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Verret on Big Bank Woes: Failure Should be Considered

Responding to calls from key Republican senators to allow big banks to fail, Professor J.W. Verret told CNNMoney.com, "Letting more banks fail is something we should at least consider. Blanket capital injections for all banks no matter how healthy they appear to be seems to be counterintuitive. Some banks need to go through FDIC receivership."

Senators Richard Shelby (R-Ala.) and John McCain (R-Ariz.) over the weekend called for an end to efforts to shore up failing banks with bailout funds. Writers at CNNMoney.com examined the possible effects on the Federal Deposit Insurance Corporation (FDIC) and financial markets in general should megabanks such as Citigroup and Bank of America be permitted to collapse.

Time to kill the big banks?, CNNMoney.com, March 9, 2009. By Paul R. LaMonica.

Excerpt:
"So is the solution really that simple? After already propping up two huge banks, Citi and BofA, with $90 billion in bailout funds and hundreds of billions of dollars in loan guarantees, should the government just shut them down in the same way that the FDIC closes small, community banks?

"There is some merit to the idea that Citi, which Shelby derisively referred to Sunday as a 'problem child,' and BofA have done so much damage to the economy already that they should not longer be allowed to survive--at least in their current form.

"'Letting more banks fail is something we should at least consider. Blanket capital injections for all banks no matter how healthy they appear to be seems to be counterintuitive,' said J.W. Verret, senior scholar for the Mercatus Center at George Mason University. 'Some banks need to go through FDIC receivership.'

"And the Federal Deposit Insurance Corp. does do a good job of taking over small banks and finding a buyer for them quickly--often a purchaser is announced the same day that the bank fails.

"But closing a bank the size of Citi or BofA--which is what Shelby appeared to suggest Sunday--is more complicated."

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