Is the FDIC Legally Obligated to Shut Bank of America and Citibank Down?

Wonkess who I follow on twitter, posed a really good question that got me thinking. If banks are technically insolvent, isn't FDIC violating some law by not shutting them down? That's a really good point, The FDIC was created to insure bank users like us AND to make sure that Banks are solvent. That is to say that the Banks can cover their outstanding obligations like the money we have in our accounts at that Bank. Because Banks take the money we deposit and use it to invest, spend on other things generally to make money, our money only exists as much as the Bank promises to have the money to cover those accounts. (and of course the FDIC insuring it is there up to $250,000) As long as we all don't demand our money all at once, a Bank can use the funds to make money while not worrying about covering one specific account. But what if those investments are losing money, so much money that they now have less then the money needed to cover all our accounts? The FDIC doesn't just insure that money for people like us, they are supposed to monitor the banks and shut it down if the banks can't cover the money they owe their customers. Are they violating that legal obligation? That is what Wonkess was asking, and she gives a great thought provoking answer: Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth. He was supposed to regulate many of the largest bank holding companies in the United States. Far too many of these institutions are now deeply insolvent because the banks they own are deeply insolvent. The law mandated that Geithner and his colleagues place troubled banks in receivership long before they became insolvent. Why are the banking regulators, particularly Treasury Secretary Geithner, continuing to disobey the law? ...The FDIC, on the other hand, will try to recover as much value as possible by selling assets off as fast and for as much as possible, which minimizes the amount that it will have to pull out of its reserves to meet its guarantee obligations. Where is the outrage that these banks, which everyone knows to be technically insolvent, are still allowed to continue to operate, without government intervention?? Srsly, stop getting hysterical over the $20k, $30k that the irresponsible neighbor down the street might be getting because he's going to be refinanced by the government under the homeowners bailout. We are bleeding money from the wound that is the financial sector in America, and apparently no one is willing to do anything about it. Not even the regulators whose job it is (and who are theoretically legally obligated) to do something about it. In defense of Geithner, although I do tend to agree with Wonkess, he made a good point on Planet Money a podcast by NPR that takes these complicated issues and makes them approachable. He believes that the banks assets are worth more then we think or would be worth right now with a glut of bad assets due to the bad economy. That when things get back to normal, these banks will be just fine. Their assets have more true value, just need to wait a little. No question Geithner failed as his primary job of overseeing and regulating banks as head of the New York Federal Reserve and is a key person responsible for this financial meltdown. Something I talked about when I was agreeing with Republican Sen. Jim Bunning. Sen. Jim Bunning (R-KY) Is Right About Geithner But he may also be right that taking these Banks now is premature as the assets that make them insolvent will in the long run have more value thus these Banks will be fine. That moving in and seizing their assets now would unnecessarily collapse the financial system. For now we will just have to trust them and hope they are right. RSS