When the four horseman were being minted by the crumbling US banking system in 2008 (JPM Chase, Wells Fargo, Citi & BofA ), they were left holding ~ 60% of US loans & deposits. The transactions creating these institution resulted in an immense concentration of risk and monetary power. They became substantive federal reserve banks operating on a for profit basis. There was nothing good about the idea.

Simon Johnson authored a piece carried in the NY Times Economix blog last week. It was shocking for its good news and the good sense it illustrated re: rulemaking around securing the US monetary system against the baked in risk carried by the four horseman and their brethren.

The drafters of the Dodd-Frank financial reform law got an important thing right. Despite fierce pushback from the banks …the legislators communicated a key new intent: megabanks must be able to fail, and the Federal Deposit Insurance Corporation should be in charge of that liquidation process.

Mr. Johnson keenly points out the FDIC’s strategic advantages for the role:

The F.D.I.C. was an inspired choice for this role, because it is less captivated by the “magic” of Wall Street and less captured by its money and influence than any other group of officials.

The F.D.I.C. has also long been in the business of shutting down banks while limiting the damage to taxpayers, although it did not previously have complete jurisdiction over the largest banks when they got into trouble. It could only deal with those parts that had federally insured “retail” deposits, and this turns out not to be where the biggest problems have occurred in recent times.

The FDIC also built substantial confidence in their role and process by making their decision process transparent. The methods are illustrated admirably by Mr. Johnson.

The developments being shepherded by the FDIC re : wind down of a massive institution that fails and making it clear that such an institution can fail and can be wound down safely, represent genuine and infinitely beneficial change from the current and unworkable banking industry and oversight practices.