Financial reform this week: How to handle a Too Big To Fail bank near collapse

Introduction

An all-star panel of economists, fund managers, bankers and finance experts meets Tuesday to advise the Federal Deposit Insurance Corp. on some of the difficulties it will face the first time the agency has to unwind a Too Big To Fail bank.

Former Fed Chairman Paul Volcker, Standard & Poor’s President Deven Sharma, MIT economist Simon Johnson, and former Citigroup Inc. Chairman John Reed are among the 18 members of the FDIC Advisory Committee on Systemic Resolutions. Others include senior executives of BlackRock, Depository Trust & Clearing Corp., the California Public Employees’ Retirement System (CalPERS), Glass, Lewis & Co. LLC, and Freddie Mac.

Panel member Anat Admati of Stanford University recently rallied other influential economists to argue that tougher capital requirements were essential to reduce banks’ leverage and prevent future crises.

The Dodd-Frank financial reform law gave the FDIC new authority to step in when a giant financial institution is teetering and map out an orderly resolution plan to sell its assets without resorting to fire-sale prices. That was a key issue during the financial meltdown in 2008 when several large institutions such as Merrill Lynch, Countrywide, and Washington Mutual saw their liquidity and stock prices rapidly plunge, forcing the government to hurry to find a buyer.

The panel “brings together some of the best and brightest minds to augment the groundwork that the FDIC has already put in to place to handle an extremely large and complex failure,” FDIC Chairman Sheila Bair said earlier this month when announcing the creation of the advisory group.

Some of the knottiest problems the FDIC will ask the committee for help with include what tools are needed to work with foreign governments when a big U.S. bank with global businesses fails; the impact that resolution strategies will have on the bank’s customers; and how to unwind derivatives contracts in an orderly way.

One session at the meeting will look at how Lehman Brothers Holdings Inc. could have been liquidated under the FDIC’s new resolution authority.

Other Congressional hearings, rulemaking deadlines and events related to the Dodd-Frank reform law this week:

Monday, June 20

Home Loan Banks – Effective date for Federal Housing Finance Agency’s new investment limits on mortgage-backed securities and asset-backed securities that can be held by Federal Home Loan Banks.

Tuesday, June 21

TBTF advisory panel – Federal Deposit Insurance Corp’s new Systemic Resolution Advisory Committee holds first meeting. Members include economist Simon Johnson, BlackRock senior managing director Peter Fisher, Standard & Poor’s President Deven Sharma, ex-Citigroup Chairman John Reed, ex-Fed Chairman Paul Volcker, ex-SEC Chairman William Donaldson,. Begins 0830 ET and will be webcast.

Investor education – Deadline for public comments on the Securities and Exchange Commission’s mandated study of effective ways to educate investors. The SEC study must be sent to Congress by July 21, 2012.

Wednesday, June 22

Hedge fund regulation – Securities and Exchange Commission meets to vote on whether to require advisers to hedge funds and other private funds to register with the SEC, and whether to exempt from registration advisers to venture capital funds with less than $150 million. Begins at 1000 ET and will be webcast.

Republican bill-writing – House Financial Services Committee drafts bill to repeal or amend various sections of the Dodd-Frank law, including exempting private equity fund advisers from having to register with the Securities and Exchange Commission.

Bank lending – Treasury Secretary Tim Geithner testifies at a House Small Business Committee hearing on the current state of small business access to equity capital and debt financing. Begins 1000 ET and will be webcast.

Fed news conference – Federal Reserve Chairman Ben Bernanke holds quarterly news conference after the Fed’s Open Market Committee meets to set interest rates.

GM bailout – House Oversight and Government Reform subcommittee holds hearing on the lasting implications of the taxpayer bailout of General Motors Inc. Begins at 1330 ET.

FDIC’s changing role – House Oversight and Government Reform subcommittee holds hearing on the changing role of the Federal Deposit Insurance Corp. Begins 1330 ET.

Thursday, June 23

Short selling – Deadline for public comments on the Securities and Exchange Commission’s studies of short sale positions, and whether to conduct a voluntary pilot program in which companies would agree to publicly disclose in real-time trades of shares marked as “long” or “short.”

Friday, June 24

FDIC chief – Federal Deposit Insurance Corp. Chairman Sheila Bair, who ends her term on July 8, speaks at National Press Club’s newsmaker lunch. Remarks begin at 1300 ET and will be webcast on www.press.org

Mutual fund investors – House Financial Services subcommittee holds hearing on oversight of the U.S. mutual fund industry to ensure investor confidence. Begins 1400 ET.

Derivatives capital requirements – Deadline for public comments on a proposal by banking regulators to set margin and capital requirements for swap dealers and major swap traders. The margin required by the proposal would vary based on the risk of the counterparty and the transaction. No margin would be required from a commercial end user as long as its margin exposure is below an appropriate credit exposure limit established by the swap entity.

Credit union insurance – Effective today, the National Credit Union Administration fully insures the net amount that any depositor maintains in a noninterest-bearing transaction account, as required by the Dodd-Frank law.