Because, just like it says on the little sign at the deposit window, federal insurance was always part of the deal. It's not a new twist, it's not a new giveaway, and it was already priced into the product. Maybe the price of the government insurance was too low, but at any rate, depositors accepted lower interest rates in exchange for the government guarantee. So, the government needs to pay up. There was no such gaurantee for stock or bondholders of these institutions, and their losses, to use a technical financial term, are "tough luck."
Where do you get this stuff from Samclem? Deposit insurance is a corruption of the free market -- it was ushered in by that last great government socialist, FDR. Without deposit insurance, we had a total lack of confidence in the banking system which resulted in panic and inaccessibility of credit.
Priced into the product? At what price? Didn't I just get a $150K increase in my insurance without doing anything or paying for that? You mean if the Government ran the deposit insurance program as a private business the cost of deposit insurance incurred by the banks would be much higher? You also mean we consumers really have a choice to go to an uninsured institution for deposits; how many states do you think currently allow state banks to be uninsured? and there's not one federal chartered depository institution that's uninsured.
I point out federal deposit insurance because it is one true success story of government intervention into the market place.
Deposit insurance is there simply to instill confidence in the banking system. Without that confidence, we'd be going through rounds and rounds of great depressions. And the idea of protecting, in limited cases, some bondholders and perhaps some equity interests in institutions that are too big too fail, is based on the same notion that we need to bolster up engines of credit and institutions critical to our payments systems because the alternative is to take a hit on "confidence" which is perhaps the single most important aspect of psychology driving the markets right now and ultimately the real economy.
"Process" might be too complimentary by far for what we are seeing. A good alternative process (that has been proven to work) is the Resolution Trust Corp. It was expensive, but much less expensive (at the end of the day) than what we are doing now. The government recovered approx 50 cents on the dollar, and the toxic assets were scrubbed off the balance sheets and we moved on. If we'd done then what we are doing now, I guess we'd still be keeping those damaged S&Ls on life support and wondering if the pain would ever end. The RTC model is scaleable, and would work fine under the present situation. We just need someone in DC with the backbone to tell it like it is, make the hard decision, and administer the medicine. Like you, I won't hold my breath waiting for this to happen.
Apples and oranges; the RTC process of shutting down numerous failing thrifts is simply not available here for banks too big too fail like Citi; BTW, there's nothing new with this process it was done in the 1930's with the Reconstruction Finance Corporation and the FDIC, before there was an RTC. And the FDIC continues the process; it does not work well with banks too big too fail!
RTC never shut down a mega, mega thrift; and each of the mega institutions resolved by the FDIC over the past 40 years have had "bridge banks" formed (like the conservatorship in IndyMac) and in many cases there was a "good bank, bad bank" division of balance sheets. I suspect what the Government is now doing is out of the textbooks of success they've had in the past -- the problems however are so big and daunting this time around, however: dealing with AIG, IndyMac, WaMu, Bearns Stearns, Lehman, B of A, and the toxic mess is truly unprecedented. The savings and loan mess of the 1980's and 1990's does not even remotedly approach the mess we're now facing!