still need to have made the decision: Do we pay off AIG’s counterparties or don’t we? Do we pay off Citigroup’s (C) counterparties or not? Wind-down authority doesn’t make these questions any easier to answer. Not even slightly.
Second, it’s easy to see how things could have been made worse if regulators could more easily pull the plug on major firms. During the crisis, the threat of nationalization was one of the big fears among investors. Imagine how much more heightened fears would have been if, say, Sheila Bair could have pulled the plug on Citigroup or Bank of America with easy over the weekend?
Let’s deal with the problem of too-big-to-fail directly, and not come up with some measure that doesn’t begin to address our challenges.
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