How bailout plans have changed

Flags fly over the Federal Reserve Building on December 16, 2008 in Washington, D.C.

Jeff Horwich: The stabilizing election result in Greece does not change the reality that banks are on the brink in a number of European countries. And there's hot debate in Europe over just how much the European Central Bank should do to prop up, back-stop, bail-out. That's a problem we can relate to here in the states.

Fortune magazine senior editor-at-large Allan Sloan is here with me now -- good morning, Allan.

Allan Sloan: Good morning Jeff.

Horwich: So take us back to our own American bailout -- 2008. What was the roll that our central bank, the Federal Reserve, played in all of that.

Sloan: What it did was, it invented ways to put money into institutions that it technically didn't deal with. So, it put money into AIG and stopped a complete collapse; it put money into Bear Stearns and stopped a complete collapse. It did not put money into Lehman Brothers, and there was a complete collapse that scared everybody so badly that they didn't allow that stuff to happen anymore.

Horwich: So I gather from what you've been writing lately, that you're worried that if and when we faced another financial crisis, the Fed could not or would not play that critical role -- that it's been pushed out of the bailout business. What's happened?

Sloan: There was this Dodd-Frank reform legislation, which -- because of annoyance at the way the Fed just kept making up stuff and doing what it did -- now, when a large institution is on the brink of collapse, there's a very complicated method involving the Federal Deposit Insurance Corporation and the Treasury and all sorts of stuff. And this is supposed to stop a complete calamity from happening, while punishing the guilty.

The problem is, the Fed can just do stuff, and it doesn't have to go around to talk and make any deals. And this stuff is all going to become complicated and slow and political, so if there's a real crisis, you know, the problem is that you don't have anybody who could just deal with it.

Horwich: You're worried that the Fed can't execute a bailout. It seems to me the whole point of this Dodd-Frank arrangement is that we don't want a bailout; we want to prevent a crisis, if possible, and then we want to wind firms down in an orderly fashion if necessary -- not bail them out. What am I missing here?

Sloan: Well, if you look at what actually happened, the shareholders of many of the big firms were essentially wiped out. I'm all in favor of wiping out the people who lent money to these institutions. The problem is, excluding the Fed specifically is going to make things much more complicated. I don't know what the next one's going to be, but it's going to be really ugly.

Horwich: Allan Sloan, senior editor-at-large Fortune magazine. Great to talk with you, thanks very much.

Sloan: My pleasure, Jeff.

 

About the author

Jeff Horwich is the interim host of Marketplace Morning Report and a sometime-Marketplace reporter.

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