FDIC sees rule early next year on dismantling firms

WASHINGTON Tue Aug 31, 2010 5:26pm EDT

Federal Deposit Insurance Corporation Chairman Sheila Bair gestures during a news conference to announce bank and thrift industry earnings for the first quarter of 2010 in the FDIC board room in Washington May 20, 2010. REUTERS/Jonathan Ernst

Federal Deposit Insurance Corporation Chairman Sheila Bair gestures during a news conference to announce bank and thrift industry earnings for the first quarter of 2010 in the FDIC board room in Washington May 20, 2010.

Credit: Reuters/Jonathan Ernst

WASHINGTON (Reuters) - Regulators aim to have a final rule early next year that will lay out how the government can dismantle financial giants if they are headed toward collapse, bank regulator Sheila Bair said on Tuesday.

Bair, who heads the Federal Deposit Insurance Corp, the agency that will be responsible for the resolution authority, said regulators will first issue an interim rule that will be a vehicle for getting more detailed comments.

"There is no wiggle room for bailouts here. No more bailouts. So I think we would like to get an interim rule out fairly quickly," Bair said during an FDIC-hosted roundtable on resolution authority.

Regulators would try to finalize the rule in the first quarter of next year, Bair said..

The roundtable attracted Goldman Sachs Chief Risk Officer Craig Broderick, Citigroup Vice Chairman Hamid Biglari, and JPMorgan Chief Risk Officer Barry Zubrow among others.

Wall Street is scrutinizing how regulators craft the rules on resolution authority, because of the impact it will have on credit ratings and companies' ability to issue debt.

Some of the bankers said they were concerned about different standards in different countries with regard to the resolution authority.

The new authority was given to the FDIC last month in the Dodd-Frank Act, a broad overhaul of financial regulation that aims to prevent many of the problems that arose during the financial crisis.

The law deals with the issue of banks perceived as "too big to fail," in part by forcing financial companies to write living wills that regulators could use to dismantle them if they became insolvent.

The lack of such a mechanism forced the U.S. government to treat shaky financial giants on an ad hoc basis during the crisis -- crafting massive bailouts for companies such as AIG while letting Lehman Brothers collapse.

Financial companies, investors and counterparties are eager for details on how the resolution authority will work, including the treatment of creditors.

Regulators said they want to minimize differences between this new system with how creditors are treated under the existing bankruptcy process.

"Generally the intent of the statute, and if I could state our intent in adopting regulatory things for our board, is to make sure there is parity with bankruptcy treatment of creditors," said Michael Krimminger, the FDIC chairman's deputy for policy, and the panel's moderator.

Mary Schapiro, chairman of the Securities and Exchange Commission; Gary Gensler, head of the Commodity Futures Trading Commission, and Deputy Treasury Secretary Neal Wolin also took part in the discussions.

Bair said regulators have a lot of work ahead of them to lay out the claims priority if a company is dismantled, to determine which non-banks may be systemically important to markets, and to create a framework by which regulators can get real-time information on large companies' counterparties, business lines, and international operations.

"We think it's important to clarify for the market how these rules would work," Bair said during the roundtable.

Bair said the creation of a resolution authority was at the top of the FDIC's wish list for financial reforms, but said she hopes it serves as a precaution.

"I certainly don't anticipate having to use this any time in the near term or perhaps never," she said.

(Additional reporting by Karey Wutkowski; Editing by Steve Orlofsky, Leslie Gevirtz)

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