It's been said that Wall Street has a "gun to our head", threatening a financial Armageddon if they are not bailed out. The failure of Lehman Brothers last fall is commonly cited as proof. But we should realize that Lehman Brothers was not a regulated commercial bank; it was an unregulated investment bank. Therefore, the federal government had no authority to put it into receivership in order to effect an orderly wind down. There are no more investment banks on Wall Street. They all either failed (Bear Stearns, Lehman), merged with commercial banks (Morgan Stanley), or converted into commercial banks (Goldman).
What's left are five major federally-regulated commercial banks: Citi, BofA, JP Morgan Chase, Goldman Sachs and Wells Fargo. The federal government has the authority to take any or all of them over and wind them down in an orderly fashion. What would that look like? Over the jump . . . (with a personal anecdote, as a customer of a failed bank).
In contrast to the Lehman Brothers experience, we also experienced last fall the failure of the fourth and sixth largest regulated commercial banks.
Let's take WaMu first:
As of June 30, 2008, Washington Mutual Bank had total assets of $307 billion. It was servicing for itself and other banks loans totaling $689.7 billion.
http://en.wikipedia.org/...
This was the nation's sixth-largest bank, hundreds of billions in deposits. What happened?
On September 25, 2008, the United States Office of Thrift Supervision (OTS) seized Washington Mutual Bank from Washington Mutual, Inc. and placed it into the receivership of the Federal Deposit Insurance Corporation (FDIC) . . . The FDIC sold the banking subsidiaries (minus unsecured debt or equity claims) to JPMorgan Chase for $1.9 billion, which re-opened the bank the next day. The holding company, Washington Mutual, Inc. was left with $33 billion assets, and $8 billion debt, after being stripped of its banking subsidiary by the FDIC. The next day, September 26, Washington Mutual, Inc. filed for Chapter 11 voluntary bankruptcy in Delaware, where it is incorporated.
I can personally testify to the fact that, as a Washington Mutual customer and cardholder myself, I suffered not a single iota of inconvenience when it failed -- no effect on my savings, my checking account, my ATM, my credit cards, or those of anyone else's.
Let's look at Wachovia, previously the nation's fourth-largest bank holding company:
On the morning of September 29, the FDIC board, acting under a 1991 law empowering it to deal with large bank failures on short notice, voted to order Wachovia to sell itself to Citigroup. The FDIC's open bank assistance procedures normally require the FDIC to find the cheapest way to rescue a failing bank. However, the FDIC bypassed this requirement after determining that a potential failure of Wachovia posed a "systemic risk" to the health of the economy. Steel had little choice but to agree, and the decision was announced roughly 45 minutes before the markets opened.
However . . .
However, on October 3, 2008, Wells Fargo and Wachovia announced they had agreed to merge in an all-stock transaction requiring no FDIC involvement, apparently nullifying the Citigroup deal. Wells Fargo announced it had agreed to acquire Wachovia for $15.1 billion in stock.
. . .
The Federal Reserve approved the merger with Wells Fargo on October 12, 2008.
Again, according to all reports, not a single person that lost access to their savings, checking, or credit card accounts for a single moment as a result of Wachovia's failure.
We can also go back to the 80's S&L where 8000 banks failed and again not one single person lost one single penny of insured savings.
Would it be a challenge for the federal government to orchestrate a takeover of a Citigroup or BofA? Of course it would. But do I believe that they could pull off a sudden wind down of the fourth and sixth largest banks, not to mention 8000 banks during the S&L crisis, with zero inconvenience or loss to the general public, but somehow if the number two and three banks go down it's Armageddon, no I don't believe that, not for a minute.