Failure on a Level Playing Field
The modern history of US government policy toward the failure of financial firms is marked by a series of milestones: the 1933 banking crisis is one, but several others loom as large. Among them are the failure of Penn Square Bank, the first $100 million bank to be liquidated, in 1982, the bailout of Continental Illinois, at the time the nation’s seventh largest bank, in 1984 and the rescue of Long-Term Capital Management, a hedge fund, in 1998.
KeywordsFinancial Market Hedge Fund Deposit Insurance Bank Failure Financial Firm
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Notes and References
- A. Dale Tussing (1967), ‘The Case for Bank Failure’, The Journal of Law and Economics, vol. 10, pp. 129–47, especially p. 136 (‘Banks which mismanage their own assets are poor managers of the nation’s financial processes and should be replaced. Low profits, losses, and at the extreme failure are appropriate devices for accomplishing this replacement, either through changes in management or closure of the bank.’).CrossRefGoogle Scholar
- For discussion of the liquidation function of federal deposit insurance, see Helen A. Garten (1994), ‘A Political Analysis of Bank Failure Policy’, Boston University Law Review, vol. 74, pp. 443–5.Google Scholar
- John Hanna (1936), ‘The Banking Act of 1935’, Virginia Law Review, vol. 22, pp. 638–9.Google Scholar
- In a traditional purchase and assumption transaction, the financial assistance provided by the deposit insurance fund equaled (1) the value of the failed bank’s liabilities less (2) the value of the failed bank’s performing assets less (3) the franchise premium. The FDIC typically retained and liquidated assets, usually non-performing, that the acquiring bank refused to take. Joseph F. Sinkey, Jr. (1979), Problem and Failed Institutions in the Commercial Banking Industry (Greenwich, CT: JAI Press), pp. 34–9.Google Scholar
- William C. Melton (1985), Inside the Fed: Making Monetary Policy (Homewood, Illinois: Dow Jones-Irwin), pp. 157–8.Google Scholar
- This story is told in James Grant (1992), Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken (New York: Farrar Straus Giroux), pp. 202–11.Google Scholar
- Arthur M. Schlesinger, Jr. (1956), The Crisis of the Old Order 1919–33, vol. 1 of The Age of Roosevelt (Boston: Houghlin Mifflin Company), p. 236.Google Scholar