A top FDIC official is prepared to tell the House Financial Services Committee that Wall Street is not too big to fail - meaning, bailouts no longer are an option.  Michael Krimminger, the FDIC general counsel, says the agency wants all market players to understand that new policy.

According to Dealbook's Ben Protess, Mr. Krimminger's position is a sharp turnaround from 2008, when the nation’s economy teetered on the brink of collapse.  At the time, Washington enacted a $700 billion bailout for banks, the automotive industry and the giant insurer American International Group. Policymakers argued that they had no choice but to rescue the firms because they were so large and interconnected that their collapse would have caused the nation’s economic downfall.

“Such a presumption reduced market discipline and encouraged excessive risk-taking by firms.”  -- Michael Barr, former assistant Treasury Department secretary, now a law professor at U. of Michigan. 

In the aftermath of the financial crisis, Mr. Barr was a leading architect of the Dodd-Frank Act, which aimed to rein in derivatives trading, mortgage securities and other risky Wall Street businesses.  The law, according to Mr. Krimminger, ended the era of bailouts, too, noting:  "The Dodd-Frank Act expressly bars any bailout and prohibits taxpayers from bearing any losses."

Financial Stability Oversight Council.   Dodd-Frank, for instance, created this panel of regulators who will keep an eye on the nation’s biggest and riskiest companies.  It will designate specific financial firms - including MF's, insurance companies and HF's - that pose a systemic risk to the financial system. These firms, and banks like Goldman Sachs that have more than $50 billion in assets, will face tougher federal oversight and higher capital requirements.  The plan, regulators say, will prevent a repeat of the chaotic Lehman Brothers bankruptcy.

So-called "systemically important financial institutions," or "SIFIs," must also create a “living will” that spells out how the firms could be unwound through bankruptcy if they fall on hard times.  And, if the FDIC or Federal Reserve concludes that a firm’s plan is not “credible,” the regulators may force the company to shed some of its riskier assets or operations, Mr. Krimminger said.

Some Republicans and financial industry executives counter those arguments, saying that “systemically important” labels reinforce the too-big-to-fail problem, while others note that bankruptcy filings by complicated and huge institutions - a la Lehman - can cause markets to panic.

Dodd-Frank Alternative.   "Orderly liquidation authority" under the Act” gives the FDIC receivership power over firms that are on the brink of collapse, similar to the agency’s role when a local bank fails.  Critics contend that the process would give the government the arbitrary authority to decide when a firm lives and dies.  Some also say it will force a fire sale of a failing firm’s assets.  Mr. Krimminger reassured lawmakers that the concerns did not have “any basis in reality,” adding that:

“This orderly liquidation authority effectively eliminates the implicit safety net of ‘too big to fail’ that has insulated these institutions from the normal discipline of the marketplace.”   

For further details, go to:   [Dealbook, 6/14/11, "Regulator: Wall Street.."]