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March 19th, 2009

Fed. Gov. Seeking FDIC-Like Power Over Institutions

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According to information obtained by CNBC, President Obama has asked members of Congress to “fast-track” a legislation that would allow the Federal government to take over large financial institutions — much in the same way the FDIC does with commercial banks:

Such authority would allow the government to seize control of [bank holding] companies that posed a risk to the system and unwind their businesses in an orderly, yet expeditious fashion. Such authority would presumably allow the government to amend contracts, as necessary.

When a commercial bank is seized by the FDIC, the bank is either temporarily kept open until the pre-arranged buyer resumes the bank’s functionality or the FDIC closes the institution and repays depositors. Since no temporary system is currently in place for failing bank holding companies — the parent institutions of commercial banks — the only legal option is bankruptcy proceedings:

The legislation now in development would apply to companies that represent a systemic risk to the financial sector and the overall economy and would thus include companies such as the insurer AIG, which the government has poured tens of billions of dollars into to help avert its failure, and Citgroup, which has a huge non-banking operation, including investment and insurance services.

It’s arguable that the new administration’s intentions of reforming the financial industry were hastened by the AIG debacle. The government is tightening its grip of influence on financial institutions — and the presumed authority to “amend contracts” could very well ensure that these issues don’t arise again.

“These types of sweeping powers can either be used for the public good or the detriment of the private market,” said HSH Vice President Keith Gumbinger.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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