I think on this matter, this American Banker interview with Sheila Bair is instructive: But does this bill stop them from happening?
BAIR: It makes them impossible and it should. We worked really hard to squeeze bailout language out of this bill. The construct is you can’t bail out an individual institution — you just can’t do it. In a true liquidity crisis, the FDIC and the Fed can provide systemwide support in terms of liquidity support — lending and debt guarantees — but even then, a default would trigger resolution or bankruptcy.
Would the Fed’s 13-3 emergency powers allow a bailout?
BAIR: Not for an individual institution, no. This is more like the debt guarantee program, or the Transaction Account Guarantee program, which we just extended yesterday. It’s for those types of programs. … This would only help healthy institutions. And if there were a default on those programs, it would automatically trigger resolution or bankruptcy and the government would have priority claim off the top.
But if we ran into the same kind of situation as 2008, won’t the government find some way to prop up the big banks if several were in danger of failing?
BAIR: If there is a true systemwide problem, that’s why you have systemwide liquidity support — through either a debt guarantee program or lending program by the Fed. It would have to be generally available. Again, if there is a default on it, that automatically triggers a bankruptcy or resolution; regulators can decide which.
Me: If multiple banks get in trouble, government does have the option of giving them support. But more importantly, does Wall Street believe it would be bailed out, even if it meant Congress bypassing the law or changing it on the spot? If you look at the cost of bank funding, it seems clear that the implicit Too Big To Fail guarantee still exists. And a gaggle of regional Fed bank presidents agree.