How to Clean a Dirty Bank

By ANDREW ROSENFIELD
NYT

Chicago

COMMERCIAL banks in the United States are not subject to the bankruptcy statute — when they become insolvent they are simply acquired by the government. This is what banks sign on for in return for a charter, deposit insurance and direct access to the Federal Reserve lending window, which generally allow banks to prosper as long as they control risk.

Now Treasury Secretary Timothy Geithner wants to apply this same swift acquisition process to large insolvent “shadow banks” that risk doing damage to the financial system — big hedge funds, investment banks, insurance holding companies and the like — because bankruptcy proceedings move too slowly to allow these institutions to be quickly refinanced or restructured.

Secretary Geithner says the lack of a good mechanism to restructure Lehman Brothers contributed to that firm’s failure last fall. And it is why the Bush administration’s ill-designed overnight infusion of capital into American International Group turned out to be such a mess. The company avoided bankruptcy, but could not be properly restructured.

(More here.)