By Arnold Kling
[update: see Woodward and Hall for an idea for handling Citicorp. I assume they mean to deal with the parent company, Citigroup.]
See Simon Johnson and Tyler Cowen. Tyler argues that shutting down failing banks could be really ugly, because the large complex holding companies are not something that the FDIC has experience in managing.
I think that the FDIC is going to have to learn how to deal with the “too big to fail” holding companies sooner or later, and better sooner than later. My view is that zombie banks are a bigger threat to the health of the financial system than a shutdown of failed banks, even if shutting them down is a really ugly process.
Keep in mind, also, that these large holding companies have lots of debt outstanding. The simplistic economic view of bankruptcy is that the shareholders hand over the keys to the debtholders, who become the new owners of the firm. Maybe that is what should happen with the failed banks.