Friday, July 18, 2008

Paulson Calls for "Wind-Down" Facility

In an interview with WaPo's David Ignatius, Treasury Secretary Henry Paulson has called for the creation of a "Wind-Down" facility to deal with the current financial crisis.

Ignatius writes:

The other practical worry for Paulson is finding a mechanism for unwinding the skein of debt for financial institutions that aren't covered by banking regulations. If Bear Stearns had been allowed to collapse, for example, what would a bankruptcy judge have done with the billions of dollars in derivatives contracts -- and what would the other parties in these contracts have done in assessing their potential losses?

If Congress wants to avoid future bailouts similar to the one given Bear Stearns, "you need a resolution or wind-down facility," Paulson says, so that the liabilities of failing investment banks or hedge funds can be sorted out carefully, the way the Federal Deposit Insurance Corp. untangles the books of a failing bank.

The country needs to address the big systemic issues of regulation, Paulson says, but not in the middle of an emergency. "Right now, we need to emphasize stability. That's our top priority."

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