Should the FDIC simply pull the pin on all non-performing assets? I don’t think its wise and I agree that the moral hazard aspect is outweighed by the concomitant implosion of hundreds, if not thousands, of lending institutions. That’s why I favored Bernanke’s approach, even while agreeing with him when he said he “held his nose” during the AIG bailout.
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The FDIC is basically grouping problem banks into three categories:
(1) Too big to fail (the 20 largest)
(2) Screwed up, but should be o.k. if we just give them a little forebearance and breathing room
(3) Too fucked up to save
The real trick is between groups (2) and (3) because a number of banks could go either way. The FDIC announcement in this thread basically pushes some banks that would have been in group (3) back into group (2).
The FDIC are behind the curve but they’re not complete idiots. The know that a lot of banks must fail (and they’re going to fail). But they also know that a number of banks can be saved if some tweaks are made in the regs.
So, to get to your question, I think the FDIC is basically going through the various asset classes and deciding what’s beyond saving (e.g., most defaulted construction and development loans) and what can be saved (e.g., cash-flowing CRE). It’s applying the same analysis to individual institutions. It ain’t pretty and it ain’t perfect, but it’s a fairly pragmatic way of handling a bad situation.
I think what’s coming down the pike for the Too Big To Fail Banks is MUCH higher capital requirements. But that’s not going to happen immediately. That will get sprung on these companies after they’re in better shape.
