Our hero of the day is Sheila Bair, the Chairman of the Federal Deposit Insurance Corporation, the agency that insures bank deposits and regulates many large banks. It's supposed to be an "independent agency" and she's actually displaying some independence from the Obama White House and Treasury. She said recently that the notion of "too big to fail" should be cast into the dustbin. The departed, but still here in spirit Bush Treasury Secretary Hank Paulson, his former partner and successor Tim Geithner, and the eternal Ben Bernanke, Chairman of the Federal Reserve are true believers in" too big to fail." How dare Sheila challenge the principle at the heart of our financial crisis policies? What will she do next, tell the Pope to drop that Holy Trinity stuff?
"Too big to fail" has worked wonders for the managements, highly-paid employees, shareholders, and especially bond holders (are you happy now Bill Gross? How many billions do you need, anyway?). Sheila has retrieved the lost second part of the concept -- "too big to fail overnight."
Nothing wrong with putting Citibank, AIG, Bear Stearns, Lehman, etc etc, into conservatorship the way lesser banks and thrifts get treated by the FDIC.
Yes, it might take a few years to wind them down in an orderly fashion. People who made bad investment decisions would suffer, but the markets would not seize up because the failed institutions would still be open and operating while they were being given a decent burial.
I guess Sheila Bair never worked for Goldman Sachs or she would understand who really wins from too big to fail.